Scott has worked as a real estate lawyer for 10 years.
Title Insurance - To Buy Or Not To Buy?
people found Scott's experience helpful.
For 10 years, I've worked in the trenches as a real estate attorney. My work includes transactions, litigation, and sometimes foreclosure. I've worked on hundreds of real estate transactions across the United States. I'd like to discuss an important consideration for every home purchaser that is rarely discussed.
At every closing, the buyer must decide whether to purchase title insurance. For most people, at the urging of their real estate agent or attorney, the answer is yes. But what is title insurance? And is it worth the financial investment?
Several years ago, I conducted the closing of a loan to refinance a commercial property. The property was a community center that served hundreds of local senior citizens every day. The community center, with its buildings, swimming pool, and gardens, had a value well over $1 million.
Most refinancing transactions are routine. The owner signs new loan documents to allow the existing mortgage to be paid off and to provide the new lender with a lien (or mortgage) on the property. The closing attorney conducts a title search to confirm that the current owner is, in fact, the owner of the property and that there are no other liens or issues that will interfere with the lender’s right to lien the property. The community center had been in the hands of the current owner for more than 10 years. We expected a very smooth closing.
However, as I went through the earlier deeds to the property, I found that a deed from 20 years earlier, transferring the property from one corporation to another, lacked a corporate seal stamp. Legally speaking, the property was never transferred. Therefore, the current owner was, in fact, not the owner. What’s worse, the lender being paid off never had a valid lien on the property. Disaster! The title to a million-dollar property just vanished!
We notified the owner’s title insurance company about the problem. After reviewing all of the other title-related documents, it was decided that the title insurance company would “insure over” the defect in title. The title insurance company would, if necessary, pay the cost of going to court to get the title corrected. A million-dollar crisis was averted by a $400 title insurance policy purchased 10 years earlier.
What is title insurance?
Title insurance is an insurance policy that the buyer purchases at closing to protect against undiscovered problems with the title to the property. These problems can include unpaid taxes, an unknown mortgage or lien on the property, an incorrect legal description of the property on a prior deed, or an earlier deed in the chain of title with a previously unnoticed defect. Without title insurance, the owner bears the burden of paying for the title defect. For residential properties, most title insurance companies provide a standard form policy covering most losses a residential home owner may encounter.
Whether or not to purchase an owner’s title insurance policy is up to the buyer. Most closing attorneys will include title insurance as part of your settlement statement under the assumption that you must want the coverage. You have to affirmatively decline the coverage. If you elect to decline, the attorney will give you a lecture, usually littered with stories like the one above.
Should you purchase a title insurance policy?
The cost of the policy, compared to the cost of the house, is minimal. For most homes, the policy is no more than a few hundred dollars. But the likelihood that you will ever make a claim on the policy is very low. Most real estate transactions are thoroughly vetted by professionals, and the chances of something being missed that would cause a title insurance claim are remote.
However, in the current market, I find that title insurance is a wise purchase. We all remember the real estate market collapse at the end of the last decade. The result was foreclosure on millions of homes. From personal experience, I can tell you that the resale of those homes to banks and investors was shoddy work, at best. Foreclosure “mills” conducted hundreds of title examinations per day. Their overworked employees produced sale documents at an astounding rate. The result was mistakes — mistakes in property addresses, legal descriptions, conveyance deeds, and taxes paid. On the market today are thousands, if not millions, of homes with questionable title histories. Over the last few years, these homes have passed through many hands. Today, a buyer would never know that the house they’re considering was in foreclosure only six years ago and had passed through one or more of these mills.
Based on the current market, and weighing the cost against the potential benefits, it is a wise investment to purchase an owner’s title insurance policy with every real estate transaction.