When you sign a contract to purchase a home, it usually takes between 30-60 to complete the transaction. During this time, usually referred to as the escrow or closing period, many activities occur to secure a loan and to transfer the property from the seller to the buyer.
What is a Title Search?
One of these steps is called a title search. A title search is conducted to determine who owns a property. A property's title records the history of ownership about a property and identifies any parties that have an interest in a property. A clear title indicates that the current seller has full rights to sell the property,
A title company or their representative usually conducts a review of a title. These people are looking for any notations in the title's history that would suggest problems in clear ownership of a property. Any problems identified in a title are commonly referred to as "defects" or "cloud on title."
Defects or Clouds on Title
There are many causes of defects or clouds on title. These defects or clouds could have occurred with the current owner or with any previous owner of a property. For example, two owners prior to the current owner, a husband may have sold a home without the permission of his estranged wife. The "wife," in this example, may have some claim of ownership to the property since the property was sold without her permission. There may be other problems in a title such as forged or missing documents, unpaid taxes, liens, judgments, or other claims against ownership to the property not uncovered in the title search or review of public records.
In most cases, a title search does not reveal any problems with a title, and if problems are identified, they are resolved before the property changes hands. However, there are occasions that claims against a property are filed after the new owner takes ownership of a property. So this creates a problem for the new owner and their lender because other parties are asserting an ownership interest in the newly acquired property. This is the type of situation that title insurance was designed to address.
How is Title Insurance Relevant?
Title Insurance is an insurance policy issued by an insurance company to cover beneficiaries if there are claims against a title. If defects are found after a buyer closes escrow, then a title policy usually covers the expense to remedy the defect (if possible), or pays the insured for any loss due to the defective title.
If you get a home loan to purchase a property, most lenders will require that you purchase title insurance for them at your expense. This will cover the lender against any claims filed against the title of a property. Lenders usually require this coverage. Title Insurance companies also offer coverage for the homebuyer, but this is optional and is separate from the coverage required by lenders.
Compare Companies
As with any other form of insurance, different companies cover different items and charge different rates. Be sure you understand what your policy covers, since each company will have their list of included and excluded coverage items. You should also know that you might be able to get a lower rate on title insurance if the current home seller provides you a copy of their title policy. In these situations, you may be able to use the same insurance company and request a "reissue rate."
Title Insurance Cost
The cost for title insurance is usually charged as a one-time fee and itemized as part of your closing costs. While rates vary from company to company, they generally range from 0.5% to 1% of the mortgage amount. Be sure to get several bids when comparing title insurance.
Bottom Line
A title insurance policy will provide you or your lender protection against defects in a title. There are separate policies for both the lender and the homebuyer. The lender usually requires the homebuyer to purchase title insurance for the lender and pay the expense. The owner's coverage is usually optional. The title insurance industry is a competitive business so it's best to compare rates and coverage benefits between companies. Title insurance is a complex decision, so be sure to talk to your real estate agent or attorney before making any decisions about title insurance.
If you are interested in joining the ranks of successful women in real estate, it is important that you come to a complete understanding of the fundamental elements associated with real estate investing. Yes, few people find the intricacies of title insurance exciting and many feel it's down right boring. However, if professional women have learned anything over the course of the past few decades, it is that knowledge is power. In this regard, one of the most important elements of the real estate investment process is to understand how title insurance works.
So, read on and learn.
Title insurance is exactly as it sounds. It insures you in case that at some later date, a recorded or unrecorded document surfaces that can affect the title of the property you purchased. Putting it simply, a title insurance policy insures the ownership of the property, and protects you as the owner.
Before providing a title insurance policy, the title company examines, summarizes and classifies every document affecting the property and its previous owners. Highly skilled title searches assemble this material and forward the results to a title officer. The title officer or examiner then writes an opinion on the title. The opinion will initially take the form of a preliminary title report and ultimately become a policy of title insurance.
Although title insurance is designed to protect a purchaser of real estate against title defects that are discovered after that individual takes title to a piece of property, the real work of a title insurance company is actually undertaken in advance of the closing on the sale itself. After a real estate sales contract is executed between a seller and purchaser, a preliminary title search is performed and then a policy of title insurance is obtained.
