First some background regarding a friend’s situation:
In the process of selling his home, a title search was done that uncovered several tax liens on his property. He has owned the property since the mid nineties and the title searches done upon his initial purchase and two subsequent refinancings turned up nothing (a total of 3 searches that were clean and 1 that found bad stuff). Each of the four searches was done by a different company. The company that did the first search (when the home was purchased) has very recently filed for bankruptcy. It turns out that he bought title insurance and is now in the process of making a claim to it so it looks like he’ll be OK.
Questions:
How did three title searches miss this stuff? Isn’t this what title searches are for? There are at least 3 different liens that were placed on the property only a few years before he bought it.
Is it legal (in Ohio) not to disclose liens to a potential buyer?
Will his insurance cover this? The liens total roughly $50,000.
I declined the title insurance when I purchased my home, but I can still get some (for about $1000 more than I could have at closing). Should I?
I just closed on a piece of property and my lawyer gave me one of his horror stories: an old farmer in upstate NY sold his land to some young urbanite. The urbanite bought no title insurance. Turns out that someone disputed part of the ownership of the land (it was a large rural tract, with confusing boundary lines), and the lawyers had to go through several hundreds of years’ worth of records, all the way back to the original Dutch settlers to determine the rightful owner. It cost the guy a fortune in legal fees.
In any event, the title insurance should cover it. I mean, that’s the whole point of getting it. But IANA Insurance Agent.
Title searches can miss such things, since, I believe, they only have to look in reasonable places for information. Things can always get lost in the background. That’s what the insurance is for.
Title insurance companies search two indexes: the chain of title (of record) and the tax records. Most liens have to be recorded, so a search of the chain of title will reveal these liens. If they are not recorded, a bona-fide purchaser is protected. Tax liens are, however, liens without a notice of them being recorded. There are others: homeowners’ assessment liens (you need a certificate from the secretary of the condominium that the unit is free of all unpaid liens); mechanic’s liens (construction work either by general contractors, subcontractors, or materialmen have liens for their charges which need not be recorded - the rationale for this is that recordation is just notice to the public and the public can see the construction being done, so no further notice is needed); and there may be a few more that I cannot think of offhand.
So, you need title insurance. The title insurance company will demand the secretary’s ctf. It will also get waivers from all mechanic lien holders if it insures against mechanic’s liens. Your normal run-of-the mill owner’s policy will make an exception for these types of liens. You have to read your policy, and before that your preliminary report of title to see what they will insure over. If you get a mortgage when you buy the property, the mortgagee will usually demand the type of insurance that insures over mechanics liens. If it is new property being constructed, this is a must.
If you don’t get title insurance, you will need an attorney’s opinion as to the state of title. The attorney will either examine an abstract of title (from an abstract company) or make his own search. The abstract should contain a note as to unpaid taxes. An attorney should also examine the tax records. The problem with an attorney’s opinion is that he or she does not have the assets a company has to back up the title. In addition, a title company not only agrees to insure the property but agrees to defend the title in court.
As to public notice, normally contracts must be recorded to give notice to purchasers; however, if the buyer is living on the property, that is also public notice.
How did you decline title insurance? Did you get an attorney’s opinion? If you did neither, you made a serious mistake. Here are some of the problems. How do you know that the seller had the title? How do you know if he owned it unencumbered by any liens? How do you know what easements are on the property? If you did neither, you obviously did not have a lawyer.
Somethings I omitted from my prior post. Title insurance companies can do the most exacting searches and not be negligent, but there still may be defects in the title which they cannot discover. Depending upon your state real estate law, there may be outstanding homestead or dower. There may have been a forgery in the chain of title. There may be easements on the land not of record and not needed to be recorded since the public has notice of them by an inspection. (Most title policies will except from their coverage unrecorded easements.) Those are things which the title company is liable for and will have to defend in court. If unsuccessful, it is liable to you for your loss.
For my home, a title search was done by the title company handling the closing. We have a mortgage so I assume the bank would want to be very certain the seller had the title. We were given the option by the title company to buy title insurance (through a third party). My feeling at the time was that this was along the same lines as the extended warranties third parties want you to buy for your car or appliances. I still have the option, but if I had done it within 30 days of closing, it would have been a lot cheaper.
I guess title searches just miss things sometimes. I will certainly get the insurance now. Thanks for the advice…
Just to be complete, I want to add that there are actually 3 different searches necessary. In addition to the chain of title search and tax search, a judgment search is needed. Judgments are liens against property owned by the debtor. Even if the debtor sells the property, the lien remains until satisfied. These, also, do not have to be recorded. Judgments are usually valid for 7 years, but with 2 renewals, totaling 21 years. States may vary. Hence, not only the seller must be searched, but all the owners going back 21 years.
If the lender got the mortgage policy, you are safe. They would not loan the money without your having good title. Nonetheless, it’s a good idea to have your own policy. For example, if there is a defect in the title (hidden or otherwise), you would have no recourse against the title company since you are not insured.
In a highly populated county this is very time-consuming. As I said, there are three different public offices you must visit. Actually more, since more than one kind of court can issue judgments. A title company has the staff to do this efficiently.
In those areas where title insurance is not common (are there any left?), attorneys issue opinions based on abstracts (are there still abstract companies around?). All they have to do is examine the abstract. The abstract company will have the personnel to do all the appropriate searches and show the results in the abstract.
