Title Searches, Abstracts, and Insurance
Do you know the difference in a title search and a title abstract? Mortgage title insurance and owner’s title insurance? If you do, you are in the minority of the people that I help with real estate transactions. Most that I deal with have no idea what these are and what the differences between them are. However, this is an area that is very important for the buyer to understand. I ask my buyers those same questions whenever I help them reduce an offer to writing.
Each one of these offers a buyer a measure of protection in making sure they are buying what they think they are buying. Sometimes things are best explained by example.
Mr. Buyer is buying 40 acres from Mr. Seller. Mr. Seller tells Mr. Buyer that he owns the 40 acres free and clear. Now this is a cash transaction and they decided to have an attorney just “draw-up a deed” in order to save everybody money. Based on this information, Mr. Buyer proceeds with the transaction and Mr. Seller grants Mr. Buyer a Warranty Deed to the property. Everything is great until 2 years down the road when Mr. Buyer decides he needs to sell the property. During the process, it is discovered that there were several outstanding judgments against Mr. Seller that had been attached to the 40 acres prior to the time when Mr. Buyer bought the property. The new buyer’s attorney tells Mr. Buyer that he will have to pay off these judgments against Mr. Seller and the property before he can convey good and merchantable title to the property. Mr. Seller has not been seen or heard from since the close of the transaction, and Mr. Buyer suspects he may even be deceased. The Warranty Deed is a guarantee from Mr. Seller to Mr. Buyer that the property was free and clear of all encumbrances and that Mr. Seller had every right to sell Mr. Buyer the property. It turns out that this was not the case. However, enforcement of that Warranty Deed is only as good as Mr. Buyer’s ability to find Mr. Seller and hold him accountable for the error. In this case, most likely, Mr. Buyer has to take it on the chin, pay off the judgments and chalk it up as a life lesson. If Mr. Buyer had a title search performed on the property prior to closing with Mr. Seller, then in all probability, Mr. Buyer would have known about the outstanding judgments against Mr. Seller before closing. Mr. Buyer could have insisted on the satisfaction of those judgments. In addition, Mr. Buyer could have purchased title insurance that would have been one more safety net in the event that the judgments were not found before closing occurred, or if there were additional encumbrances that did not show up at the time of the title search.
Hopefully, this helps you see the value in having a title search performed and what title insurance can do for you. Following, I will describe what each of these are and when you should use each one.
Title Search/Exam – When do you use this? EVERY time you buy a property. Even if you are buying it from your brother. Just do it. It’s comparatively inexpensive to the headaches it can save you. So, “What is it?”, you say. A title search and a title exam are terms that are generally used interchangeably. It refers to a process completed by a competent individual whereby the title history and public records regarding a property are searched from the present, backwards for a stipulated period of time. Most in my area look back 40-60 years in the title history. They are checking to see if the property was properly conveyed between all owners in the chain of ownership. They are checking to see if any interests or rights of ownership have been severed from the chain of title. They are looking for unsatisfied judgments and liens against the property. They are looking for anyone else that says they have a claim to or against the property. They use the public records available to make these determinations. Generally, title examiners work for attorneys and title companies, through which their services are available to you. This is the basic level of protection against scenarios like I described above. Again, have this done every time, without exception.
Title Abstract – A title abstract is basically the same thing as a title search except for a couple of characteristics. A title abstract, in its purest definition, does not stop at 40-60 years into the title history. It continues the history to the point of original land grants from the government or to a point where records are no longer available. This can be helpful when researching interests and rights severed from a property such as mineral rights…rights that may have been severed long ago. Some places include mineral rights searches in an abstract and some do not. Market conditions in a given area generally dictate whether or not you choose to have an abstract or a search done. Abstracts are generally more expensive and take longer to complete. Talk with your agent or attorney about what is the best option for you given the market in your area. In ten plus years, I have never had a buyer have a full abstract completed. However, another agent just 100 miles south of me that works with property in a different area almost always has an abstract done in the transactions he helps close.
Title Insurance – Title insurance is a policy that you buy at closing, or shortly thereafter, that insures you against errors and omissions made by the title examiner. To get title insurance a title search or abstract will have to be completed first. In the event that there is a claim against the title that originated prior to the title search, you are afforded some monetary protection by a title insurance policy. There are different types of title insurance that protect you in different manners. Most title insurance policies have some exceptions for scenarios in which they will not pay. These exceptions are explained to the buyer as “standard exceptions” , but what is standard will vary from market to market and by the company that issues the policy. Make sure you understand what those exceptions are. Make sure that the company that issues the policy is an established and well-rated company, just as you would when buying any other type of insurance. If they are not around when you need them, then it’s just as worthless as the Warranty Deed was to Mr. Buyer in our example above.
Owner’s Title Insurance – I recommend that all of my buyers obtain owner’s title insurance. It will protect the buyer, in the amount the buyer paid for the property, from now on. It will protect the buyer, even after that buyer sells the property. It puts the issuing attorney/agency in the position of defending the title to the property, and having a vested interest in doing so, should you ever need them.
Mortgage Title Insurance – When you borrow money against a property, the lender usually requires mortgage title insurance. This type of insurance is less expensive than owner’s title insurance because it has more limits. It’s only good during the time which the loan that it was issued with at the same time as the policy is still against the property. It’s only good in the amount of the loan that is still outstanding when a claim against the policy is made. This type is to cover the lender’s interest in the property, not the owner’s.
Simultaneous Issue Title Insurance – This is the best measure of protection that you can get. It is effectively owner’s title insurance with a mortgage title insurance rider. It covers both, and does the things outlined in both of the above types. It is, of course, more expensive than either. If you are borrowing money on the property, and the lender requires mortgage title insurance, go ahead and opt for simultaneous issue title insurance. The difference in the premium is not huge, and you will be protected from now on by the owner’s title insurance portion of the policy.
Title searches, abstracts, and title insurance are all tools for the buyer to use to mitigate risk in buying a property. Without use of these tools, the buyer is leaving himself open to unwarranted risk. If you are buying, at the very least, get a title search completed and make sure you understand the findings of that search. I recommend getting title insurance as well. Again, make sure you understand those “standard exceptions” to the policy as well.
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