When a buyer contracts to buy a home, he wants to be certain that the seller can legally sell it. Ownership of real estate can be very complex. There can be a variety of parties with an interest in the real estate.1 Some examples include a mortgage, unpaid property taxes, mechanic’s liens, IRS liens or judgment creditors. These parties may have an interest in the property involved in the contract. A buyer wants to be sure that once he has the property he will not in any way be surprised by another party’s claim on it. There may be other issues involving the property itself, a neighbor may have built his driveway on the land.2 These issues are title problems, and the reason one needs title insurance, and why proper title insurance is always included as a contract contingency.
The information regarding rights of ownership to a piece of property may be located in various places, though primarily the information should be with the recorder of deeds for the county where the property is located. Even so, the documents recorded require expertise to read and interpret. Determining who can buy and sell the property requires an experienced researcher. These individuals are employed by title insurance companies.
Title Company Duties
In preparing to issue an insurance policy, the insuring company will do a full search of the title records making sure the title is free and clear, or determining what needs to be done to make the title free and clear. The company may require the seller to take action before issuing a policy. The seller is usually required to pay off any mortgages, liens or taxes as part of the sale of the property before the company will issue title insurance.
There remains the possibility that the insurance company did not find every possible claim on the property. If the company missed a claim, it promises to pay any costs associated from someone challenging the insured’s title and to reimburse the insured for any losses. If a third party makes a claim against property’s title, the insurance company will pay the legal costs of defending against the claim. If the claim is lost, they reimburse the insured for the cost of the property.
Additionally, many title companies also can act when needed as Qualified Intermediaries for a 1031 tax deferred exchange.
Owner’s Policy & Lender’s Policy
When a closing takes place for a property that has a new mortgage, there are two types of title insurance that are issued. The first is an owner’s policy. This protects the new buyer and is paid for by the seller, and is for the full value of the property. This enables the seller to provide to the buyer a warranty deed. A warranty deed says the seller warrants to the buyer that he is getting title to property that is clear of all other claims. The only way a seller can give real meaning to this warranty is to provide insurance to the buyer from a title company. That is why the seller pays for the insurance.
The second type of title insurance is a lender’s policy. When a financial institution provides financing for the purchase of real estate, it wants assurances that the property has no other claims against it. This assurance comes by way of a title policy that protects the lender to the value of the mortgage. Since this policy is necessary for the buyer to obtain his loan, the buyer pays for the cost of this policy.
Title Insurance Premiums
The insurance is paid for at the closing of the property. It is a one-time premium that covers the new owner as long as he owns the property. As the investment in real estate is significant, it is money well spent.
1There are multiple types of “interests” that can be attached a given parcel of real estate. One is ownership, and that can have a variety of forms. See, Types of Property Ownership are Important in Estate Planning for an explanation. Others can have a claim to money if the property is sold, through the mortgage money that was used to buy the property, or a lien placed upon the property for a debt to the government or a private party as the result of a lawsuit. If these matters are not cleared when a property is purchased, the debts for which the property is collateral will remain, and diminish the value to the new owner.
2It is possible that a neighbor, through a variety of legal means, may have acquired an “easement” over a property that allows the neighbor to use part of the property. This is why a professional survey is critical in a real estate transaction.