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Title insurance demystified: do homeowners really need it?

Posted by Rona Fischman August 12, 2009 02:43 PM

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Attorney Richard D. Vetstein who writes the Massachusetts Real Estate Law Blog is back to answer questions about one of the least understood aspects of a real estate transaction: title insurance.

He writes:

I always recommend that buyers purchase an owner’s policy of title insurance. The problem is that most home buyers don’t know what title insurance is or what it covers, and only see it for the first time on the closing settlement statement.

What Is Title Insurance?

Title insurance is policy of indemnity protecting homeowners and lenders from financial loss in the event that certain problems develop regarding the rights to ownership of property. While closing attorneys check each title to real estate before a closing, there are often hidden title defects that even the most careful title search will not reveal. In addition to protection from financial loss, title insurance pays the cost of defending against any covered claim.

There are two types of title insurance, lender’s and owner’s policies. Lender’s policies are required by every public mortgage lender, but do not protect a property owner. Buyers must separately purchase an owner’s policy.

Title Defects: What Does An Owner’s Title Insurance Policy Cover?

I recently represented a condominium seller who was shocked to learn a day before the closing that there were several un-discharged mortgages and liens on her unit left over from the original developer. Fortunately, she had purchased title insurance which enabled the closing to go forward as scheduled, with the title company undertaking the obligation to discharge the liens and clear the title.

Other common title defects which are covered by standard owner’s title insurance include:

• Sudden appearance of unknown heirs claiming an interest in the property
• Forged deeds or impersonations
• Incorrect legal descriptions
• Improper recording of deeds

There is also a newer enhanced coverage policy available from First American Title and other companies which covers many situations excluded by standard policies such as:
• Building permit violations
• Adverse possession or prescriptive easements
• Building encroachments
• Incorrect surveys
• Pre-existing violations of subdivision, zoning laws, restrictive covenants.

Title insurance, however, does not guarantee a property has good, clear title, and is not a substitute for a competent title examination by an attorney. There are numerous exceptions to a standard owner’s policy (i.e., certain boundary encroachments) which should be discussed with your real estate attorney. Many of these exceptions are removed in the enhanced policy which I recommend obtaining.

How Much Does Title Insurance Cost?
Title insurance is a one-time premium paid at closing directly related to the value of your home. The cost today is roughly $3.65 per $1,000 in value. Thus, insuring a $500,000 home would cost a $1,825 one time premium. Title insurance is a good deal because you pay once and it continues to provide complete coverage for as long as you or your heirs own the property. Those who decline title insurance rationalize that the risk of a title defect is minimal and not worth the premium. As a former claims counsel for a national title company, I have seen countless title problems derail closings and drag on for years. If you don’t believe me, here are some title defect horror stories.

Full Disclosure: The Role Of The Closing Attorney

Most homebuyers don’t know that the closing attorney, as the agent of the title company, pockets a share (typically 70%) of the title insurance commissions paid at closing. While lender’s policies are required by lenders, closings attorneys do have a financial incentive to recommend owner’s policies for buyers. But not getting title insurance for this reason is like saying you shouldn’t buy life insurance because your financial advisor makes money off it. The risk of a title defect rendering your property unmarketable remains regardless of whether the closing attorney has a financial stake in the matter.

Ask any real estate professional. Get title insurance.

As a real estate professional, I do not give advice about title insurance. It is a legal issue that needs to be discussed with a lawyer. That's why I think it is a problem when the closing attorney (who gets a big commission) is also the buyer's attorney (who pays for the insurance.)

Do you think Title insurance is a good deal? Did you buy it when you bought your home? Do you think a new buyers should get the optional owner’s policy? The enhanced policy?

This blog is not written or edited by or the Boston Globe.
The author is solely responsible for the content.

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Scott Van Voorhis is a freelance writer who specializes in real estate and business issues.

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