Southern California Real Estate by Phil McCollum

The Mystery of Real Estate...

What is Title Insurance and Why Do I Need It?

The home buying process is, by its very nature, a complex transaction which involves the exchange of a valuable asset in return for money. The buyer needs confirmation that the seller actually owns the property and has the right to sell it. That's where title insurance comes into play.

Title Insurance is an important part of the real estate transaction since it insures you that all liens placed against the prior owners of the property, or documents that will restrict your use of the property, have been fully disclosed to you.

The process of evaluating title begins with a Preliminary Title Report. This report provides the buyer with an opportunity to review any impediments that would prevent obtaining clear title to the property.

When reviewing a Preliminary Title Report, it is important to check the extent of the ownership rights or interest you will be acquiring. The most common form of ownership interest is ‘fee simple’ or ‘fee,’ which is also the highest form of interest an owner can have in real estate. What this means is that the land is owned and not leased. Liens, restrictions, and interests of others will be listed numerically as exceptions in the report.

You may also have to consider interests of third parties, such as easements granted by prior owners, which limit use of the property. Some buyers attempt to clear these unwanted items prior to purchase.

Title Insurance insures owners that they are acquiring marketable title to the property. Unlike casualty insurance policies which insure against future events, title insurance is designed to eliminate risk or loss caused by title defects from past events. Title insurance provides coverage only for title problems that were in existence at the time the policy was issued.

A title insurance policy is a contract of indemnity that guarantees that the title is as reported. If it isn’t, and the owner is damaged at a later date, the title policy covers the insured for loss up to the face amount of the policy.

How Does the Title Company Confirm Clear Title?

Issuing a title insurance policy is an extensive and exacting process. Title insurance companies work to eliminate risks by performing a painstaking search of the public records, or the title company’s own "plant", where public records, laws, and court decisions pertaining to the property and the parties to the escrow are maintained. This is done to determine the current recorded ownership, recorded liens or encumbrances, and other matters of record which could affect the title to the property. Once a title search is complete, the title company issues a Preliminary Title Report detailing the current status of title.

A Preliminary Title Report contains vital information which may affect the willingness and the ability of the parties to close an escrow. Information includes ownership of the subject property, the manner in which the current owners hold title, matters of record which specifically affect the subject property or the owners of the property, as well as a legal description of the property and an informational plat map.

The Preliminary Title Report indicates the type of title insurance to be offered by the title company, and the exclusions and exceptions from coverage based on the type of title insurance policy the company intends to issue. Exclusions and exceptions can include items such as: recorded deeds of trust, easements, agreements, and covenants conditions and restrictions, commonly referred to as CC&Rs.

What Should Be Looked For in a Preliminary Title Report?

As your real estate representative, we will review the Preliminary Title Report as soon as it is issued, paying particular attention to the following items:

* Verifying the ownership vesting by insuring that the names on the report are the same as the names on the purchase contract. Sometimes the name of an unexpected owner will appear (i.e. a previous spouse or relative who died), and corrective documents may be required.
* Verifying that the property address, the plat map, and legal description all match. An owner could own two properties adjacent to, or across the street from, each other, causing confusion in identifying the correct property.
* Reading the informational notes for pertinent items about the property, such as: transfer taxes, monument fees, homeowners’ association fees, etc.
* Carefully reviewing the exceptions. Common exceptions include: current taxes, bonds, deeds of trust, Mello-Roos Assessment District items, CC&Rs, and easements. Be sure the CC&Rs or existing easements don’t interfere with the buyer’s future plans. For example, an easement across the backyard could have a profound effect on the buyer’s ability to add a swimming pool at a later date.
* Always looking for surprises. If you can’t locate an easement, or an unexpected deed of trust shows up, or you see an item you weren’t aware of before, immediately call the escrow officer or title company to discuss the matter. The title company should be a problem solver, and top-notch escrow officers and title companies go out of their way to resolve quickly the majority of "red flag" items. However, the responsibility for early detection and resolution of problems falls on the entire escrow team, including the agents, the escrow and title company, and sometimes the buyers and sellers as well.

What Exactly is Covered by Title Insurance?

Not all risks can be eliminated by a title search, since certain "hidden defects", such as forgeries, identity of persons, incapacity, incompetence, and failure to comply with the law, cannot be disclosed by an examination of the public records. While the Preliminary Title Report is an offer to insure under certain circumstances, the Title Insurance Policy is a contract, providing coverage against such "hidden defects."

In addition to indemnifying the insured against losses which result from a covered claim, the policy also provides for legal fees and defense for future claims against the property.

Extended owners’ and lenders’ policies of title insurance provide broader coverage and are available through the American Land Title Association (ALTA). Coverage is extended to certain matters that are "off-record", but which are generally discoverable by an inspection of the property or by questioning the parties in possession. These include:

* Unrecorded liens and encumbrances
* Unrecorded easements
* Unrecorded rights of parties in possession
* Encroachments, discrepancies, or conflicts in the boundary lines

ALTA policies are available for owners and lenders, and a "plain language" ALTA Residential Policy is also available for residential property containing one to four units.

Agents, buyers, and sellers should not assume that all title insurance policies and title companies are the same. They aren’t, and it is important to ask questions of your title company to determine the type and cost of coverage available.

Title Insurance CASH BACK Offer

I believe in helping my clients by providing quality information that is easily accessible, full service to take care of all the details associated with buying or selling your home, and giving little extra that you can take to the bank. To help defray the cost of title insurance, let me make this proposal…

I’ll give you with a $150 reward just for working with me to defray your closing costs. Not only will you be buying much needed title insurance protection for your investment, you’ll be putting $150 extra dollars in your pocket.

Title Representatives

Tim McChesney
Ticor Title
310-930-3524
tim.mcchesney@ticortitle.com