Whenever you purchase, finance, refinance, or sell real estate, title insurance is required. The difference between a good, clean title insurance policy and an imperfect title policy may be the difference between a profitable investment and a disaster.
Title insurance is a contract obligation where one party agrees to indemnify or reimburse another party for loss or damage which may occur under the terms and provisions of their contract. The contract is called a title insurance policy.
Title insurance is different from casualty or life insurance, which insure against the occurrence of future events. Title insurance typically insures against the past history as of the issuance of the policy date. The title policy also insures the clear ownership of the property.
The premiums or costs associated with title policies are usually based upon the amount of liabilities issued. The liability on a sales transaction is determined by the sales price of the property or the loan amount in a refinance transaction.
In purchase transactions, the seller and buyer may choose to split the costs in half, or one party may pay all of the title costs.
There may be existing real, implied, or improper risks or clouds on title. These ownership risks can adversely affect your ownership of your investment property. Many people pay hundreds or thousands of dollars for title insurance without fully understanding the benefits.
Title insurance insures that a property has “marketable” or valid title. The insurance insures that the owner has a true ownership interest in the property. Title insurance protects both the owners of record and lenders against the loss or damage, according to the terms of your specific title policies.
Title Insurance Coverage
Typically, the title insurance premium is paid one time at the close of escrow. Each time the property owner refinances their existing mortgage(s), a new title insurance policy is placed upon the property.
Much of the title insurance premium is used on research to confirm who legally owns the property that you may wish to buy. In addition, the title companies research whether there are any unpaid liens or judgments on the property.
Listed below are several examples of title irregularities that can adversely “cloud” or negatively impact the clear ownership of real properties.
Mistakes: Incorrect street address or legal descriptions. Incorrect surveys or boundaries or overlooked state, federal, or property tax liens.
Forgery and Fraud: Sellers may have been impersonated by someone else. Signatures may have been forged on grant deeds or other important documents.
Secret Spouses: A seller may claim to be single when, in fact, he or she is legally married. The spouse may have no knowledge of the sale of the property. In the midst of a divorce, many couples refuse to cooperate with one another regarding the sale of a property.
Improper Easements or Encroachments: Your property may infringe upon your neighbor’s property line or you may not have full access to your driveway or walkway.
Zoning Violations: Your single-family home may be improperly located on a commercially zoned lot.
Your Title is Unmarketable: Due to defects in the ownership history or the “chain of title” of the property, the owner is unable to sell the property for true market value.
Standard vs. Extended Coverage Title Policies
There are two major types of title insurance available to the general public: a standard coverage policy and an extended coverage policy.
The standard coverage policy is less expensive than an extended policy because it provides less coverage. Standard coverage policies are limited to certain off-record risks, such as fraud in the chain of title, defective recordings, and competency.
Additionally, recorded (at the local County Recorder’s Office) mechanic’s liens, tax liens, judgments, and other property defects that a search of public records may uncover are covered by many standard coverage policies.
Extended title insurance policies cover the same things that standard coverage policies do, as well as provide additional coverage for off-record risks that may be discovered later through physical inspection or by verbal inquiries. Unrecorded mechanic’s liens, leases, or land contracts may also be insured against.
Title insurance policies is a must for all types of real estate transactions. Lease options, land contracts or contracts for deed, AITD’s, “subject to” acquisitions, conventional transactions, or any other real estate transactions should include title insurance policies.
Again, the difference between a good, clean title insurance policy and an imperfect title policy may be the difference between a profitable investment and a costly one.
Check with local real estate agents, escrow companies, mortgage brokers, and others in the real estate industry for their perspectives regarding the best regional or national title insurance firms to work with. You’ll see future profits more clearly with clear title insurance policies.
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