This means that the title insurance officer physically evaluates the deed to the property, and then reviews all of the liens and encumbrances that have been filed against that deed over time. This effort by the title insurance company is designed to ascertain that any liens or other encumbrances that may have been placed against the property in the past have been released.
Any liens or encumbrances remaining on the deed or title to the real estate subject to sale will prevent the buyer to obtain "clear" title because every questionable item recorded on title is classified as a defect or "cloud" on title. One of the essential clauses in real estate sales contracts requires the buyer to deliver "clear" title of the property to the purchaser by a certain date. Therefore, the title insurance company will take all necessary steps to clear up any "clouds" on title within the time frame mandated by the contract for the sale of the property.
As mentioned, if for some reason there is a defect on title - a lien or encumbrance not discovered before the new deed is recorded - the title insurance company is responsible for any loss sustained by the real estate purchaser because of that title defect. In most instances, the loss sustained amounts to legal fees and court costs associated with taking action to clear the defect.
If the purchaser or real estate investor does not have adequate title insurance, she is the one who sustains the loss. This is why it is vital to forgo standard title insurance and invest in extended coverage policies with every one of your transactions.
Top SEVEN ways your property can be put at risk:
Your property can be put at risk in a variety of ways. If your property does not have clear title, any questionable recorded or unrecorded documents may have been executed many years before, yet surfaced much later. In this case, know that you are protected by title insurance. Below are seven common items that can put your property risk.
1. Forged deeds, mortgages, satisfactions or releases
2. Deed by person who is insane or mentally incompetent
3. Deed by a minor
4. Deed from a corporation, unauthorized under corporate bylaw
5. Deed by partnership, unauthorized under partnership agreement
6. Deed given under fraud or duress
7. Deed executed under falsified power of attorney
Top SEVEN things to look for:
If any of the following items appear on the preliminary title report, you must take immediate action. The first step is to contact your title company. Failure to investigate any of the following may cause a significant delay in closing of escrow and/or decrease your profit.
1. Tax Liens
2. Mechanics Liens
3. Notice of Action/Judgments (including back child support)
4. Bankruptcies
5. Uninsured Deeds
6. Legal Access to and from the subject property
7. Typos in the legal description and/or parties' names
Two Separate Policies
Nearly every sale of a residential property involves the purchase of two separate policies of title insurance. One policy names the buyer as the interested party and the second names the lender as the insured party. It is customary for the seller to provide and pay for a title insurance policy on behalf of the buyer. This is done so that the buyer can be assured that the property does indeed belong to the seller and that there are no unexpected liens or encumbrances against it. If the buyer borrows money to purchase the house, it is normally a requirement of the loan that the buyer purchase title insurance on the lender's behalf for the amount of the loan and sometimes for the amount of the entire sales price.
One-time Investment
The purchase of a tile insurance policy is single purchase transaction. You pay one premium, and the policy stays in force until you sell or refinance your property. There are no recurring fees. Premiums for the title insurance policy are usually based on the amount of risk assumed by the insurer. The liability is based on the sales price of the property, or, in the event of a lenders policy, on the amount of the loan.
In conclusion
It would be to your benefit as a woman investing in real estate, to have a working relationship with a helpful and motivated title representative whose sole purpose is to sell title policies on behalf of his or her employing title insurance company. Find out what he or she is willing to do in order to earn your business.
- Will the company allow you access to their public record database?
- Can you request and receive copies of recorded documents?
- Will the company create property profiles for your hot deals?
- Can the company set up a farm (territory) to help you generate leads?
Ask ahead of time. A good working relationship with a title insurance company enables you to conduct business efficiently. In simple terms, everyone investing in real estate must know the specifics and the complexities of title insurance and the benefits of building a solid relationship with a good title representative.
Both Real Estate Pros & Brenda Cote are contributors for EditorialToday. The above articles have been edited for relevancy and timeliness. All write-ups, reviews, tips and guides published by EditorialToday.com and its partners or affiliates are for informational purposes only. They should not be used for any legal or any other type of advice. We do not endorse any author, contributor, writer or article posted by our team.