An ownership and encumbrance report, or O&E, is a search of the public record that shows who currently owns a property and what liens and other recorded claims sit against it. It generally costs less than a title insurance policy and comes back sooner, but it is information only, and nothing in it is insured.
Why a note buyer orders one
When you buy a note you are buying a lien on someone else’s property. The seller’s description will say the lien is in first position and the borrower owns the house. The O&E lets you check both statements against the county’s records. That goes for a note from us as well: when you join the buyer list and one interests you, order the O&E in your own name so the search is one you chose.
An encumbrance is any recorded claim or burden on a property. The kind a note buyer meets most is a lien, a claim that secures a debt.
What the report lists
- The owner of record and the deed by which they took title.
- The legal description of the property.
- Open mortgages and deeds of trust, with their recording dates and amounts.
- Assignments of those mortgages or deeds of trust.
- Judgments and other liens recorded against the owner or the property.
- In some reports, property tax status: whether taxes are paid or delinquent.
Products differ between providers. Before you order, ask how far back the search goes and whether it covers taxes, judgments and assignments. The O&E is the title entry on the due diligence checklist for note buyers, one stage of the purchase described in the investor guide, so order it with the rest of that list in mind.
Reading it when it arrives
- Is your borrower the owner? The name on the deed should match the name on the note. If the borrower has transferred the property, find out to whom and when.
- Is the lien recorded? The mortgage or deed of trust you are buying should appear, with the right amount and date.
- Where does it rank? Liens generally rank in the order they were recorded, with exceptions such as property taxes. Anything recorded ahead of yours gets paid before you.
- Does the chain reach the seller? Each assignment should link to the next, ending with the person selling to you. An assignment to anyone else has to be explained and corrected before you go on.
- What else is attached? Unpaid taxes, judgments, a second mortgage or a notice of a pending lawsuit all change the risk, even if they rank behind you.
O&E report and title insurance compared
| O&E report | Title insurance policy | |
|---|---|---|
| What you get | A report of what the search found | A policy that pays covered losses if title is not as stated |
| Depth of search | May be limited to the current owner or a set period | A fuller search before the policy is issued |
| If something was missed | Little or no recourse, depending on the provider’s terms | A claim under the policy, within its terms |
| Cost and speed | Generally lower and quicker | Generally higher and slower |
Coverage and terms vary by provider and state. Read the report’s own limitations page.
What stays outside the report
An O&E reports the recorded documents and nothing else. An unrecorded deed, a private agreement, or a debt that has not yet become a recorded lien will be missing from it. So will anything older than the search period, which is how a short search can pass over an old defect in the chain of title. Physical facts such as boundaries, encroachments and the condition of the property are a matter for a survey or a valuation. And county indexes can run behind, so a document filed last week may not have reached the report.
When to go further
A clean report on a small first lien leaves less to worry about than the same report on a large or complicated purchase. Consider a full title search or insurance when the amount is large for you, when the report shows gaps or surprises, when the property has changed hands several times, or when you are buying a second lien and need to be exact about what ranks ahead, since the difference between a first lien and a second is whether you are paid first or from what is left. Ask a title company, too, whether the lender’s policy issued when the loan was made is still in the file and whether its protection passes to you.
If the report shows a problem
Ask the seller to cure it before closing, for example by recording a missing assignment or paying a delinquent tax bill. If it cannot be cured, lower your price to reflect it or pass on the note. A promise to sort it out after funding leaves you holding the defect and the seller holding your money.
Whatever the report says, look at its date. New liens can be recorded at any time, so have it brought up to date shortly before you fund.
Related questions
Who orders the O&E report on a note purchase?
The buyer can order one through a title company or a title search provider as part of their own checks. A seller or broker may also supply one. If so, look at its date and consider ordering an update before closing.
Is an O&E report enough to buy a note?
For some purchases, buyers decide it is. It gives no insurance, so you carry the risk of anything the search missed. On a larger purchase, a second lien or a report with gaps, ask a title company about a fuller search or a policy.
How current does the report need to be?
As current as you can get it. New liens can be recorded at any time, so a report from months ago may be out of date. One approach is to order it early and have it brought up to date shortly before funding.