Real estate transactions involve two related but very different protections—title searches and title insurance—and misunderstanding the distinction can expose property owners to far more risk than they realize.
What’s a title search?
Examining the log – A title search is the way in the United States that one examines the log of all documents recorded for any property at its county recorder’s office. A search does three things: First, it identifies ownership through tracing deeds and wills from some point in the past to the present day. How far back in the past the search must start varies by state and the type of transaction the search if for (purchase, refinance, foreclosure, etc.) Secondly, a search identifies the valid mortgages, liens, and encumbrances on a property, and other documents related to them. Thirdly, a search identifies the tax amounts and payment status of a property. Encumbrances are generally documents that state various parties’ rights to a property, and they include items such as leases, easements, purchase options, etc.
All the documents mentioned above are prepared by humans, signed by humans, notarized by humans, and then recorded (added to a property’s log on the county recorder’s computer) by humans.
What a title search CAN’T find
Title defects – Everywhere humans touch documents, there’s potential for error – both unintentional and fraudulent. Many error types can invalidate a document completely, forcing it to be corrected and/or invalidating purchase transactions altogether. Transactions are like dominoes, so if one is invalidated, all the subsequent ones are as well. This can be a huge problem and involve huge dollar amounts of previous investment made by multiple parties.
Indexing title defects – When a county recorder’s office records documents under inaccurate names or addresses. This is very common. If searching a property’s records, and a document is not in the record, then it is not detectable. Key – mis-indexing does not necessarily impact the validity of the document. The mis-indexed document can be identified later and indexed correctly. This can be a costly surprise and lawsuits.
Other title defects, including fraud – These include incorrectly prepared, signed, or notarized documents. Fraud or errors from negligence include forgery, impersonation, omitted heirs, wills executed (notarized or witnessed) after death, wills and documents signed by persons who are impaired, under duress, or not of sound mind. These are but a few of the many potential issues that can invalidate real estate documents, entire transactions, or a series of past transactions. Most of these defects cannot be detected in a title search.
Here’s the key
Most title defects are 100% invisible to any title search. If a document is not in the record (due to mis-indexing or that it was never recorded but still valid) it cannot be detected. The almost endless forms of fraud are invisible to any title searcher, and so on. Therefore, a perfect title search cannot protect a seller, buyer, borrower or lender against financial loss as a result law suits due to title defects being discovered. Regarding timing, it’s important to note that title defects could have occurred at any point in the past (before you purchased a property), and/or they may occur at any point in the future (during your ownership), thereby impacting your ownership, usage rights, or rights to some or all of the sales proceeds you may have received from a past sale!
What’s at risk?
As a result of title defect discovery, any person could come forward and claim to have an ownership interest (partial or total) or usage rights to your property. They will have to either be paid off to make them go away, or you will have to defend the claim in court at your time and expense. If you lose, worst-case scenario is that you could be forced to forfeit your property in full and all the equity you have in it.
What protection is there? Title Insurance.
What is title insurance?
First, title insurance is NOT insurance that a title search was done properly! Those errors or omissions by a title searcher are covered by the title attorney’s malpractice insurance, or by a title company’s errors & omissions insurance. Search performance is NOT what title insurance covers. On the other hand, title insurance DOES protect you from all the defects that CANNOT be found in a search.
Lender’s title insurance is REQUIRED and does NOT cover the borrower or property owner. Why is it required by lenders? They understand the risk of financial loss due to lawsuits as a result of title defects being discovered in real estate deals they finance. You’ve seen these premiums on the settlement statements of every transaction you’ve ever engaged in.
Owners’ title insurance is OPTIONAL. It protects the borrower (real estate owner) from title defect lawsuits. Typical owner’s title insurance features include:
- It is a one-time premium.
- There is zero deductible, so you have first-dollar coverage.
- Premiums are very low, and if purchased at, or within 6 months, of a lender’s policy, you get a substantial discount.
- It covers you for the purchase price plus 50% appreciation. So as your investment grows, so does your protection.
- It covers you for as long as you own the home, and, typically, even if you rent the property or put it in trust for your heirs or put it into an LLC.
Five must-buy scenarios of owner’s title insurance
There are certain circumstances in which I recommend the purchase of owner’s title insurance, and I see them as being an absolute necessity. They are:
Cash purchase – Because you risk forfeiture of some or all of your equity, that means 100% of the purchase price in a cash purchase. Not just a small down payment.
New construction, renovation – You risk materialmen’s liens being filed on your property, which will have to be paid off, or sue the builder to force them to pay them off. These are dependent on the financial strength, experience, and warranties of the builder.
Estate – When buying from an estate, that means money (even if it is only the real estate you are buying), and heirs commonly argue over money and file lawsuits, even after you’ve purchased the property.
Foreclosure or Short-Sale – Contrary to popular belief, these often result in parties still having legal claims against your property due to omitted lienholders from the lawsuit, surviving judgments, unforgiven or carryover debt, etc.
Known Boundary Dispute – Encroachment on or across boundary lines or easements (fences, driveways, buildings, access, egress, usage, etc.), or disputed location of boundary lines, can cause lawsuits with current or future neighboring parties. If in doubt, get multiple surveys and have neighboring parties sign an indemnification before purchase, and always buy owner’s title insurance.
Summary
In short, a title search explains what can be found in the public record. Many items and problems can be hidden from the public record. Owner’s title insurance protects property owners from financial loss due to the discovery of any of these hidden items or problems. Always ask your settlement agent (title attorney, title company, closer, etc.) to a quote of owner’s title insurance, and the incidence rate of claims resulting from title defects in your state. Then make a judgment call on the risk versus your risk tolerance and purchase it or not.
