Wednesday, November 2, 2016
Title Insurance and Why a Property Needs it When Buying Land or Real Estate
Title insurance is indemnity insurance. It essentially is a backup plan in the event there is an issue the ownership of the real property you are buying. It protects the buyer against financial loss from defects in title to real property and from the invalidity or unenforceable mortgage liens. Most home purchases have had debts on them. A buyer needs to ensure those debts to a bank or mortgage lien holder has been released. It is also meant to protect the current property owner's and or the lenders on the property their financial interest in the real property. This protects both the buyer, seller and lender against loss due to title defects, liens or other matters. Notwithstanding it will also defend against a lawsuit. Virtually everyone gets title insurance on a home when the sale is between strangers. Not everyone gets title insurance when the quit claim on real property between family members, joint tenants, and married couples. What we have found is many land parcels transactions and even home sales is where one spouse quit claims on a property to the other spouse. Years in the future that spouse retaining title sells the property. The title shows that a prior spouse quit claimed on the property without title insurance. In many cases there is an unrecorded quit claim deed. This recorded or unrecorded quit claim will create a cloud on title. A new title insurance company will require that the prior spouse sign a new quit claim deed. In many cases that prior spouse can’t be found is deceased, or is out of the country. The seller may have great difficulty in selling the home. Another major issue are deeds of trust. This is where one party buys land with a debt on the property. The buyer paid off the debt, but there was not a re-conveyance deed recorded showing the debt was cured. We have seen this a lot in many cases where the deed was paid off even decades ago. In this case the seller of the property must find the prior owner and get them to sign a re-conveyance, or if a seller is lucky the new title company will approve the sale, but will be held harmless if the old property owner shows up asking for the old debt to be paid off if it hasn’t. This clearly demonstrates that selling property with past debt can tangle up the sale of that property in the future. Occasionally, a seller may have to bond around an old deed of trust. This is where a seller pays a bonding company to protect the new buyer against an old debtor coming forward and requesting the old debt to be paid. This bonding process protects the title insurance company against such an occurrence, and places the responsibility on the seller with that prior debt to pay off that debt. The bonding process will not work for a foreign seller though. If a foreign seller has a deed of trust (debt) on a parcel that doesn’t show a re-conveyance then a bonding company will not allow a bond unless the foreign seller has other US real estate that the bonding company can attach the bond to. The bonding company needs some protection in the event the debtor wants a debt paid, but the prior seller is foreign. In such a case a foreign seller can’t sell the real estate until they can show a re-conveyance or demonstrate to a title insurance company that the debt was fully paid. In 98% of cases the title company will want the re-conveyance recorded. Buyer and seller beware of deeds of trust and quit claims.