Why title insurance should be an imperative
As a real estate broker, I recently helped a buyer acquire a piece of property to develop in my area. However, the seller of the parcel had acquired the land at a county auction of properties. Many of these properties had prior owners who had unfortunately not paid their tax bills for a long period of time. As such, when they purchased the property, the county made no warranties as to the “cleanness” of the title on the property. It was up to the buyer to do their own due diligence and obtain an owners title insurance policy on any given parcel involved in the auction. So the current seller of this particular parcel my buyer wanted to purchase had gone ahead and put the property on the market for sale, figuring they would deal with any potential title issues down the road, once they found a buyer. This was a risky maneuver on their part.
The saga continues…
And this is where me and my buyer come into the picture. Unfortunately, after negotiating the sales price with the seller, we were then notified the seller would have to clear up any title issues before a closing could take place. Unfortunately, we were forced to wait another couple of months, while we were under contract, for the seller to have a title company review the exact chain of title records, and determine that the last owner of the property still had an outstanding mortgage lien that needed to be cleaned up. Luckily, the seller, his attorney, their title company and my buyer’s attorney were able to come up with a workable solution to the problem to allow our sale to go through.
However, this could happen only with my buyer having to obtain a new title insurance policy as “extra” insurance that there would be no future claims on the parcel. (In our area of New York state, title insurance is not a requirement.) Title insurance cost can vary depending on the parcel and area involved. Your title insurance company will usually utilize a title insurance calculator for your area to come up with your one time only policy cost that will be paid by you at closing. In the case of my buyer in this story, it only cost several hundred dollars for her title policy.
A complex process
I have written in a prior article here about the complexities of the title insurance process (see http://investinginproperties.org/rental-investments/purpose-title-insurance-rental-property/). In that article I defined exactly what is title insurance. I also noted that the title company’s title search will include “all records the local municipality has on file for the investment property. This will include…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.”
Title insurance is crucial
This process illustrates the real need for title insurance. It helps protect any purchaser of property from a prior owner somehow coming into the picture at some point in the future, and claiming the land is actually owned by them. You can see the compound effect of how disastrous things could get without a title company involved as insurer. The title company basically would be guaranteeing they would be on the hook for any potential “damage” in the future from such a claim. Imagine a current owner building on the parcel, then a claimant from the past coming forward saying the parcel is theirs. The potential for a major real estate mess would be financially onerous, if not disastrous, to say the least. In effect, the title insurer makes a promise to make things right. They can afford to do so by being very thorough in their research of the existing chain of title. Though mistakes occasionally occur on the part of a title company’s research, they are very, very rare. After all, title insurance companies are in business to make money. So research thoroughness on their part is essential.
Photos courtesy of welchgroup.net, business-law-pa.com, gfmag.com, taylorinsuranceblog.com