What Is Title Insurance and Who Pays For It?

Title InsuranceTitle insurance seems to be a mystery to many home buyers and sellers, so I want to give an overview on it in this post.  We’ll discuss what it is, why it’s needed and when, and also who pays for it. (For the difference between title insurance, home warranties, and homeowner’s insurance, please see another post on this blog: Homeowner’s Insurance, Title Insurance and Home Warranties.)

What is title insurance?

The purpose of title insurance is to protect against loss of ownership of the land, condo, house, estate, or other real estate due to a problem or defect with title. The loss could be complete (losing the property entirely) or partial (losing a portion of ownership or use). It may also include a financial loss, whether direct or in terms of future market value of the property. A company providing this type of insurance is called either a title company or a title insurance company.

Sometimes the loss could be as a result of a “defective recording” of a document, an improper signing of a document, or much worse, forgery or signing under duress (being forced to sign under undue pressure, such as by blackmail).

Loss of title can also result from hidden heirs who may claim a partial interest in the property.

If there’s a recorded easement that the title company does not find when a home is sold, and the buyer is surprised by it after the closing, that title company may be writing a check to the new owner for the loss incurred in market value due to that easement, which should have been found.

Another type of loss would be if someone claimed an unrecorded easement, which might cause a “partial loss”. When the title is somewhat in question, or considered “not clear”, it is often said that there is “a cloud on title”. What you want, though, is “clear title“. You want to know that no one else will have any kind of right or claim to the property: not a lienholder, not the IRS, not a contractor, not the county tax collector or anyone else.

Title insurance covers smaller issues too, such as finding out later that a major component of the home has a building permit violation.
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Why Good Realtors Refer Buyers and Sellers to Lawyers and Tax Professionals for Some Questions

There are a number of things which are related to the purchase and sale of real estate which require the professional guidance of those other than your Realtor, namely a legal or tax professional.  This sometimes surprises consumers.  Once I was discussing one of these areas with a prospective client and she felt quite frustrated and exclaimed, “you know the answer, you just won’t tell me!”  That was many years ago, but I’ve never forgotten it.  Many Silicon Valley home buyers and home sellers assume that they’ll never need to talk to a tax or legal professional, and if advised to do so, may balk.

So let’s talk about it.

In other states, such as New York, attorneys are very involved in real estate transactions. Here in California, though, that’s not the case most of the time.  We call on CPAs and lawyers when there’s a problem or a question which is beyond the real estate licensee’s scope.  I’ll provide a few examples.

Holding Title: Probably the most frequent question I get that I’m not allowed (or qualified) to answer is about how people should hold title when buying a home.  The purchase agreements we use (both CAR and PRDS) lay it out best and puts it in bold so that consumers don’t miss it:

“THE MANNER OF TAKING TITLE MAY HAVE SIGNIFICANT LEGAL AND TAX CONSEQUENCES. CONSULT AN APPROPRIATE PROFESSIONAL.” (newest revision of the CAR contract, April 2010)

Most title companies have a nifty little chart that summarizes the pros and cons of the various ways in which people can hold title.  But neither the escrow officer nor the real estate agent can tell you what’s best for you.  We know what’s most common, but that doesn’t mean it is best for you and your particular set of circumstances.  So talk to a CPA or talk to a lawyer (or both) if you do your research and are at all unsure of what to choose! (Old Republic Title has a summary of the most common ways to hold title in a downloadable pdf file, which you can access via this link.)
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