Title insurance provides coverage for losses due to title defects that render title to the insured real estate unmarketable. For example, if there is an easement on a property, the current owner may not recall the existence of the easement, but a title insurer should find the easement in the insurer’s search of the public filings in the real estate records and disclose the existence of the easement to the buyer in the commitment for the title insurance policy. Many title companies provide hyperlinks to the documents, so the owner can read the easement or other restriction on the title and understand the rights granted in the easement or the limitations on the use of the property. If there is a judgment lien on the property or other recorded lien, the title insurance company should find the lien and require that the lien be paid and released at the closing. At a minimum, the buyer will have the title commitment that lists recorded liens and other encumbrances against the property and the buyer can determine from a review of the recorded documents whether to purchase the property with the encumbrances shown on the title commitment or require that the seller remove those encumbrances that can be removed. A buyer does not want to find out that there is a restriction on the title that prevents the construction of a garage to house the buyer’s travel trailer after the buyer buys the property and starts construction of the garage.
Many buyers, particularly those who are flipping a house or buying a property from a relative, feel that the coverage provided by the title policy is not worth cost. However, before deciding not to purchase title insurance a buyer should consider the risk that the buyer is taking by not buying title insurance. First, who researched the title to the property? If the buyer researched the title himself or herself, what confidence level to you have in your own search?
A title search or title report does not provide any protection if there is a title problem. A title search provides information on the title to the property from the date of the last deed to the date of the title search. While that information, typically on liens only, is useful in a foreclosure context, the information provided does not include the depth of research contained in a commitment for a title insurance policy. The searcher for a title commitment searches for easements, covenants and restrictions that predate the last deed to the property. The searcher should also search for bankruptcy filings that may not be included in the title search.
Many buyers assume that the seller has marketable title to the real estate. If the property has been owned by the same person for many years, the theory goes, if there was a problem the seller should have been aware of the title defect. The absence of someone asserting the defect, or asserting some competing right to the property, is frequently viewed as indicative that there is no defect in the title. This assumption can be wrong, and if real property is purchased without title insurance, the buyer has to bear the entire cost of clearing title, which could include a quiet title action, which is both costly and could delay the resale of the property for several months, or a year or more depending on whether the quiet title action is contested.
A flipper may decide to buy a property without title insurance because the flipper intends to rehab and sell the house in a short time frame. However, if there is a lien against the property, such as a judgment lien in the hands of an uncooperative judgment lienholder, the flipper may get to pay not only the purchase price to the owner, but also part or all of the judgment lien on the real estate. If the title defect requires the filing of an estate proceeding involving the death of a predecessor in title who has been dead for many years, there could be significant delay and cost associated with clearing title to the real estate.
If the buyer is buying a home and the lender intends to sell the loan on the secondary market, the lender will require a lender’s title insurance policy. In that case, the premium for the lender’s title insurance policy protects the lender against title defects that cause a loss to the lender, but there is no coverage for the buyer of the house. How much did the homeowner save? About $75 — which is the cost for a lender’s policy when an owner’s policy is issued in connection with the transaction. Seventy-five dollars buys about 20 minutes of a lawyer’s time to correct a title defect.
We recommend that all buyers purchase title insurance policies to protect their ownership interest in the property. The risk of a title defect that could require months to clear and could cost thousands of dollars in attorney’s fees and expenses is not worth the saving of a few hundred dollars for an owner’s policy.
If you have questions concerning the purchase or sale of real property, please contact one of our real estate attorneys for assistance.