Contract for Deeds: Does a Buyer Need Title Insurance?
Tuesday, February 15, 2011 at 2:21PM 2.15.11
By: Stephen J. Nash
Nash Law Firm
nash@nash-law.com
With more sellers turning to contract for deeds to sell their property, in the next few months we are going to look at some issues that must be considered when using contract for deeds.
The first issue we will discuss is whether a buyer on a contract for deed needs to purchase title insurance before entering into a contract for deed.
Many people do not see the point in obtaining title insurance since they are not actually buying a fee title interest in the property. In addition, you can always obtain title insurance before you pay the contract off. This is a dangerous tactic.
When a buyer enters into a contract for deed, the buyers goal is to ultimately own the property. Money is put down towards the purchase, and each month a payment is made that reduces what is owed. In other words, the buyer is invested in the property. The greater the invest, the greater the concern over the status of the title. Nobody wants to invest in a property only to find out that there are title problems.
While the contract for deed should contain a representation by the seller that the seller has good title to the property, why take the risk? What if the seller doesn't have the funds to correct the problem?
The safest course of action for a buyer is to make sure that the seller has good title to the property before entering into the contract for deed and paying money towards the purchase. If there are title problems they can then be dealt with prior to that investment or the buyer can get out of the deal.
Just getting title protection prior to entering into the contract for deed is not enough since a great deal can happen during the course of the contract for deed. In order to protect the buyer from subsequent title issues, the buyer must get updated title work prior to paying off the contract for deed. The worst thing the buyer can do is payoff the seller only to find out later that there is a title problem. Instead of retaining leverage over the seller to remedy the title problem, the buyer has bought themself a lawsuit.
Contract for deeds can provide buyers with a tremendous way to purchase a property; howver, it is important that the buyer does it safely and protects him or herself.