There are several things that go along with the process of purchasing real estate, whether it’s for personal use or investment purposes. One of the necessary parts of the buying or selling process is reviewing and understanding a property profile report, having clear title and title insurance.
The purpose of a Title Insurance policy is to protect the new owner’s interest in the property from things that happened in the past of which the new owners would have no knowledge without a title search. Problems with Title can limit your use and enjoyment of real estate, and have negative financial consequences.
Title Insurance begins with a search of the public records for matters affecting both the property and the individuals concerned. If a discrepancy is found, the history or “chain’ of ownership is further reviewed.
Some examples of what could be disclosed in a search are:
- Outstanding mortgages, deeds of trust, judgments, or tax liens
- Deeds, wills, and trusts that contain improper vesting, incorrect names or incorrect legal descriptions
- Incorrect notary acknowledgments
- Easements, CC&R’s, and Rights of other parties
When these things are discovered they are resolved before the transaction can close. In your typical transaction it is rare that there are things found that would slow down a transaction or stop it from closing. However when you are dealing with foreclosures, REO’s and Short Sales there is a high probability that something will arise and be found in the preliminary title report..
Even with all the expertise that goes into a title search and examination, hidden defects can emerge after the close of escrow causing unpleasant and costly surprises.
- Previously undisclosed heirs with claims against the property.
- Forged deed that purports to affect said land.
- Mistakes in the public records including erroneous legal descriptions or misspelling of parties’ names.
Title Insurance gives you security and protection against many title issues and the potential loss of your most valuable asset, your home.
Definition of Title Insurance: “Title Insurance means insuring, guaranteeing or indemnifying owners of real or personal property or the holders of liens or encumbrances thereon or others interest therein against loss or damage suffered by reason of: a) Liens or encumbrances on, or defects in the title to said property; b) Invalidity or enforceability of any liens or encumbrances thereon; or c) Incorrectness of searches relating to the title to real or personal property.”
One of the issues that arise for investors of foreclosures is that title insurance can’t be issued at the time the property is purchased from the courthouse steps. This means that the buyer has to rely on a property profile report (we talked about this last week). There has to be to enough profit margin in the deal so that if an issue is discovered after the purchase the investor can resolve it.
There was a story out of Florida about an investor who purchased a condo for $35,000 at a foreclosure sale. That was about 75 percent below market, the investor thought he had a great deal. However the preliminary title report he relied on did not show a $140,000 lien from the Homeowners Association.
Hence the great deal turned into a big loss. In fact the investor just let the Homeowners Association take the property because the loss of $35,000 was better than paying the $140,000 and then being upside down on the condo.
The lesson is that a preliminary report does not guarantee clear title. Even with title insurance things arise, however you are then protected.