Real Estate - Back to Basics: Title Insurance

Real estate isn't cheap. Whenever investing significant sums of money into an asset, you want to protect your investment. This why car purchasers often buy extended warranties. They want to be sure their vehicle will last long enough to make their purchase a worth it. Just like warranties and other types of insurance policies that provide protection when the item is damaged or destroyed, title insurance protects your ownership of the land. 

The reason land is different from other big money items is real estate comes with a complex transaction history that can impact owners today. Title insurance protects landowners from having something in that history come back and nullify your investment. Whenever buying real estate, you need to have that history examined by an attorney in a title search. A title search is when the records pertaining to a piece of property are examined to look for potential red flags that can impact title. It is true that anything found in a title search will not be covered by a title policy. However, you will know about these issues prior to making your investment and will be able to make an informed choice. Title insurance comes in when there are issues not readily available in the records.  

For example, Bob buys a lot to build on. Bob begins building and then his neighbor demands he stops work because there is an easement going through the property right where Bob is building. If Bob has title insurance, Bob either gets paid or the insurance will provide coverage to pay for expensive real estate litigation defending his title. If Bob doesn't have insurance, Bob pays his own attorney anywhere from $150 to $300 per hour and still risks not having clear title in the end. 

The issuance of a title policy has several steps. First, the title agent or attorney will perform a title search on the property as discussed above. From that search, a title commitment will be issued. A title commitment is a document stating that the title insurance company will issue a title policy at closing when the premium is paid and the stated requirements are met. The requirements are generally going to be things like a deed to the new owner needs to be executed and recorded and the prior mortgage discharged. A title commitment will also include a section of exceptions. All title policies come with some standard exceptions. For example, anything could have been found with a formal survey is excepted from coverage. The exceptions will also include anything that comes up in the record from the title search such as deed restrictions or subdivision homeowner's association rules. The last piece of a title commitment is the Exhibit A, which is the legal description of the property. 

After the transaction finally closes and the deed and mortgage discharge (if any) are recorded, the final policy will be issued and you're covered.  It is true that, after a thorough title search, the likelihood of something coming up is slim. Title insurance premiums reflect that fact and are relatively inexpensive, especially when compared to the rates litigation attorneys can get paid defending a claim against your title.