While title insurance is admittedly not the most exciting topic in the world, it is a crucial part of the real estate closing process that buyers should understand but unfortunately often overlook. While it seems that the transfer of property ownership is straightforward, a buyer’s ownership rights aren’t always very clear so understanding the title insurance process could help you avoid a lot of costly mistakes and headaches down the road.
What is title insurance?
Title insurance protects the buyer from the possibility that the seller (or previous sellers) didn’t have free and clear ownership of the property and, therefore, can’t legitimately transfer full ownership to the buyer. This means that while documents that convey ownership of a property to a buyer (i.e., a deed) may be signed and everything may seem official, it may be meaningless if the seller didn’t have full legal ownership of the property in the first place. There are dozens of ways in which the title to a property can be jeopardized (we’ll get to those later) and title insurance will help protect against loss if a buyer’s ownership is challenged.
How do you get title insurance and what is the process?
An escrow agent will initiate the process of getting the buyer title insurance once the purchase agreement is signed. The title agent will then conduct a title search to examine the various public records to find any title issues (called title ‘clouds’). It is quite intricate work and typically takes a few weeks for the title company to complete the search. What results is called the preliminary title report. It lists any issues uncovered during the search and will let you know the conditions under which you will be offered insurance (e.g., an issue that can’t be remedied will be excluded from coverage). If any issues arise from the search (which is quite often), the title agent will take steps to either remedy these issues or insure against (or around) the risk. The title company is trying to identify and remedy all likely risks before they issue the buyer an insurance policy so they can protect the buyer and minimize paying out any claims.
What can go wrong if you don’t get title insurance?
Performing a proper title search is not something you can just learn on the fly. It requires significant training and experience to identify potential issues, obtain the correct documentation (e.g., purchasing from executors / trustees) and know the proper steps required to remedy these issues. The title agent will be looking for various issues such as tax liens, judgments, unreleased loans, probate issues, divorce proceedings, pending bankruptcy, child support liens, if another person / entity has a claim to the property, deeds / trusts that contain improper vesting and/or incorrect names, etc.
Here are a few examples of title issues we have come across when purchasing property (often can take months to resolve):
- Probate issues: personal representative of the estate didn’t have the correct court documents to prove they had legal authority to sell real property
- Unknown claim on the property: Title search revealed a deed which showed the property was conveyed to an unrelated trust that the seller wasn’t aware of
- Issues arising from a prior transaction: A seller purchased a property outside of escrow years ago and our title search revealed that the property now has multiple liens on it due to judgments against the entity our seller purchased it from
- Issues due to trusts: Seller (an heir) lacked legal documentation of authority to sell property; errors on deed with how the property was previously conveyed to seller’s trust
Other potential issues could include:
- Fraudulent acts such as forged satisfactions or releases of loans, impersonation of true owners and fabricated or expired power of attorney
- Invalid or erroneous interpretations of wills
- Previously undisclosed heirs with claims to the property
- Issues arising from divorce such as pending divorce settlements or your seller failed to disclose the existance of a former spouse with ownership rights
- Pending lawsuits that call into question the property ownership
In many cases the current seller is unaware of these issues because they didn’t have the title work done in the first place. While some of these issues can be cleared up in a straightforward manner (such as typos), many of these issues can only be resolved through legal processes which can be time consuming and costly. While beyond the scope of this article, quiet title actions and probate related court processes are examples of actions that may be needed to become the legal owner of or have legal authority to sell the property. An attorney will be able to give you a sense of how long it will take and how much it would cost based on the legal process required and your jurisdiction but often these processes take many months.
Who should get title insurance?
Title insurance is not required to purchase property. Everyone has their own level of risk tolerance and they have to decide if the benefits outweigh the cost. If the property is only worth a few hundred dollars, the cost of title insurance may not be worth it. But, if the value of the property is more than a few thousand dollars, it is likely worth the cost. You don’t want to be in a situation where you are being penny wise but pound foolish. It is important to note that if you ever want to build on the property and require financing to do so (e.g., a construction loan) the lender will require title insurance before they distribute the funds to you. If any unresolvable title issues emerge while you are trying to obtain financing, you will be in the unfortunate position of having to delay your plans and potentially pay significant legal fees to remedy your title issues. It is likely better to do the title work up front to avoid all of the hassle and additional costs.
Land Endeavor does the title work up front to give you peace of mind
At Land Endeavor, if the value of the property is more than a few thousand dollars we typically get title insurance when we purchase the property so you can be confident that when you purchase from us you will have full ownership of the property. We believe that you shouldn’t have to worry about title issues and having to go through costly and time consuming legal processes just to take rightful ownership of a property you already paid for. Although, in order for you to benefit from the title insurance policy we have purchased (at a reduced cost to you given we just did the title work), the transaction must be closed through the title company we used. As noted in our listings, the buyer is responsible for all title / escrow costs.
Many other land vendors may try to lead you to believe that title insurance isn’t important or worth the cost. Typically, they are doing this because they didn’t do the title work when they bought the property to save money and now that they are selling it to you, they don’t want you to find title issues and have the deal fall apart. At Land Endeavor, we prefer to provide our customers peace of mind by doing the title work up front on parcels of significant value, as we know that title issues are quite common and can create huge legal headaches (we have been involved in transactions that have taken 6 months+ to close due to title issues). We have many properties for sale with title insurance available. Take a look at our listings here.