Two questions that I am often asked are, “What is title insurance?”, followed by the question, “Do I need title insurance?”
These questions usually get asked when I present the seller with a “net proceeds” sheet which has a line item for the title insurance fee. According to homeclosing101.org (provided by the American Land Title Association), more than one-third of all title searches result in a title problem, but most are easily fixed before closing without the buyer or seller getting involved.
Here are just a few things that are examined during the “title review” process:
- Verify seller has the right to sell the property. Oftentimes there are other entities who may be listed as legal owners. These could include divorced spouses, heirs, or trusts. These need to be cleared before the property and the actual seller identified before the property can change hands.
- Identify any lienholders. Sometimes creditors put “liens” on properties to make sure debts are paid before the property can change hands. These can include creditors for property tax, some utilities, contractors, and even the IRS. In some cases, these debts can be paid out of closing dollars, but often they need to be taken care of by the seller before closing.
- Identify easements which provide ongoing access. The buyer needs to be informed of any existing easements and ongoing access that goes along with the property. For example, some utilities such as power companies, gas companies, pipelines, driveways, and shared spaces must be identified so the buyer knows exactly what they are purchasing and which areas must remain clear of fences and outbuildings for those who need ongoing access.
- Legal description. As a buyer you want to make sure that you are purchasing the right property!
If issues do arise, Title Examiners and their teams do their best to try to solve these items if a solution is possible, or determine potential solutions which require action from others to solve. For example, items such as unpaid taxes, mortgages, child support, and other liens may have been placed on the property by others and represent debts that need to be satisfied before the property can change hands. It is possible the property is part of an estate in which there is a dispute among the heirs. Or a builder may have failed to pay a contractor for work and the contractor may have put a lien on the property. If these liens are not satisfied before a property closes and changes hands, it becomes the responsibility of the buyer to solve or pay (as the lien follows the property, not necessarily the seller). This is why taking the extra precaution of having insurance is so necessary and, in fact, most lenders require it to protect their financial interest in the property.