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Never Purchase Any Real Estate Unless You Can Obtain Title Insurance - 2008-02-03 |
Recently I was asked whether or not a buyer should pay for title insurance in addition to his other closing costs. My answer was an emphatic yes, and here are my reasons.
A "chain of title" is the written evidence of transfers of ownership for a particular parcel of property. It is typically maintained by the Clerk of Superior Court for the county in which the property is located, and is evidence of ownership.
Because transfer of title is most often accomplished by a general warranty deed, the chain of title might most often look like a list of the deeds and when they were recorded. In addition, when we take out a home loan in Georgia, we usually sign a "security deed," in which we post the real estate as collateral for the debt. Those deeds are in the chain of title as well.
Because being able to prove who owns which house and who does and does not have an interest in any piece of real estate is so important, the business of verifying ownership is vital to the purchase and sale of real estate.
Normally, when you buy a piece of real estate, you will hire an attorney who specializes in real estate to perform a title examination, and to report back to you that the seller does appear to own the house that you intend to buy.
Furthermore, the seller will be required to sign a statement at closing affirming that there are no known challenges to his ownership of the property. But even with all that evidence, there could be problems down the road that even an experienced title examiner could not find.
These problems are called "defects" in title, and can pop up anytime during the ownership of the property. Here are some examples:
* Errors in the recording of legal documents. Let's say your builder refuses to pay for the roofing contractor, and the roofer files a mechanic's lien on your house before you buy it. But the clerk at the courthouse files it under Lot 81 instead of Lot 18 in your subdivision. And because there is no Lot 81, the error never comes up.
Then later, the roofer gets a judgement against your property based on the mechanic's lien which was properly recorded, but mis-filed by the courthouse personnel. It's a valid judgement. You would have to pay, and hope to collect later from the builder, now long gone.
* Forged deeds or wills. You might end up buying your next house from an estate, in which the executor is named under a forged will. Your executors deed is later challenged by a disgruntled family member who wants the house back. You would have to pay to defend your ownership, and still might lose the house. And if you did lose the house, you would still be personally liable for any sums still owed on the mortgage.
* Liens for unpaid local or federal taxes.
You are buying a house, and your attorney checks out the complete chain of title through the date of all recorded documents, which was yesterday. You are scheduled to close today at 4:00 pm. At noon, an official with the Internal Revenue Service files an entirely legal $100,000 lien for income taxes against your seller, and gets the lien recorded as it is filed. Your seller and your attorney are both unaware of the tax lien, but it is completely valid against both the seller and the house. You buy the house at 4 pm. You also bought the lien, and your house is now at risk of being sold to satisfy the income tax bill.
Title insurance is a product designed to protect the policy holder against just these types of unseen challenges to title.
Yes, in every case, you could try to bring an action against the seller, but many times it is difficult or impossible to find the seller, and they may not have assets needed to solve the problem.
Lenders believe so strongly in title insurance that they will never close any loan unless they are covered. That's why you will find that the "lender's title insurance" coverage is part of every loan's closing costs. But know that the lender's policy does not protect you, the owner.
For your own level of protection, you need "owner's title insurance," a different policy designed to protect the owner against these unusual threats to the ownership of real estate.
Owner's title insurance is typically offered to the purchaser at the time of issuance of the lender's policy. It usually costs about two dollars per thousand dollars of purchase price, and that is a one-time only premium. Once paid, the policy protects you and your heirs for as long as you own the property.
In addition, your owner's title insurance policy virtually guarantees the insurability of the title when you get ready to sell the property, In other words, because the title insurance company has already accepted the risk or title defects to you, they are very likely to accept that same risk going forward. That makes your property more sellable in the future.
For all these reasons, I would never buy real estate unless I am also able to purchase owner's title insurance along with the property. It's the only way I can know my investment will be safe from challenges to ownership.
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BUYING FORECLOSURES IN GEORGIA
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This seminar has been updated and revised for 2008 to reflect the dramatic changes in the Georgia foreclosure marketplace. We are literally facing a flood of foreclosure properties, and there is profit to be made in each and every one of these homes.
Whether you want to build a portfolio of homes for your retirement or you simply want to find a better home for yourself and your family, this program is for YOU.
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This COMPLETELY NEW SEMINAR examines the roots of today's foreclosure meltdown and explains how you can take advantage of this opportunity in your spare time.
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The Real Estate Investor's Institute will be held at Emory University on
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available under "Seminars."
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