Posted on Thursday, July 2, 2009
PThe purpose of an owners title insurance policy is to protect commercial or residential property owners from most things that could be wrong with the title (the legal right to own, use, etc) of the property. Title insurance coverage is limited by the dollar amount of coverage (for an owner's title insuranc epolicy, this is typically the purchase price) and by certain language contained in the policy. Anyone considering purchasing distressed real estate is encouraged to read an actual title insurance policy for a better understanding of what it will and will not cover. For example, under certain circumstances the underwriter is only obligated to correct a title defect, not pay the property owner for other damages (such as lawsuits or loss of entitlements) which may result from the title insurance defect. One thing that many people assume is covered by title insurance, but is not, are a lack of properly permitted improvements in the absence of an actual code enforcement violation notice having already been filed in the public records. Examples of title defects for purposes of better understanding this concept are many. For example, if a prior owner (perhaps even prior to the current owner from which the soon-to-be-insured is purchasing the property) contracted for a new roof and never paid the final balance but no one has noticed that a lien was filed against the property. Or if a prior owner was married and his spouse should have signed the deed conveying title to the property but did not. Or if the legal description in a prior deed is incorrect. Or if a former owner dies and his estate, which included the property, was not properly probated. Again, the possibilities are limitless.
The purpose of a lender or mortgagee title insurance policy is to insure that the lender's mortgage lien is a valid and first lien against the property. In other words, that there are no parties with an interest superior to the lender's which could potentially impact the lender's collateral for the loan. Examples might include a prior mortgage which has not been properly satisfied in the public records. Remember what happens in the real world is not what counts with title insurance, it's what gets recorded in the public records or “chain of title” that matters. Again, the possible issues are many.
The dangers of not having title insurance are obviously that one of these issues will arise and the owner or lender will not have coverage. Given the potential cost of these issues, the price for title insurance is a bargain, especially since (unlike other types of insurance which are typically paid annually) the title insurance premium is only paid one time – when an owner purchases for an owners policy and when an owner gets a mortgage for a lenders policy (a lesser premium will be paid each time an owner refinances as again this will involve a NEW mortgage).
Foreclosures often create title issues, most often due to the fact that all parties may not have been properly served or there may be some other deficiency in the foreclosure proceeding. The goal of a foreclosure is to eliminate all prior interets in the property. Oftentimes these are many – in other words the owner being foreclosure has not paid a lot of people so a lot of liens, etc. have been filed. This would render title insurance specially important when purchasing and lending on a property that has been recenetly foreclosed.
Though the title insurance process varies by state, in general a policy can be purchased from an Agent for one of the Underwriters (two of the biggest underwriters in the U.S. are First American and Fidelity but there are others, some regional and some national). Some Underwriters also have their own direct operations which do the same thing as their Agents (and in fact compete with their own agents). People wanting title insurance can also go directly to one of these retail operations. As a side note, many law firms are also qualified as Agents for title insurance underwriters and can provide title insurance for their clients. In some states Agents must be lawyers, in others they do not have to be lawyers. The requirements for becoming a title insurance Agent and regulatory oversight vary by state.
The cost for title insurance coverage also varies by state. Florida is one of the more expensive states for title insurance. Texas is another. In Florida title insurance is about $5.50 for every $1000 of coverage. The state has established “promulgated rates” for title insurance in Florida. The Dept of HUD also regulates what title Agents and Underwriters may charge, must disclose, etc - in particular see RESPA.
Customers can shop on line or ask a trusted Realtor, banker, etc for a referral to a title insurance agency or law fimr that can issue title insurance. But be aware that oftentimes the referral may end up being merely to a friend or someone who refers that person customers back and not to the best choice. A major issue during the bubble was the payment by title insurance Agnec;es to Realtors and mortgage broekrs of illegal "kick backs" in return for the referrasl of customers. I'd suggest asking the Realtor or other professional exactly why they refer busienss to a particular title insurance agency and evlauating those reasons. Also it may be worthwile to ask how long he or she has been referring that Agency business, what other Agencies he or she has referred business to in the past and why he or she stopped doing so.
Again in many states the state sets the rates for title insurance. There are several other fees charged at a closing and quotes should be requested for those. But overall costs from one Agent to another do not vary as much as the quality or work and service vary. This is one are where it does not pay to be penny-wise and pound-foolish. Even with a title insurance policy in hand, no one wants to have to deal with a claim – it's a major hassle just like any other type of insurance claim and again the policy may not cover everything the claim ends up costing.
The best course is to try to prevent a claim in the first place by focusing less on the absolute cheapest closing company and a little more on finding the most qualified one. Some suggested questions to ask:
1. Is the title Agency owned and overseen by an attorney?
2. How many years experience and what other type of certification or qualifications does the attorney have to be doing this (for example most state bar associations offer certification in real estate for attorneys who have the know-how to meet the criteria)?
3. How many other staff people work at the Agency?
4. How many different people will I be dealing with – the more people, the more chances for miscommunications etc?
5. How many files does each person have per month – depending on how work is divided, 15 to 50 is normal – the less work per person the greater the chance of good service and no errors.
6. How many of your files close on time verses late? A purchase that closes late due to the title agency can cost the parties money for various reasons.
7. How many banks have approved the Agency to close their loans (title agencies serve the second role of “closing agent” and accept liability beyond that in the title insurance policy by way of a “closing protection letter” they must issue to lenders and lender closing instructions” they must sign, both of which contain responsibilities they must meet.
8. How much E&O or professional liability insurance coverage does the agency carry? And has the Agency ever had a claim – if so ask for an explanation.
9. Has there ever been a claim filed under one of the title insurance policies issued by the Agency? If so get the details.
10. Have the owners ever operated another title Agency or this one under a different name – crooks are sometimes attracted to the business due to the big trust accounts, they can be spotted by asking the right questions.