Whether purchasing a first home, a dream home, investment property or new office space, numerous questions and expenses arise which can make acquiring real estate an incredibly frustrating event. Often, the process of shopping for an interest rate, completing the endless loan application, negotiating the purchase contract, preparing to move and finally closing the deal prove to be so daunting that an extremely important element to consider when acquiring real estate often gets overlooked: purchasing an owner’s title insurance policy.
Many choose not to obtain an owner’s title insurance policy for various reasons:
- The purpose of title insurance is not fully understood
- The buyer mistakenly assumes that the lender’s title policy also protects an owner’s interest
- The expense of acquiring the new property forces cost-cutting measures.
Whatever the reason, the failure to seriously and fully consider the pros and cons of obtaining an owner’s title insurance policy may prove to be costly in the long run. This article will seek to clarify the difference between a lender’s policy and an owner’s policy and to explain the importance of obtaining an owner’s policy.
To understand title insurance it is imperative to understand what it means to be in “title” to real property. When purchasing real estate, a person or entity is not really purchasing the building and land but rather the legal title to the property. Being in legal title means you are the current record owner of real property in accordance with the records of the jurisdiction where the real property is located. A title insurance policy provides insurance to the insured party against certain title problems up to the amount provided for in the policy. This insurance protects the insured party in two ways: (1) by indemnifying the insured party for costs associated with a title dispute; and (2) by defending the insured against adverse title claims. Without title insurance, a party could incur thousands of dollars in legal fees defending the party’s interest or may even suffer a complete failure in title and total loss of the property.
Two types of title insurance policies exist: lender’s and owner’s. Both, unlike most other types of insurance, offer backward-looking relief in protecting insured parties against defects in title to the real estate based on past events. An owner’s policy insures the property owner against certain title risks. Most purchasers of real estate view an owner’s policy as “optional” since the purchase of such is not a requirement to obtain financing. Lenders take a very different approach and require in almost every real estate transaction (both residential and commercial) that the borrower pay for a lender’s policy that meets the standards established by the American Land Title Association (“ALTA”). Such a lender’s policy protects the priority of the lender’s mortgage lien and safeguards the lender against the same title defects as the owner’s policy.
The most important difference between the two types of policies is that each insures a different party. The lender’s policy required by the mortgage lender only protects the interest of the lending institution. A lender’s policy offers no coverage for losses sustained by the owner if a title defect should surface. According to ALTA, one in four title searches (25%) reveal a title problem. Title insurers usually remedy these issues prior to closing but this statistic exemplifies just how many title problems actually exist. On occasion, undisclosed title hazards may surface after closing. Mistakes in the public record, previously undisclosed heirs staking a claim to the property, fraud, forgery, defective deeds and liens accidentally missed by the title examiner may cloud title to the real estate and jeopardize an owner’s investment.
The cost of an owner’s policy, although it may seem daunting amidst all of the other expenses associated with acquiring real estate, is actually rather minimal when compared to the amount of the investment at stake. The premium for an owner’s policy requires a one-time payment of between $1 and $2 per thousand of insurance obtained and when issued simultaneously with a lender’s policy will cost even less.
Remember, when buying real estate, what you don’t know can cost you. Relying on the lender’s title commitment showing title to the property as clear does not mean that your investment is safe. Most title defects surface after the dust has settled from the closing. The only way for an owner to insulate itself from expensive title problems down the road is by obtaining and owner’s title policy. The next time you or your company are looking to acquire real estate, be sure to thoroughly discuss with legal counsel whether obtaining an owner’s policy is right for you.« Back to news