Why do you need real estate title insurance?
Real estate is filled with terminology that is foreign to most people as they buy homes infrequently, and even investors are typically not transacting frequently enough to become experts in every facet of real estate. If you don’t understand the purpose of title insurance, start here.
I spoke with 2 title insurance reps, Marc Angstead of Stewart Title, and Brad Hobson of Chicago Title, about what the purpose of title insurance is, and why reading exceptions is so important. Even if you don’t know how to interpret title exceptions, your Realtor or title rep should be doing a preliminary title review with you!
Title insurance is an insurance policy that protects a buyer of a property from financial loss in the event that there are defects or issues with the property's title. The title is the legal document that establishes a person's right to own and use the property.
Here are some ways that title insurance can protect a homebuyer. The following applies to residential property- 4 units or less. The standard policy in CA that is issued is the ALTA Homeowners Policy.
Clear title: Title insurance ensures that the property being purchased has a clear and marketable title, meaning that there are no liens, judgments, or other legal claims against the property that could affect the buyer's ownership.
Unknown Easements: An unknown easement may prohibit your use or could allow government agencies, businesses, or other parties access to all or portions of the property
Boundary/Survey Disputes: A neighbor or other party may be able to claim ownership to a portion of the property if a differing survey is discovered
Fraud and forgery: Title insurance protects the buyer against fraudulent activities such as forged documents, improper recording of deeds, and other similar scams that could potentially cause the buyer to lose the property or incur significant financial loss. Common and similar names can make it possible to falsely “impersonate” a property owner. If a home is purchased by a false owner, the new owner’s legal claim to the property may be jeopardized
Unknown issues: Title insurance protects the buyer from any issues that may arise after the purchase, such as undiscovered heirs, undiscovered will, or previously undisclosed claims against the property. It’s possible that a third party holds a claim to all or part of the property due to a former mortgage or lien, or non-financial claims, like restrictions or covenants limiting the use of the property.
Legal expenses: If a claim is made against the property's title, the title insurance policy will cover the legal expenses involved in defending the buyer's ownership of the property.
In summary, title insurance protects the buyer from financial loss due to issues or defects in the property's title. It is typically purchased at the time of closing and provides peace of mind to the buyer that their investment is protected.
During escrow, you will be issued a report called the “Preliminary Title Report” or often referred to as the PR.
The PR will cover the legal description of the property as well as a list of “exceptions” which are items not insured nor covered by the insurance policy
Common exceptions are for existing mortgage debt, property taxes owed, solar liens, utility easements, condo CC&Rs. This list of exceptions are found on a Schedule B. Additionally, any special restrictions on use are noted in this list. Since these are known constraints on the property, they are not covered by the insurance.
Debts will be paid off by the close of escrow in order to convey a clear title
The PR will include documents going back into history from the time it was land, to being developed as the property stands today, so you can expect to find historical references that may no longer be applicable under current laws
Where possible, you can request color plotted easements so that you can understand where existing easements exist. If you have a large gas line running through your property, this can impact where you place an ADU
Commercial properties: If you are buying 5+ units, here are critical aspects that differ and you should understand:
5+ no longer qualifies for an ALTA Homeowners Policy. 5+ units becomes a commercial designation from loans to title
You can only receive a standard coverage policy known as a CLTA
Missed or unrecorded easements, deeds, liens are no longer covered
The recommendation when you are a Buyer is to work with the title officer to visit the property for an inspection and write in endorsements for additional coverage. Examples include unknown CC&Rs, unknown leases
Additionally, it’s imperative that you have a title officer walk you through the preliminary title report line by line
Quality of your title company is key to protect your interests:
Employ great searchers & examiners: they look through all public records that has ever affected a parcel. Having a local title company with this expertise in San Diego County is critical because the history of how land is parceled & sold is county specific. Your goal is not to have title claims so the expertise of your title company is step 1 to mitigating this risk
Financial stability to pay out claims
NEXT: Why reading exceptions are so important and can be very expensive or a nightmare if you do not understand how you can & cannot use or maintain your property
