Title insurance and me
My first-person narrative about buying a home in Boston (read it here) drew a flood of responses from readers, much more than I get when I write about other people.
Many of the writers, maybe most, are mad at me. They're mad because I didn't buy homeowner's title insurance and, they say, because other people may not buy a policy as a result. One writer said he was "furious." Another characterized the choice as "a grave mistake."
The thing is, the writers are mostly lawyers. And lawyers make money selling title insurance.
Most buyers don't know this because it's not something that lawyers share with most buyers. But a hefty portion of the "premium" you pay for title insurance goes directly to the attorney.
One writer, who actually made an effective case for title insurance, started by laying out the case against it:
...the attorney is paid 70% of the fee as commission. So they always recommend it partly because they have a large interest. The lawyer would have made an additional $584.50 on your transaction. He also gets paid the same on the lenders policy.But he went on to say, as did several other writers, that the policy still offers protection against something that really does happen: The possibility of an outstanding claim on the property. And several writers emphasized that not even a good title search can ensure a clear title. For example, contractors have several months to file a claim. If the old owners failed to pay a contractor, there might not be a claim on the title until well after you buy the property.
The first writer continued,
Even knowing that 70% of your money goes into the pocket of the attorney, I would run back there and see if he will still sell it to you for the original quote. Typically the price goes up quite a bit if you buy title insurance after the initial purchase. Otherwise, I recommend that you go perform your own title review. The documents are all public and in many cases can be retrieved on line. Every lien needs a corresponding release.
Here's my take: Title insurance serves a clear purpose. There's no doubt that titles sometimes need clearing, which can be expensive. There's also the nightmare scenario in which you don't actually own the property you think you bought. Failing to purchase title insurance means you're shouldering that risk, which is something my girlfriend and I were willing to do. But people should clearly understand the nature of that risk before they make the same choice.
At the same time, it strikes me that the cost of title insurance is excessive, padded by the cost of marketing title insurance to lawyers, and paying lawyers for selling policies to buyers. Maybe it's like health care -- you've got to have it no matter how much it costs.
But I'm certainly struck by how many of its defenders are paid to sell the stuff.
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The costs associated with title insurance and the amount that is paid to the lawyer issuing the policy is clearly set out on the HUD settlement statement in every transaction. If you really are an expert, or even a very interested real estate neophyte, you'd know that and would double check the amount BEFORE signing off on the HUD.
I am not an attorney but a real estate agent with 15 years experience and I've seen instances where title insurance was needed. Just this year I had a closing delayed for months because the seller who inherited a property without a mortgage and her heirs didn't have owner"s insurance. In this instance, one condo association sued another condo association over access of the main driveway into the complexes and who owned it and who owed money to whom to maintain it. No title insurance company would write a new title policy. This unit's closing was delayed until the lawsuit was settled. If the owner had title insurance than the closing would have happened because the title insurance company was on the hook whether it was the current owner or the new owner.
A decade or so a large condo complex in Norwood, MA had a big title problem when it was discovered that some of their buildings were actually on land owned by another condo complex. The developer didn't divide the land properly. It didn't get discovered until the complexes started fighting over the common pool and who actually owned it.
I've also seen closing that went forward because someone had title insurance and the title company would write a new policy with the understanding that the title problem would be fixed at a later date.
I think of owner's title insurance as cheap insurance to the cost of fixing a title problem down the road just before you want to sell your property especially if you have built up equity on your property. Insurance is one of those things you buy hoping you never have to use it.
Speaking of insurance, do you have disability insurance so you will have the income to pay the mortgage if you get hurt or ill and can't work?
Title insurance is certainly a big scam - the only ones who benefit, most of the time, are the lawyers who write the policy.
If you are skeptical of those who responded, I suggest asking people close to you - other homeowners, for one.
For other people encountering this situation, I think they should do more research, well before closing date arrives.
What I've never looked into is - is it possible to buy a title insurance policy directly from an insurance company, without paying any commission?
Borrowers do have the right to negotiate the commission (just like they do with their agents ..) but most feel too uncomfortable asking their attorneys to lower their fees.
Do it, anyway.
I recently sold a condo -- the bank's atty found 3 title defects 48 hours prior to closing. Fixing the issues would have delayed the closing by several months and I would have lost the sale in a very difficult market. Due to the title insurance we closed as if nothing was wrong and the lawyers sorted it all out later.
This is on top of it providing coverage for a special assessment for legal fees when the condo was sued.
I am not a lawyer, nor do I have any financial stake in title insurance, except for the fact that it saved me many times the face value of the policy.
Given the cost of the insurance relative to what it's protecting, and the complete lack of control you have over the risk, you would be insane to turn this down.
I am a real estate lawyer (but do not sell title insurance). I always recommend that home owners and commercial property owners purchase an owner's policy of title insurance. For a home owner, it is insuring that you own your most valuable financial asset.
To compare, a commercial property owner would invariably purchase an owner's policy of title insurance.
True, most of insurance price goes to the attorney. They carry the risk that if they missed something in the title, the title insurance company will come after the attorney for negligence.
I think you did a disservice to your readers on Sunday when you dismissed the idea of buying title insurance, without discussing the benefits. That being said, the closing attorney should not have put the cost of the owner's policy on the closing statement without asking you if you wanted the owner's policy of title insurance and without explaining the benefits to you.
Wait ....
You wrote this:
[An] owner's title insurance is a second policy that covers you in case the lawyer made a mistake
and the lender's insurance company doesn't care.
