When Realtors explain the importance of title insurance to prospective homebuyers, many homebuyers understandably assume that title insurance is like other insurance—a policy for which they pay ongoing premiums that will protect them in some way against problems that could occur in the future. However, title insurance does the opposite. For a one-time fee, title insurance protects you against problems that may have occurred in the past (to prevent them from coming back to cause problems in the future).
Without title insurance, you cannot be sure that your claim on a property has priority over someone else’s, which is of vital importance to both you and your lender. Title companies research the whole history of ownership on a property to ferret out fraud and ascertain whether someone else has a legitimate claim. This is no simple task, especially when you consider that records can be filed under various headings, such as legal description, the grantor’s name, or the grantee’s name, rather than the property address, which would be the most obvious. Also, searches on older properties may include paper records dating back decades or even centuries.
Once the search is complete, title companies provide a preliminary report, often referred to as the “prelim,” that lists any liens, easements, or other covenants recorded against the property. Here are the kinds of issues they can uncover.
Liens – A lien is a legal right to a property belonging to another person. Standard liens are deeds of trust, property tax liens, or judgment liens, but you may also see mechanic’s liens, child support liens, or bail bond liens on a property’s title. A lien can be filed against a property (a specific lien) or a person (a general lien that extends to any property that person owns).
Let’s say you do business with an unscrupulous person who steals your money. You take that person to court and the court finds in your favor. To recoup your loses, a lien is put on all of that person’s properties in the county where the lien is recorded. (If you suspect the unscrupulous debtor owns property in more than one county, you need to record your lien in each of the counties where he owns property.) When this person tries to sell one of his properties, depending on how things are structured, you may get first dibs on the sale proceeds up to the amount equaling the debt owed to you.
In 2007, I had a judgment lien against a borrower for $50,000. When he didn’t pay, I recorded a lien in Mendocino County, and I asked my attorney to record a lien Santa Clara County where my debtor lived. My attorney and I had a communication breakdown, and the Santa Clara lien was never recorded. Eight years later when real estate prices rebounded and I discovered my lien had not been recorded in Santa Clara County, I dutifully recorded it, only to discover that my debtor had filed bankruptcy in 2010 and my lien had been expunged. Not recording that lien in Santa Clara County probably cost me $130,000. So the moral of the story is: confirm that your liens get recorded properly.
Easements – An easement is a right of way or access to part or all of a property. Some easements are to be expected, such as PG&E easements that provide the utility company with access to power lines that cross private property. Some easements, however, are unexpected. I know of a man on the Mendocino Coast who wrote in easements when he sold his properties, giving himself lifelong access to the ocean via those properties. At one point, a homeowner found him traipsing through her garage and she asked what he thought he was doing. Apparently, she had not read the fine print on the title insurance, giving this man legal access to her property. As you might expect, she was a little taken aback.
Another type of easement is a borrow easement, which allows the beneficiary of the easement to clear, borrow, excavate or remove soil, dirt, or other materials from the servient property. I know a homeowner that is betting the borrow easement on his property will not be enacted because he has built a home on dirt that could be excavated out from under him.
Next time I’ll share more information about why title insurance is such a good investment. In the meantime, if you have questions about property management or real estate, please contact me at firstname.lastname@example.org 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 45 years.