Why title insurance is a sometimes-costly evil

Just about everybody understands the need to purchaseautomobile and homeowner’s insurance to protect against unexpected losses thatare often more costly than most of us can afford to pay. We hope we never haveto file such a claim but, just in case, we pay relatively affordable premiumsfor protection.

However, when buying or selling a house or condominium,there is another type of insurance with which most of us are unacquainted. Fora one-time premium at the time of home purchase, the title insurer will protectthe mortgage lender and/or the homeowner as long as the mortgage or homeownership is in effect.

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To illustrate, when is the last time you heard of ahomeowner encountering a title insurance claim? Although I’ve been buying andselling real estate almost 40 years, I have never had to file a title insuranceclaim, nor have I ever heard of a title insurer paying a title policy claim.

Yet, title insurance is a “necessary evil” forreal estate owners. Without title insurance, most mortgage lenders won’t lend.Smart home buyers won’t buy without an owner’s title policy to show marketabletitle. But our chances of ever filing a title claim are minimal.

Title insurers readily admit they pay out less than 10percent of premiums collected for title claims. By comparison, most autoinsurers pay at least 50 percent of premiums collected for policy claims.Instead, most title insurance premiums pay for title research to preventlosses, plus profit, of course.

WHY TITLE INSURANCE IS REQUIRED FOR VIRTUALLY EVERY PROPERTYSALE. Would you buy your house or condo based on the seller’shandshake assurance, “You can be sure the title is good”? I hope not.

Instead, as the buyer you should insist on receiving anowner’s title insurance policy to protect your equity just in case the title isnot “marketable.” More important, you won’t be able to get aninstitutional mortgage unless the lender receives a lender’s title policy.

Virtually the only real estate sales that do not involve atitle insurance policy are transactions between friends or relatives, inheritedproperties, all-cash sales and foreclosure sales. Although title insurance isavailable for such title transfers, the buyers often trust the sellers and tryto save a few dollars by not insisting on receiving an owner’s title policy.

WHAT DOES TITLE INSURANCE INSURE? The exactanswer depends on whether you are a mortgage lender or a property buyer.Lender’s title insurance offers more extensive coverage, such as for waterrights, zoning and conditions obvious from a property inspection, such as anunrecorded, overhead-power-line easement.

But a property owner’s coverage is less complete unless thebuyer purchases “extended coverage,” which is virtually the same as alender’s title policy. Both coverages include protection for title risks, suchas forged signatures in the chain of title (the major cause of title losses),encroachments, surveys (if specifically included), recorded easements,mechanics’ liens, property tax liens, claims by heirs and ex-spouses, titlesearch errors, and many others.

WHO PAYS THE TITLE INSURANCE PREMIUM? Theanswer to this question depends on local custom and the terms of the propertypurchase contract. For example, in the county where I live, the custom is thebuyer pays for the lender’s title insurance and, if desired, for an owner’stitle policy. But in the adjacent county to the south, the custom is the sellerpays for title insurance.

Local custom is not binding. For example, years ago I boughta San Francisco apartment building where the custom is the buyer pays for titleinsurance. As I was short of cash, I wrote in my purchase offer that the sellerwould pay for the lender’s and buyer’s title insurance. My offer was acceptedso I saved several thousand dollars for the title insurance premium.

Equally important, whether you are the seller or buyer whois expected to pay for the title insurance, it pays to shop around. Except in avery few states where title insurance premiums are heavily regulated, titlepremiums vary by title insurer. If you are buying a $100,000 house or condo,you won’t save much by shopping among title insurers. However, if you arebuying or selling a $1 million house, you can probably save at least severalhundred dollars by shopping for title insurance.

If you are buying a new house or a new condo, chances arethe developer has negotiated a discount rate with a title insurer. Be sure toinquire if you will receive a title insurance discount by purchasing from thedeveloper’s title insurer.

WHEN YOU PLAN TO “FLIP,” ASK ABOUT A “BINDERTITLE RATE.” Another way to save on title insurance premiumsoccurs if you plan to make a quick resale (called a “flip”) afterpurchase. Ask if a discount title rate is available in your area.

Perhaps you are buying a fixer-upper house that you plan toupgrade and resell for a huge profit within less than 12 months. You are then aperfect candidate for the discounted “binder title rate.”

Where allowed by state title insurance law, the binder rateis usually 110 percent of the regular title insurance premium. However, whenyou resell the property in less than 12 months (up to 24 months in somestates), you will receive a 100 percent title premium refund and the titleinsurer keeps only the 10 percent extra premium.

THE BIG RISK OF NOT OBTAINING AN OWNER’S TITLE POLICY.Especially in areas where it is customary for the seller to pay for titleinsurance, home buyers often think, “Well, the seller is paying for mymortgage lender’s title insurance policy so the title must be good, and I don’tneed to buy an owner’s title policy.”

Wrong. In the rare case where there is a major title defect,such as a home builder has a defective title, or unpaid mechanics’ liens,”the title insurer will pay the lender’s claim up to the insured amount. Butnothing will be paid to the homeowners for their lost equity if they didn’tobtain an owner’s title policy.

TITLE INSURANCE WON’T PAY UNTIL THERE IS A LOSS. Threatof a possible loss is not a valid reason for a title insurer to pay. Only anactual loss requires the title insurer to pay.

Title insurance is called an “indemnity policy,”just like your auto or homeowner’s insurance.

For example, suppose a neighbor claims your house encroacheson his lot. Until he actually files a lawsuit against you, the title insurerhas no obligation to pay for a possible threatened loss. However, after theencroachment is proved, then the title insurer must pay.

SUMMARY: Title insurance is different from virtually everyother type of insurance. For a one-time premium, title insurers providecoverage as long as the lender, the insured or his/her heirs own the property.Until a title loss occurs, the title insurer has no legal duty to pay even if apossible title loss might occur. For more details, please consult a local realestate attorney.

(For more information on Bob Bruss publications, visit his
Real Estate Center
).

Copyright 2006 Inman News

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