What Every Buyer Needs to Know About Title Insurance
Tuesday, January 18, 2011 at 5:09PM November 2010
Nash Law Firm, PLLC
By: Stephen J. Nash
nash@nash-law.com
ForeclosureGate has highlighted the need for buyers to make sure that the seller of the property they are purchasing has good title. Unfortunately, most buyers and many real estate professionals don't know what the buyer has to do to ensure that they will receive good title. Both often assume just because title insurance is being paid for by the buyer, that the buyer was protected. The buyer often assumes that their real estate agent has reviewed the title commitment for them, while the real estate agent generally does not have the knowledge necessary to properly review the title commitment and does not feel that this is a part of their job or necessary.
These misconceptions could lead to disaster. Imagine the outrage if ForeclosureGate ultimate leads to the courts determining that a number of foreclosures were invalid and to challenges to the title of the REO sales and the new owners find out that they don't have title insurance to cover the challenge!
The Title Company Does Not Have To Offer The Best Coverage
A title company does not have to offer their clients the best insurance coverage or the cheapest prices. In this sense, they are no different than any other insurer. Do you assume that a car insurer is providing you with the best coverage at the best rate? No. We understand that they are trying to sell their policy and are not going to tell you that they or someone else can provide better coverage.
When the buyer and their real estate agent leave it to the title company to take care of everything, neither can complain later on if they did not get the correct coverage.
In almost every case that I have been involved in the buyer has told me that they thought their real estate agent was at the closing to protect them and that included getting the right title insurance. When I would ask the real estate agent, they would respond that they never review the title commitment but relied on the closer. The closer would tell me that they would give a summary explanation of all the documents but did not review them on behalf of the buyer. The end result is that nobody reviewed the title commitment.
That is a recipe for a disaster.
When buyers hire any real estate professional, they must ask what that professional is going to do for them so there is no misunderstanding as to what will be done for them. Each real estate professional, prior to entering into a relationship with a client, should go through what services they will provide to the buyer and what services they do not provide so that their client does not expect them to do something that they have no intention of doing. The services provided should then be clearly set forth in a written contract with their client.
Its Not Just What Is Covered, It Is Also About What Is Not Covered
Would you buy health insurance that excluded cancer from coverage?
Prior to getting the actual title policy, the title company will produce a title commitment which is their promise of what title coverage they will give the buyer with respect to that purchase. Remember, the title company is not promising the buyer that there is good title to the property; the title company is promising what title coverage they will give if the title policy is purchased.
The title company may be aware of title issues yet still provide title coverage for those issues. The title company in that case would make a business decision to provide such coverage gambling that the issue will not arise or will be defeated.
The title company may make a business decision that the potential title problem creates more risk than the title company is willing to undertake. This does not mean that the title company has determined that the title issue is valid, it simply means that it is not willing to take the risk posed by the potential title issue.
An example of this today is the potential title issues arising from foreclosed properties. Many borrowers have asserted that many lenders are not foreclosing properties correctly and/or that the lenders who are foreclosing do not have the legal right to do so. Because of this controversy (the industry maintains that their foreclosures are valid), each title company has to decide whether they are willing to insure that the lenders foreclosure is valid. If they provide such coverage, they may expose themselves to great liability if the courts ultimately determine that foreclosures are invalid and that the title to previously sold foreclosures is now in question. On the other hand, does the buyer want to take such a risk if the title company refuses to provide such coverage?
Of course, if the buyer does not read the title commitment or understand what the commitment says, the buyer might believe that he/she has coverage only to find out later that there was no coverage for such a problem.
Better Get a "Marked" Title Commitment
Would you rely on a purchase agreement that was orally amended?
Since the title company does not have to provide the buyer with the best coverage, how does a buyer know if the coverage being offered is sufficient? This can be difficult because the title company is unlikely to point out the limits of their coverage or make it known that they would provide better coverage if the buyer negotiated for it.