One of my company’s largest clients happens to the the country’s number one name in title insurance. We rewrote most of their software a few years ago so I got a lot of firsthand experience in the business. (We’re still adding features!) Barbitu8 covered your question very well, so I don’t have much to add other than this. Title insurance companies have very small claims departments If the title search came back clean, it is unlikely that you’ll have a problem 5 or 10 years down the road. Opting out of title insurance at closing to save a couple hundred dollars or because you think the bank’s policy will protect you is a foolish mistake since you could potentially lose your property latogether. You can buy an owner’s policy from a title insurance company at any time. However, If you’re thinking about refinancing, you can save some money by adding it at closing.
Most banks require title insurance, even at refinancing. It’s a smart idea. However, in the event a cloud on the title is discovered, it’s like pulling teeth to get the title company to pay up. That doesn’t mean you can or should opt out of the insurance.
The title companies these days often have access to giant electronic databases and a search is more or less a computer situation. It used to involve large ledger books, a LOT of time at the county Hall of Records, and some sniffing around the County Assessor’s office. By tradition, the searches are done using the low-man-on-the-totem-pole-clerical staff, so there will be errors made. The title companies depend on the sheer volume of work to more than adequately cover their heinies.
You could do the work yourself, but you’d have to know HOW and WHERE to look. I could probably build a house myself, but it would take forever, I’d waste a lot of material, and the thing most likely would fall down before too long. Buy the insurance, and then MAKE someone explain it to you. Find out what the legal description is for your property. Obtain a copy of the tract or plat where the lot was created. Get the Assessor Parcel Number for the land, and then get a copy of the Assessor Map and understand what it says.
Buying real property is usually the biggest investment a person will ever make. You CAN get hurt, and the lessons will be expensive. Do yourself a favor and learn as much as you can.
~VOW
Chuckhung: not quite. There is a statutory prohibition on title insurance in Iowa but the prohibition is on the sale of the stuff within the State. There is nothing to stop, for example, Chicago Title, from insuring title to Iowa real estate provided the insurance sale in made outside of f the State. The Iowa statute just keeps Chicago from having agents and making insurance contracts in the State.
This has been a major fight between banks that want to sell Iowa mortgages on the interstate market on one side and lawyers, abstrsctors and consumer groups on the other side for years. Several years ago the State Bar Ass’n came up with a scheme of title guarantee that preserves the abstract and title opinion system while satisfying interstate lenders and at a cost substantially less than conventional title insurance. While a quasi-state agency guarantees title the primary source for recovery if a guarantied title goes bad is the abstractor and the examining lawyer and their individual insurers. There are still any number of out of state lenders that insist on title insurance, the Iowa Title Guarantee System notwithstanding.
Abstract and title opinion was once the standard but in the last 20 years or so most, it not all States have gone to title insurance. Among other things title insurance in hugely profitable, pays a commission to the real estate agent and is often at least partly owned by the lender. These are all powerful inducements for the buyer and his lender to go with title insurance.
During the savings and loan crises when the feds took over any number of S&Ls in Iowa, the successor lenders were stuck with literally tons and tons of abstracts. Not knowing what they were or what to do with them, they were put in semi-trailers and sent to Baltimore. As far as I know they are still there moldering away in some industrial parking lot.
I won’t advise against title insurance (though I expect that the loss ratio on this is quite favorable to the insurance companies). I will advise that anyone who buys real estate go down to the Registry of Deeds and investigate the property.
It’s typically rather easy to do, and there are also typically some little old ladies who work there who are happy to guide novices. You can learn many things – liens that have been recorded against the property and when (and whether) they were discharged, easements, sale prices, survey maps, etc.
It’s very educational, costs little or nothing but your time, and gives you a good sense of having done your duty as a buyer. It’s not unusual to turn up something that a title search misses – some professionals are obviously rather casual, banking on the fact that title defects are uncommon.
The number one spot depends on who you ask and what criteria you use and in what quarter you ask! Since you asked, though, my work was for First American. We’re still working on later phases of that project. They’ve been really receptive to new technologies to improve the business. Before that, the number one spot was held by United General, I believe. Chicago Title is right up there. They’re all ranked on Fortune.com. Title Insurance companies should be in either Mortgage Financials or Diversified Financials, something like that.
Princhester, I was about to say the same thing. Did the Torrens system of guaranteed title never catch on in the U.S.?
In my jurisdiction, there’s one office: Land Titles. You go, you look, everything’s there on the one certificate of title. No chain of title to search. Simple and efficient. And if by some odd fluke there’s a mistake in the title, the province has an assurance fund to compensate the person who’s affected.
I believe the Torrens system started in the US in Florida, but it never really caught on. Cook County, Illinois, where Chicago is situated, uses the Torrens system, but not exclusively. In fact, few of the properties use it. And many lenders do not rely on it. They will also insist on a title policy. In addition, in construction mortgages, lenders need title companies to handle the periodic waivers from mechanic lien holders. In Illinois, it’s optional by county.
If there is a large commercial loan, a lender is not going to rely on Torrens irrespective of mechanics’ liens. Torrens has an indemnity fund from which they pay off losses. However, that fund is limited and, moreover, it will not defend title to the property.
If someone claims a lien, interest, etc. in property that a title company has insured, the title company will defend the title in court. A lender wants that added option when lots of money are involved. Moreover, as I said, the Torrens indemnity fund is limited.
If the title search came back clean, it is unlikely that you’ll have a problem 5 or 10 years down the road. Opting out of title insurance at closing to save a couple hundred dollars or because you think the bank’s policy will protect you is a foolish mistake since you could potentially lose your property latogether. You can buy an owner’s policy from a title insurance company at any time. However, If you’re thinking about refinancing, you can save some money by adding it at closing.