What is Title Insurance?
By: Rene’ Rutan, Real Estate Council Relations Manager, Florida ARECS
Title insurance is a mystery to most consumers and it really shouldn’t be. Confusion can often occur because lenders require title insurance to be purchased in order to obtain a mortgage, but it is not offered through your normal insurance agent where you purchase your homeowner’s or automobile policy. Instead, title insurance is typically issued by the party who conducts your real estate closing and is often lost in the shuffle of other concerns about obtaining the loan, finishing property inspections, and getting ready for your move. Title insurance is one of the most important things you can purchase to protect one of your largest investments and deserves a little more attention!
In order to talk about title insurance you first need to understand what title is. Real estate title refers to the rights of ownership and possession of a particular property. Sometimes we think of buying and selling real estate as simple, but it is not always what it seems. Real estate title has been described as a “bundle of sticks” because it’s not one solid thing – like a car title. With a car you have a title for the entire car - and typically you can tell when parts are missing! With real estate, you can separate the “sticks” and it’s not always apparent who has what rights to the property. Some of the ”sticks” are use rights given to others like a utility company who has power lines across your property or to a neighbor who can travel across your land to get to theirs. You want to make sure you’re getting all the “sticks” you are entitled to and to be aware of what “sticks” are being used by others. So, how do you do that?
Prior to closing, the real estate attorney or title company who will conduct your closing will perform a title search, along with other research to identify all liens and encumbrances affecting the property.
However, despite their best efforts they may not find “hidden defects”. It may surprise you that not every title defect is part of the public record. Here are examples of common hidden defects:
- Forged deeds
- Forged satisfactions of mortgage
- Identity theft/impersonation
- Unpaid contractor bills
I’m a huge fan of HGTV and watch it all the time…much to my husband’s chagrin. On a recent episode of HGTV’s Flip or Flop, Tarek and Christina bought a house to flip and discovered afterwards that the seller had a new roof installed but never paid the contractor. So they had to pay for it! They could pursue the seller for the money, but good luck!
There are also discoverable defects – things that should be found but are missed due to human error. Some examples of these are:
- Unpaid mortgages
- Unpaid taxes
- Unpaid homeowners’/condominium association dues
Title insurance protects against all of these risks – and many others I have not listed. However, it is VERY important to point out that the title policy the lender requires is to protect THE LENDER, NOT YOU. The lender is writing a big check to you for loan proceeds and they want protection in the event it turns out that you don’t have clear title to the property. Shouldn’t you have the same protection? To get that protection you need to purchase an Owner’s Title Insurance Policy at closing. The good news is that in Florida you get two-for-(almost)-one! The Florida legislature sets title insurance rates and they provide for “simultaneous issue” which means you pay full price for one policy and the second is issued at a considerable discount. In addition, unlike your automobile policy that requires annual premium payments, an Owner’s Title Insurance Policy will protect you as long as you own the property – a potential lifetime of protection - for the single premium paid at closing. Buying real estate is likely the largest financial expenditure you will ever make. What if you buy a $300,000 house with your life savings and it turns out someone else has a claim to it? An Owner’s Title Insurance Policy is the only thing that protects your investment. Had Tarek and Christina had an Owner’s Title Insurance Policy, their insurer would have stepped in and paid the roofer.
Title insurance policy forms are broadly standardized across the country; however, they still can be a bit difficult to understand for the lay person. Be sure to have your real estate attorney explain the status of your title so that you understand what you are getting – and not getting.
Want to learn more? Listen to this story from a South Tampa couple who recently learned the value of title insurance.
http://wfla.com/2016/03/07/8-on-your-side-helps-couple-keep-home-after-title-mistake/