Okay, so you got an offer on your home. Although this is the right time to heave a sigh of relief, we’re not yet ready to pop open the champagne just yet. We don’t mean to sound like Debbie Downers here, but there are several potential hazard areas on the way to closing. One that is seldom discussed is the title report. So, today we walk you through the process. “Knowledge is power” is a saying that pertains to every real estate transaction – so let’s bring you up to speed.
Just what is “title” anyway?
The word “title” in real estate refers to the parties who hold legal ownership and have the right to use and dispose of a piece of property. The word is used the same when it comes to your car. When you sell your car, you’ll be signing the title over to the buyer. But, what if you aren’t the true owner of the home, yet you’re attempting to sell it? This is where the title company comes into play; searching public records to ensure that you are the legitimate owner of the property and that no other party has a claim to it. Once they’ve assured that you are, indeed, the owner, they will issue a title insurance policy to the lender, to protect it against future claims against the property. While the lender’s policy is a requirement of getting the loan, there is a separate, owner’s policy available to purchase, but it isn’t a requirement.
“Title companies report that in more than one-third of all real estate transactions they must undertake ‘extraordinary work’ to address title issues,” according to Sandy Gadow in the Washington Post. Some of this work involves searching far back into the public records, looking at divorce proceedings, bankruptcy filings, old deeds, wills and tax records. If they find an issue, regardless of how insignificant it may seem, it becomes what is known as a “cloud” or “defect” on the title and it must be cleared before the sale of the home can be finalized. Some of these issues include:
- Unpaid property taxes
- Fraud and forgery
- Missing signatures on the title
- Previous owner’s heir making a claim
You can find a list of common title defects online, at firstam.com.
Dealing with clouds on the title
When the title search is complete, the title company issues a Preliminary Title Report. In it, you’ll find information about the ownership of the property and any outstanding liens and encumbrances against it. The report provides the seller the opportunity to not only learn about previously unknown defects in the property’s title, but to cure them as well.
After all, no sane buyer will want to continue with the purchase of a property with title issues.
Note that the Preliminary Title Report may not list all existing liens and encumbrances affecting title to the property. It simply states those it was able to unearth and that the company will exclude these items from coverage in a subsequently issued title insurance policy, if they aren’t remedied. Think of it as an “offer to insure,” according to the California Land Title Association. Sellers need to carefully examine the preliminary report and, working with their agent or attorney, take action to clear up any problems. For instance, one of the most common problems title companies see is an old mechanic’s lien. These are routinely placed on a property by a general contractor before starting a rehab or other home improvement project (to ensure he or she is paid). In an ideal world, the contractor will release the lien upon payment for his or her services. But, as you know, the world isn’t perfect and contractors often neglect releasing the lien. While it’s typically not difficult to resolve this title defect, it does take time, so the closing date may have to be extended.
If the title search doesn’t find any problems, or you clear up those that have been found, the title company will issue a lender’s title insurance policy and, if purchased, one for the new homeowner. Unlike other forms of insurance, title insurance only requires one payment, at closing, and it lasts for the life of the loan. Please feel free to reach out to us if you have any questions about the title insurance process or anything else real estate-related. We’re happy to answer questions.