All About Title Insuranceby John Price on 09/24/11
(Really, just a little about Title Insurance)
When you buy a house or piece of land, everybody tells you to be sure you have clear title and to get title insurance. If you are getting a loan, your bank will require it. What is this all about?
There is an entire industry built around proving land ownership, and in a nutshell, that is what title insurance is all about. You actually get an insurance policy from a private company that tells you that you own the land. To issue the policy, the first thing they have to do is confirm that the person selling it to you owns it.
It sounds pretty simple. Either the people selling it to me own it or they don’t. It’s not that simple. Nearly no one totally owns their land or home. In fact I would almost say NO ONE fully owns their land or home. That may seem like a strange statement, but it is true. The ownership is not absolute.
Let’s suppose you buy a house in a subdivision in July from an honest person who has already paid off his bank. It sounds like he owns it. I can guarantee you there are exceptions to his ownership. He owes 6 months taxes, but cannot pay the bill because the bill is not out yet. I can almost guarantee you there is some kind of utility easement over his lot. If he has electric to his home, there is an easement. And I can almost guarantee you that he cannot do what he wants with his home. There are likely to be subdivision covenants and restrictions. The first thing that happens to issue you title insurance is a search of land records. A good search should discover those easements, subdivision restrictions, etc. And they are important in the sense they in some way limit what you can do with your own property. What I have described is an everyday simple title search and what is likely to be found on a house or piece of land considered to be “in the clear.”
Unfortunately, an honest person with the best intentions can have bad title. You are about to buy a house and what sold you is that new deck. The owner paid the contractor, but did not know the ins and outs of the law. What he does not know is that his contractor did not pay for the lumber in that new deck. The lumber yard owns part of that house and the seller may be totally innocent. But there is a title flaw. That is the kind of thing title insurance typically protects you from as a practical matter.
But title insurance can also protect you from total disaster. I have seen only a handful of extreme cases in my 40 plus year career, and they would have been disasters without title insurance. In one case, we bought 300 acres and subdivided it. I got a call from a lady asking why my "for sale" sign was on her land. I had a new survey and title insurance and thought “it cannot be true”, but I called the title insurance company and reported a possible claim on my policy. Sure enough there was a mistake in the description of the land and she owned it, not me. What caused the mistake is not important. What is important is that there was a mistake. The title insurance company bought the land from the lady that owned it and gave it to me. I was made whole because I had a good title insurance policy.
Another case was even worse and also involved about 300 acres. We purchased and started subdividing. The adjoining land and the land we bought both had very long term owners and both were big parcels. By pure luck, both were changing hands at about the same time and being surveyed at the same time. My surveying was actually subdividing at that point. My boundary had already been surveyed and insured. Two different survey companies found themselves on the wrong side of each other. It was a 30 or 40 acre mistake. My title company bought 5 or 6 lots from me at near retail because I did not own the land and they had insured me that I did. That is not many cases in 40 years, but I hope I made my point.
I have seen all kinds of things that have to be proven before closing in order to have good title insurance. Most of the strange ones have to do with land that has been in the same family for a long time. Produce proof that Bill’s first wife died before she had children. She died in 1930. What? The title company is worried about missing heirs that might have a claim. Normally these kinds of issues get resolved with an affidavit of some kind.
The list can go on and on. There are two things you really need to remember on most transactions. 1. Get title insurance. 2. Read the title insurance commitment. READ IT! It might say Joe has hunting rights for 50 years. If you have questions about a document referenced in the insurance commitment, read and question that document. Don’t be paranoid, but check it out with your agent, your title company, or an attorney. If it is land, make sure there is a fairly recent survey. I have seen absentee land owners lose as much as 50 or 60 acres because a neighbor was farming it. All may have been innocent, but in the case I remember that farmer owned the land even though the deed said the absentee owner owned it. Our survey discovered the problem.
In looking at older properties on private easements, check out the easements. I know of one case where the buyer checked it out and the proof was not there. A neighbor, who had the right, gave that buyer and his wife a 30 foot easement for road purposes. Yet the traveled drive was only about 12 feet wide. Years passed, that neighbor died and his ground was split in half. The road was still only 12 feet wide and a new buyer bought an acre 30 years later, with the hopes of building 4 new homes. The original buyer warned him that it was only a 12 foot wide prescriptive (Prescriptive means basically it has been used for years and is there whether there is an official record or not.) That 30 foot wide easement is for me, and not for the public. I’ll work with you and grant you additional rights, but you don’t have them now. But you have to work with me on how many houses and house sizes. The inexperienced developer did not listen. The original buyer, and by now you probably know it was me, came home from a business trip to find his yard totally destroyed with new road construction and mature trees cut down. The trees were both within that strip and outside it. I was not very happy. Ultimately a judge agreed with me and it was a 12 foot wide easement for anyone but me and did not meet code for redevelopment. Did his title insurance company do its job? I suspect they did, and I suspect he did not get advice on what the documents meant. What is the purpose of this story? You have a use in mind for your purchase. Be sure title conditions fit that use. His title was perfectly good for one house, but it was fatally flawed for 4 houses.
One other thing about title insurance; and this will shock you. When buying, you might have something against you personally, that means you cannot get good title insurance. Joe Smith is buying a house. Joe Smith has a lien from the IRS. He cannot get good title to the house he is trying to buy. Joe Smith is horrified as he has always paid his taxes. The title company steps in and tells him of the problem. It turns out that the Joe Smith who owes the IRS has a different middle name and lives in a different town. Not the same person. The title company helps get those kinds of things cleared up.
Check out our properties at www.priceacreage.com. We keep our titles clean, but they are never totally without some encumbrance. There will normally be subdivision covenants, telephone easements, electric easements, etc., that in some way limit your rights to the property.
Land and home ownership is the American dream. Just a little prudence and common sense on title issues can insure you it does not become a nightmare.
Email me with any questions at firstname.lastname@example.org and I will try to answer them. But I am not an attorney and cannot give legal advice. I’m just a guy with lots and lots of experience. If I cannot answer your question, I can hopefully point you in the right direction.
Thanks for reading.