You’d be amazed how many people buy real estate from a neighbor or a friend only to find out they bought the property from someone who didn’t own it free and clear.
People can have undisclosed rights to your property, so it’s important to be aware of these. How do you do this? Through title insurance. Title insurance isn’t like regular insurance that protects you from things that might happen in the future. Title insurance is a guarantee that your ownership of (or lien on) a property is senior to other claims on the property. If there are other claims (recorded liens), a title report will reveal them and the title insurance will indicate where your ownership falls on the list with respect to other claims on the property.
Let’s say you purchase the parcel next door from your neighbors. You trust these people, and you have no interest in spending money unnecessarily so you skip the title insurance. Years later, your daughter announces she’s getting married and wants to have the ceremony with 100 of her closest friends in your back yard this summer. You decide to do some home improvements to get ready for the big day by borrowing against your house, and the lender asks you to prove there are no outstanding liens against the property.
Come to find out, there was a deed of trust that was paid but never removed. Because you didn’t get title insurance when you purchased the property, this information didn’t come to light when it would have been easy to address. No matter, you think, I’ll just go look up the people who owned the note secured by my house and have them sign a reconveyance to remove that deed of trust so it’s clear to everyone that I own the property free and clear. Unfortunately for you, the original owners of the note have since passed away, so the current owners are their five grown children, one of whom lives abroad.
Not only do you have to convince each of the five kids that the note was in fact paid, you also need to get them to sign legal documents to that effect. The owner who lives abroad can only arrange to get the reconveyance documents notarized at the embassy, which requires an appointment—the soonest of which is several weeks from now. At this point, the chance of you getting funding in time to renovate your home before your daughter’s wedding is slim.
So, a word to the wise: if you purchase property, get title insurance. All things considered, it’s a lot less expensive in time and money to get title insurance when you purchase a property than it is to deal with title problems later, or worse, to discover there are title problems you can’t fix, such as having an IRS lien (and they are so much fun to deal with) against the property that must be paid off before you can either borrow against the house or sell it.
If you have questions about property management or real estate, please contact me at email@example.com or call (707) 462-4000. If you have an idea for a future column, share it with me and if I use it, I’ll send you a $25 gift certificate to Schat’s Bakery. Dick Selzer is a real estate broker who has been in the business for more than 40 years.