A title policy is designed to protect you.
A title policy is an insurance policy designed to protect you from the issues that can arise in real estate ownership and can safeguard your investment. Without a policy, you may be at risk for unforeseen circumstances—and really, who can predict the future?
First, we need to cover the difference in the two types of title policies that can insure your ownership, and how your escrow officer can help guide you through the process so you can make decisions with confidence.
The purpose of a title search is to verify the seller’s right to transfer ownership and hopefully discover any claims, errors, assessments, debts or other restrictions that may be on the property. A title company determines the insurability of the title as part of the search process. This leads to the issuance of a title commitment or preliminary title report, which reflects the requirements and the exceptions to a potential insurance policy against the existence or non–existence of rights to the property.
There are customarily two types of title insurance policies when purchasing a commercial property:
- An owner’s policy, which insures the buyer. Typically, the seller pays for this policy with the benefit being that it enables them to show you as a buyer that they have ownership of the property and no outstanding loans.
- A lender’s policy, which insures the lender, so that they can make a claim under this policy if needed. This policy is customarily paid for by the buyer.
Why should you have a title policy?
As a real estate buyer/owner, having a title insurance policy can protect you from several potential issues. While you may think a title search is enough to spot any red flags, a title policy covers you against anything that may have been missed in a title search.
For example, if you do not have a title policy and you discover there is an outstanding loan on the property you have purchased, you could be subject to the terms of that loan. Or, in the event your property is not accessible via a main road, you could run into access problems.
For a lender, a title policy can protect you in the event of a borrower defaulting on a property. Without a policy, you may not necessarily be able to foreclose on the loan.
It is estimated that more than one-third of real estate transactions have some sort of issue effecting the title. The most common problems are existing liens, unpaid loans, and recording errors of names, addresses or legal descriptions. In some cases, an existing lien can bring a transaction to a complete standstill. If an old deed of trust or mortgage, paid off years ago is not correctly released the owner may not be able to sell their property or use it as collateral to obtain a new loan. A title problem such as this can be complicated if the beneficiary is a banking institution which no longer exists.
What does a title policy cover?
A standard title policy typically covers the following areas of real estate: vested ownership of an estate or interest (for example, the immediate right to income), fraud, defects in titles, liens, encumbrances, unmarketability, and lack of access. Extended coverage includes everything in the standard policy, plus mechanic’s lien coverage, off-record matters coverage, and survey coverage.
As a policyholder, the amount of money you are insured for is equal to the cost of the purchase of the property. For example, if you are buying a $1 million property, you will receive a $1 million title insurance policy. If problems like those previously mentioned occur, as long as they are included in the title policy, the insurance company remedies the problem or pays out.
A common misconception is that the American Land Title Association (ALTA) provides extended coverage and the California Land Title Association (CLTA) offers standard coverage. However, these associations are actually brand names and do not correlate to a specific type of coverage.
How can your escrow officer can help with your title policy?
When you work with an escrow officer, they will have the title company generate your title report and commitment after you request a title search. This report will show you everything known to be recorded against the property. The title commitment includes a commitment to issue an insurance policy and details the information needs for your escrow officer to issue the policy.
Once this process is complete, you and/or your attorney may choose to create a title objection letter and your escrow officer will provide you with samples of what your final policy will look like. After your transaction is completed, you will receive your final title policy and paperwork.
Protect your investment with a title policy
Some people underestimate the importance of having a title policy. While it does not insure you against potential future problems in the way that car insurance does, a title policy protects you against potential historical or hidden issues that could come up in the future. Title insurance enables you to be reimbursed in the event an issue were to arise, whereas without it, you will be out of luck—and out of pocket.
Do you have questions about what kind of title policy is right for you? Shoot me an email at firstname.lastname@example.org to see how I can help.