First, the title commitment must be reviewed. What coverage is being offered and what exceptions, if any, are being applied to that coverage? The first part of the title commitment sets forth what the title company is willing to cover. The second part of the commitment sets out the documentation the title company requires for them to provide the title coverage offered. The last section of the title commitment sets out the exceptions to the title. All three sections must be read and understood to understand how complete the coverage is.
Examining the title commitment is beyond the scope of this article but the following general comments can be made.
Some changes to the coverage offered should not be difficult to obtain. The title commitment generally shows the ownership and encumbrances as they exist before closing. Of course, at closing, the ownership and a number of encumbrances will be changed. The buyers will now be shown as owners of the property subject to the mortgage/s that they granted in order to purchase the property. The old owners should no longer be showm as an owner and their mortgage/s should be removed.
Some encumbrances will not be removed from the commitment and are acceptable to the buyer. If thee is an easement that does not interfere with the buyers use of the property, that will be accepted. If there is a townhouse association and restrictions recorded on the property, the buyer will generally accept these encumbrances.
The exceptions that the buyer does not wish to be subject to must be objected to and the buyer must negotiate with the title company to obtain title coverage to deal with these issues. For encumbrances that the buyer is willing to live with, the fact that they show up as an exception to the title policy is not objectionable.
The final title commitment must be "marked" to change the coverage (to add the new owners) and to remove the exceptions that the title company has agreed to remove. This is no different than when a purchase agreement is amended. The changes are noted on the purchase agreement and the parties to the purchase agreement initial the changes. In the case of a title commitment the changes are noted on the title commitment and an authorized representative of the title company initials the change.
Check The Final Title Policy
They promised you a certain coverage, make sure you get that coverage.
If the title commitment was reviewed, negotiated and "marked" it will all go for naught if the ultimate title policy is not reviewed to make sure that the buyer actually received the title policy promised. Remember the title commitment is the promise of the title policy that will be produced sometime after the closing (usually months later). When the final title policy is received it must be reviewed to make sure that it is consistent with what was promised on the marked title commitment. If the final title policy provides lesser coverage than promised, the buyer needs to contact the title company to get the title policy corrected.
The buyer should also read the title policy to determine what they need to do to file a claim. This is important because buyers often fail to take into account that they must make the claim within a certain time frame and in a specific manner or they can jeopardize their claim.
Conclusion
The buyer goes to the closing, everyone is so nice. They’re given something to drink and maybe something to munch on. The closer smiles and seems so nice. They then see their real estate agent who is so excited for them. Once you get to the closing table someone cracks a joke about how many documents you are going to sign and then you see the ungodly stack of documents waiting for your signature.
Signing these documents would be daunting but the buyers feel comfortable since everyone there is so nice and surely would tell them if there is a problem.
Unfortunately, the buyers assumption, while reasonable, is wrong. Their real estate agent is not going to review the title insurance for the buyers and is not trained on what to look for. The closer works for the title company, how can they review the title commitment to protect the buyer?
In many cases everybody at the closing just assumes that the title to the property being purchased must be good. Much like we assumed that property values would always go up. In both cases, the assumption is wrong and can lead to disaster.
In every real estate transaction the title commitment should be reviewed, negotiated to obtain the best coverage and a "marked" commitment provided at closing. Without this protection, if title problems arise, the buyer must look to the seller and/or their real estate agent. If the purchase was an REO, the seller never promised that they had good title so it will be difficult to prevail against them, which leaves their real estate agent. Whether the buyer has a good case against their real estate agent will depend on the facts of the specific case; however, who else is the buyer going to go after?
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NOTICE The foregoing is not intended to constitute legal advice for any specific circumstance, but is intended to reflect broadly applicable principles, under Minnesota law, relevant to a typical situation. Each set of facts and each contract is, or can be unique; the unique facts and specific language of the contract may require a different legal analysis and may result in a different outcome. Before proceeding in reliance upon this or any other general description of law, consult with an attorney competent in the field of practice relevant to your situation. Copyright 2011 Nash Law Firm |