Chain of title
The chain of title, or who actually owned a piece of real estate, is a construct from merry old England from the days of feudal lords. When real estate investing, title ensures an owner is the rightful owner of a rental property, and that there are no other claims, past or present, on it. And the purpose of title insurance is to protect anyone acquiring real estate (and if a mortgage is involved, their lender as well) from having a claim of title placed on the property. In actuality, anyone can make a claim as to ownership of a piece of property. However, title insurance companies relieve the purchaser of anyone investing in real estate from having to worry about settling any claims on it in the future. The title company, in essence says: “It’s our problem now, you go out and worry about only your investment opportunities.” Naturally, title companies run complete chain of title checks to make sure they protect themselves, prior to any closing, and insurance being taken out on a property.
The ordering of title
Title is traditionally ordered by the buyer’s attorney for his client. This occurs after a property investor has either agreed to a purchase price and terms for all cash, or if there is a mortgage involved, he has been approved and received a mortgage loan commitment from his bank. The title company then performs an intensive search of county records to determine an accurate chain of title to the property. This search is a comprehensive review of all the mortgages, deeds, easements and liens on a given property that have ever been recorded. Recorded is the key word here, because without a property sale being recorded, no one else can make a legal claim on it in the future. Without a sale being recorded, it’s as if the sale never occurred – legally, that is.
The title search
Any title company property search will be sure to include all records the local municipality has on file for the investment property. This will include any outstanding water or tax bills, special assessments, tax liens and any other item that could conceivably affect the title. Traditionally, building department records are also checked to ascertain any outstanding building permits (opened, but never closed as completed), or similar code violations. Once title is completed, a title report is prepared by the title insurance company. It is sent to all the attorneys in the property transaction for their review.
If there are any current problems (for example, an unaddressed easement that was never disclosed), the attorneys need to hash out a solution prior to a closing. Similarly, if a building code violation comes up in the title report, or, as another example, the title picks up an existing, illegally built shed (that was built without a building permit), the seller will need to obtain a building permit (or tear down the shed), prior to the closing. Once the buyer’s attorney is satisfied that all outstanding violations have been removed, and that his client, the buyer, will be able to purchase the property with no encumbrances on it, the title is deemed to be “clear.” And a closing can finally be set.
At the closing
At closing, the buyer who has purchased title insurance is given his policy. This ensures that his title rights are fully protected, subject only to any conditions set forth in the insurance policy. An example of a condition could be any kind of pre-existing easement on the property (for example, a right of way for a trail path, or utilities right of way). And the bank holding the buyer’s mortgage is also named as an insured member on the policy. The cost of the title policy is a small sum to pay amongst all other closing costs, especially given the protection it affords the buyer (and his lender).
photos courtesy of business-law-pa.com, askgreganddanielle.com, welchgroup.net, massrealestatelawblog.com