By Timothy D. Erb
In Brief Newsletter Fall 2006
In the past, when a buyer wanted to investigate the title to real estate, a call to his or her attorney was likely necessary. Today, there are two methods to investigate a title to real estate: hiring an attorney or using a title insurance company. Title insurance is very similar to an opinion of an attorney in that it provides an opinion as to the status of the title. However, title insurance also creates a way to make a claim on the policy if the opinion of the title company is incorrect. This article provides additional information regarding investigation of the title to real estate when the buyer elects to obtain title insurance.
There are two types of title insurance that the typical buyer will be offered. First , a title company will offer a lender’s title insurance policy to the buyer. If a buyer is purchasing the real estate with the assistance of a lender, the buyer will be required by the lender to purchase this policy. A lender’s title insurance policy will only cover the lender in the event of a title problem. Second, a title company will offer an owner’s title insurance policy to the buyer. An owner’s title insurance policy typically covers the buyer up to the amount of the purchase price of the real estate. For the average residential real estate purchase this policy typically costs a few hundred dollars and protects against existing liens or encumbrances on title. Prior to closing, the title insurance company will provide the buyer with a title insurance commitment. A commitment is basically a promise by the title company to issue a policy on the terms described in the title insurance commitment.
However, purchasing a title insurance dose not mean that the buyer is protected from all existing liens or encumbrances. Title insurance commitments and policies have an “exception” section that specifies existing or known liens or encumbrances affecting the real estate. Often these liens or encumbrances are standard exceptions; such as a drainage and utility easement around the perimeter of the real estate. There may be additional encumbrances that will not be covered by the title insurance. Therefore, not only is the purchase of an owner’s title insurance policy important, but a prompt review of the title insurance commitment is necessary to determine if there are any liens or encumbrances the buyer finds objectionable. If so, the buyer’s purchase agreement may provide that such liens or encumbrances are to be addressed at the seller’s expense prior to closing.
Because failure to procure an owner’s title insurance policy could mean a loss of the value of the real estate, title companies have started to require the buyers to indicate in writing that they were offered a chance to purchase an owner’s title insurance policy and declined such an opportunity at closing. Although general protection for liens and encumbrances is important, it is even more important to investigate the title to understand specific exceptions in such protection. Procuring and fully understanding title insurance can protect a buyer’s investment.