Most home buyers understand that they need homeowner’s insurance so that they can recover their losses if their home is destroyed in a fire. Buyers do not always understand why purchasing title insurance is equally important.
What is title?
Title is evidence of a right to the ownership and possession of property. Someone other than the title owner may have a legal right or interest to the property as well. A title holder’s rights may be limited or subject to certain rights that others may have in the same property in the form of a mortgage, lien, easement, restriction, or other legal interest. An easement grants others the right to use a part of your property for a specific purpose. Encumbrances or restrictions upon the property could affect an owner’s use of the land.
Occasionally, a dispute may arise as to who possesses legal or marketable title to property. While ownership is typically determined by examination of a deed, an owner’s legal interest could be jeopardized by defects in the previous chain of title.
Prior to taking title to any property, a determination should be made that you are obtaining “clear title.” It is essential that all parties having ownership rights, claims or interests are included in the conveyance of title. All too often, deeds are executed without the required signature(s) of an unnamed spouse, heir, beneficiary or legally authorized individual. Furthermore, a prospective owner may be taking title subject to undisclosed encumbrances which may greatly affect the value of your property.
What is title insurance?
In the past, a real estate lawyer would scrutinize the abstract of a property to determine whether a potential buyer was obtaining clear title. An abstract is a record of every real estate transaction or recording that has ever had an impact on ownership or use of the property. The lawyer would then write a title opinion explaining whether the buyer was receiving clear title and, if not, describing the encumbrances or title issues that could affect the owner’s use or ownership of the property.
Today, it is far more common (and the expected practice) for a prospective owner or purchaser to obtain title insurance rather than request a title opinion from an attorney. The attorney fee for a title opinion can be costly. Moreover, depending on the location/county where the property is located, the Seller may be required by contract and/or local custom to incur the cost/fees for the title search and title insurance premium. A title/closing agent issuing the title insurance policy will obtain the title search and determine what requirements are needed to ultimately convey marketable title at closing. The title policies issued at, or shortly after closing, will insure the buyer (and buyer’s lender) from financial loss or the legal defense against any covered claim to the property.
Why is title insurance important?
Even the most careful or scrutinized public records search may not reveal certain title issues which can make a title defective. Often times, “hidden defects” are not revealed or discovered for several months or years. Defending against potential title claims can be expensive, may hinder an owner’s ability to sell or obtain loans against the property, or could ultimately result in the loss of the property.
Title insurance serves to protect owners against title defects that existed prior to the issuance of the title policy. Undisclosed and/or unsatisfied prior mortgages, improper estate proceedings, pending legal actions, easements affecting the property, or competing ownership claims can all put your property interest or value at risk. In the event a valid claim is filed against the insured property, title insurance covers the financial loss up to the face amount on the policy and the full cost of any legal defense of your title interest.
The title insurance commitment that the buyer receives prior to closing serves to alert the buyer of any known title defects or encumbrances that will not be covered by the insurance. This provides the opportunity for certain potential title defects to be addressed (i.e. a judgment lien recorded against the Seller’s property) before closing occurs.
To ensure you are obtaining clear title and that you are aware of potential title issues or defects against the property, it is essential to have an experienced real estate attorney review the title commitment in addition to all title searches, lien searches, survey and proposed conveyance documents prior to your closing. A professional review of these items will assure that any potential problems are remedied before closing, giving you the peace of mind that comes from knowing you have protected your real estate investment and anticipated enjoyment of your property.
To speak with a real estate attorney about protecting your rights and interests regarding a residential or commercial purchase or sale (including a title review, the issuance of a title policy, closing services or a title insurance dispute), please contact Marshall Grant PLLC at [email protected] or 561-361-1000.
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