By Dian Hymer
Title defects aren't common, but when they occur, the consequences can be disastrous. One seller found out to his surprise that there was a "cloud" (title defect) affecting title to his property. The title search on his property showed that a deed had been recorded transferring title from the previous owner to himself. But, that deed was signed by only one of two owners. Due to an oversight, the wife's signature wasn't on the deed. This meant that the wife could still make a claim to the property. In effect, she was still in title as an owner because she hadn't transferred her interest in the property.
Your real estate purchase contract should include a clause that requires the sellers to provide you with good title to the property at closing. If the sellers are unable to do this, you should be able to withdraw from the contract without penalty. In the example above, the buyer's title insurance company was able to track down the wife's heirs and get the signatures necessary to remove the cloud on title. The defect in the title report was corrected and the sale went through.
Most buyers take out a mortgage when they purchase a home. But, before a lender will issue a mortgage, there will need to be evidence that the buyers will receive good title to the property. Also, the lender will require that a title insurance policy be purchased, usually at the buyer's expense, guaranteeing the lender's interest in the property. Title insurance is paid for on a one-time-only basis. It is not transferable from one party to another.
First Time Tip: A lender's policy of title insurance won't protect the buyers' interest. But, buyers can get title insurance for their own protection. Even if you're paying all cash for a property, and won't need a mortgage, its wise to obtain a title insurance policy to protect yourself. Title insurance for the buyer can be paid for by either the buyer or seller. Who pays is often determined by local custom. The cost is based on the purchase price: the higher the price, the higher the title insurance premium.
Before issuing a policy of title insurance, title examiners search the public records for records that affect the property in question: such as liens, judgements and easements. An easement grants the right to use another's property for a specific purpose.
If a title defect is discovered during the course of a title search, the company insuring title will exclude this defect from its coverage. But, if the title examiner makes a mistake and misses a defect, the buyer is protected by the title insurance policy.
For example, a buyer's title examiner discovered that there was an underground storm drain on the property that passed underneath a corner of the house. This was listed as an exception from coverage on the buyer's policy of title insurance. The seller was protected by a title insurance policy that he purchased when he bought the house. The seller's title insurance company had not disclosed the existence of the underground drain and the drain wasn't excluded from the seller's title insurance coverage. The seller contacted his title insurance company and made a claim. The seller's title insurance company missed the unrecorded easement for the storm drain so they paid the claim.
The Closing: Make sure you understand the kind of title insurance you're buying. There are several kinds available. If you have a question about anything in your title search, ask your title insurer or attorney for an explanation before you close.
. Questions of a Do It Yourself nature should be submitted to our "