No, it's not. Or it is, but it's a lot more than that!
Here's how it works:
The lender's title insurance policy protects the lender if there's a problem with the title,
after closing.
However, the lender's title insurance policy only covers the cost of the loan up to the loan amount.
So, if you buy a $400,000 home and take out a $320,000 loan, the lender's title insurance policy
only covers the $320,000.
An owner would take out a second policy in order to protect his or her equity - the other $80,000.
Of course, that's the amount an owner would really care about, right?
If you're willing to gamble on losing your equity, then consider taking a pass on an owner's
title insurance policy.
As I suggested, a borrower could (and should) negotiate the commission with the lawyer.
The HUD-1 statement, in fact, will show you how much of the owner's insurance policy is for the
policy and how much is the commission paid to the lawyer.
Some people would have no problem taking a big magic marker and crossing out the commission.
Perhaps more people should?
Binyamin, congratulations on your new home. Best of luck to you and your girlfriend.
I am a lawyer and a real estate broker. I do not represent banks at closings, so I do not certify title or sell title insurance.
I spend most of my time working for the clients of my exclusive buyer brokerage firm. I would estimate that about half my buyers decide to purchase title insurance policies. I purchased it when I bought my home in 1997.
I don't blame you for being upset about the lawyer adding the cost of an owners policy to the settlement statement (HUD) without discussing it with you. It frustrates me when closing attorneys just add the policy to the HUD. They're basically giving themselves a raise at your expense and without your permission.
The closing lawyer should have contacted you prior to closing (or contacted your lawyer) to discuss whether you wanted the owners policy or not. He probably contacted your lawyer to ask how you and your girlfriend wanted to hold the property, i.e., tenants in common or joint tenants, if he was the one that drafted the deed.
Another item that closing lawyers routinely add to a settlement statement without asking buyers permission is a declaration of hoemstead, commonly referred to as a homestead deed. Everyone should have one. It takes about five minutes to draft this document and $35 to file it at the registry of deeds, but I have seen attorneys add from $50 (very reasonable) to $150 (ridiculous) to the HUD for it.
I provide my clients with a brochure explaining what title insurance is and what it covers, and I typically inform them of the percentage of the premium that goes to the lawyer. One of the important things (in my opinion) tile insurance covers is attorneys fees. Even if a title defect is something minor and fairly easily resolved, the one-time premium probably is less than the cost of potential attorneys fees.
My opinion is that title insurance is a useful product. One could certainly debate whether it is too expensive.
What annoys so many people (apparently you too) is the mystery surrounding it. Why not just send a letter to buyers a week prior to closng with a brochure explaining title insurance and indicating in the letter that the closing attorney gets a precentage of the premium? Some closing attorneys do, but not the majority.
The bottom line: You probably should have bought the owners policy, but I understand why at that moment you decided not too.
By the way, I enjoyed your article. I appreciated your honesty about being "stumped repeatedly" despite being a real estate reporter. It's so important for home buyers to have professionals they can trust help them from the beginnings of the home search through the closing.
You explained very well here why you chose not to go with title insurance. My issue with your article is that you did not explain it there. You tossed it out there, as if buying a fridge or lunch was a better idea. For you, yes. For others, maybe not. You are willing to take that risk.
My understanding is that you can shop around for title insurance, and you can negotiate the lawyer's fees. A few hundred dollars now can save you a word of headache and hurt down the line if a title issue were to arise. That is the whole purpose of insurance, you pay it knowing you may never use it, but it will come in handy if you have to. I am not a lawyer, just a home shopper who has done a lot of research before jumping into the fray.
"Here's how it works:
The lender's title insurance policy protects the lender if there's a problem with the title, after closing. However, the lender's title insurance policy only covers the cost of the loan up to the loan amount. So, if you buy a $400,000 home and take out a $320,000 loan, the lender's title insurance policy only covers the $320,000. An owner would take out a second policy in order to protect his or her equity - the other $80,000."
That's not how it works. The owner's policy doesn't protect the equity, it protects the entire value of the property --$400,000 in your example. The lenders policy pays the lender, while the owners policy pays the owner.
Is there any diffence in price of Title Insurance if the property is in the Torren's system? It seems that the price of insurance is based on the value of the property and it does not matter if the property is registered or recorded.
I have been doing work with real estate law for 25 years and have seen unbelievable things pop up subsequent to the closing, i. e. lost heirs coming forward, surveys that were incorrect and you own less land than you thought you were acquiring, or buying a parcel with a pool that you believe is on your property but is on the neighbors, etc. If the buyer does not have title insurance it could the homeowner tens of thousands of dollars to defend his title.
The closing attorney assumes the risk up to the amount of insurance if a title defect is found after the closing. An average house costs around $400,000.00. The attorney is on the hook for this amount if there is a total failure of title. The amount of his commission is insignificant in comparison with the risk and work it takes to cure a title.
Speaking of a pool on another owners property....I bought a condo and recently learned that there is a parcel, supposedly common area, that is still owned and separately taxed to the original declarant. It is almost 1/2 thecommon land area and includes our pool and clubhouse as well a parking. Appx. area is 2 acres and is a buildable lot.
Is my deed valid since it says this property is part of our development? Can I cash in on my title insurance to get out of this property? This is only one of many, many misrepresentations that have recently surfaced. My closing Atty. was the banks Atty as well as my personal Atty and he also was the Title Insurance company rep. Talk about conflict of interest!!
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