The Bona Fide Purchaser

The Bona Fide Purchaser

You get a deed from a seller in foreclosure. Before you can record the deed, the seller gives a second deed to your competitor. The competitor records his deed at the country first. Who wins? This is an interesting issue that most investors don't seem to grasp. First, understand there are two issues here: one is ownership, the other is notice. The recording of a deed is NOT necessary to transfer ownership of real estate. The simple act of executing a deed and delivering it to the buyer passes ownership.

The recording system gives constructive notice to the world of the transfer of title to property. Recording simply involves bringing the original deed to the local county courthouse or clerk and recorder’s office. The original deed is copied onto computer or microfiche, then returned to the new owner. In addition, the county tax assessor usually requires the filing of a “real property transfer declaration,” which contains some basic information about the sale.

There is a filing fee for the deed, which runs about $10 per page. In addition, the county, city and/or state may assess a transfer tax based on the value of the property or the selling price. This makes recording a deed an expensive proposition in states that charge 2% or more of the purchase price. If you are taking a deed in anticipation of doing a short sale or other deal that has a small chance of success, keeping a deed in your file cabinet until the last minute may be the only option. Just understand that if you don't record, you run the risk of another investor beating you to the punch.

Every state has a recording statute which dictates who wins in a battle over ownership in the case of a "double deed" scenario as described above. Most states follow a “race-notice” rule, which means that the first person to record his document, wins, so long as he is a bona fide purchaser. A bona fide purchaser is one who:

• Received title and recorded in good faith, and

• Paid value, and

• Had no notice of a prior transfer

In a foreclosure situation, an investor often gets a quitclaim deed for free. So, if a subsequent purchaser gets a deed for nothing, then records first, he is NOT a bona fide purchaser. Also, if he had notice of a prior transfer, even unrecorded, he is not a bona fide purchaser. If he acted in bad faith, he is not a bona fide purchaser. In short, the BFP rule protects an innocent buyer who really did lay out money and get a deed in good faith. Foreclosure investors often act in bad faith, convincing a seller to give a deed to a property that was already transferred.

The practical side of the issue, however, is proving your case. If you get a deed from a seller, then your competitor gets a deed and records it and is not a bona fide purchaser, what do you do? The bad news is that you have to hire a lawyer to commence a lawsuit to contest his title. This may not be worth the effort if there isn't much profit in the deal. It may make sense to simply record a lis pendens to hold up the re-sale of the property by the other investor, then settle out of court. Of course, you should consult with an attorney before proceeding if you are in a situation where you are uncertain of your legal rights.