I can guarantee that for most buyers, the title of a property is the LAST thing on their mind when looking at homes to purchase. According to the American Land Title Association 26% of title searches reveal an issue that can be corrected before purchasing a property.
The title process is very complex but is an important part for any real estate transaction. When you buy a home you will want a “clean title”. What this means is that you do NOT want any iens or other documents that will restrict your use of the property in question.
Shortly after escrow opens you will be given a preliminary title report (prelim) which you shouldreview with your real estate agent for any issues that would prevent clear title from passing to you. When you look at the prelim you should look for a “fee simple” or “fee” ownership. These types of ownership are the highest form of interest an owner can posess in real estate. If there are any liens, restrictions, or other interests of others they will be listed as exceptions on the report.
Sometimes there are third party interests. An example of this could be an easement that was granted by a previous owner which in some way limits your own use of the preoprty. A buyer should attempt to clear these unwanted issues prior to purchasing the property.
When you purchase title insurance you are assured that your title will be marketable. Title insurance is different than most insurance because the insurance is for PAST events and not FUTURE events (you are covered from future events that are caused by PAST issues). Title insurance covers all clouds on the properties title prior to the purchase date (if it was not listed on the report). Once you purchase title insurance you will be guaranteed that the title is as reported. If the title is not accurate then you are covered for all damages up to your policy limit.
When a title insurance policy is issued the title company must search all records of the property. This can be an exhausting task. All public records, laws, court decisions, and all parties included in the escrow are researched. Most title companies have their own database that includes most records. The title company must figure out who currently owns the property (in all official databases), any liens or encumbrances, judgments, mortgages, taxes, assessments, charges, or any other issue pertaining to the title of the property. After this title search is completed the title company send out a preliminary title report (prelim) which will show the details of the current title.
The buyers agent should always review the preliminary title report right away. The most important things to look for in a prelim are the following:
- The owners listed on the prelim match the names on the purchase contract
- The property address, the plat map, and the legal description all match.
- Making sure there are no transfer taxes, monument fees, homeowner’s assocation fees etc…
- CAREFULLY review the “exceptions” (current taxes, bonds, deeds of trust, Mello-Roos, easements, and CC&R’s (covenants, conditions and restrictions). An example of this would be an easement in the backyard of the property. This could effect the buyer MAJORLY if he buys the house planning on putting a swimming pool in the back.
Title Insurance Coverage
Title searches cannot find EVERYTHING that might cloud a title. There are issues like forgeries, identities, incapacities and incompetencies which will not be disclosed in public records. This is why having title insurance is so important, because it covers these “hidden issues”.
- Not all title polices are the same… every company is different
- The cost of a prelim is anywhere from $400-600 (this is a rough average)
- It is usually cheaper to purchase the lenders title policy and owners policy at the same time
- Lenders require title insurance as a condition of your loan (lender’s policy). A lender’s policy does not protect the owner.
- An owners title policy protects the owner for as long as they own the home.
- The owner should insure the full purchase price of the property; the lender only requires title insurance to cover the loan amount
- In Southern California the seller usually pays for title insurance… and in Northern California the buyer usually pays (however this is always negotiable)
- The buyer usually always pays the lender’s premium.
- If you have questions, consult your local escrow officer!