You’ve found your dream home. You’ve spoken to your real estate agent, you’ve made your offer, and now you’re ready to throw it in escrow. So you buy this thing called title insurance. Why? This is a common question I receive. Maybe you buy title insurance, because your real estate agent said you should. But the deeper reason is that even though the title looks good and you feel confident that the closing is just around the corner, you buy title insurance because it protects your investment and helps you with closing the deal. Unlike car insurance or life insurance which protects you from future accidents, title insurance protects you from the past.
What is a title?
In the realm of real estate transactions, a title is an abstract term for the status of a property. As a buyer, you want the title to be as clean as possible. Remember when you purchased a car? If you bought it used then you probably made some phone calls to ask for the title of the vehicle before going out to see it. Is it a salvaged car? Yes? Next! Easy right? Unfortunately, it’s not as easy when inquiring about the tile, or status, of a house on the real estate market, because you need to know if there are any liens and encumbrances that might affect the title in the future. Liens and encumbrances come in many shapes and sizes and to find them, you have to do a title search. The first place to start is by looking at the deed.
What is a deed?
Remember playing Monopoly? A deed is like that square card you get after purchasing a home on Park Place. Unlike a title, a deed is not abstract; it’s a record of an event. In real estate, the record shows the transfer of ownership of the property from one person to another. If you look in your county’s registry of deeds, you’ll often find deeds dating back to before the American Revolution!
While a deed will typically not have information about liens or mortgages, the researcher of the title will work backward or forward from one deed to the next to verify who owned the property, creating a chain of title. This is called a title search.
What is a title search?
The purpose of a title search is to see if the property has any liens or encumbrances. To do this, you hire a title company to examine the records in many offices such as the Register of Deeds, Small Claims Courts, Clerk of Courts and other municipal and county officials. Depending on the title company, a search can take up to nine working hours during a span of 1-3 business days.
What is a lien?
A lien is a type of debt that is owed to a person or an indemnity that has an interest in the property. There are many types of liens but you can separate them into two categories: voluntary liens, like a mortgage, and involuntary liens, like taxes that need to be paid off. There are many types of involuntary liens: Delinquent taxes, Special Assessments, Mechanical Liens, etc. In the case of a Mechanical Lien, let’s say that you hired a contractor a few years ago to remodel your roof. However, since you did not pay your invoice, the contractor now has a lien on your property, and in order for the property to proceed through escrow, you have to take care of that first.
Another common lien is the Special Assessment which is a financial cost due to some improvement being done on the street that can affect your taxes. For example, after parking two blocks away from your home and walking around the dusty construction site next to your house for weeks (this time for a new sewer pipe), you may find a Special Assessment cost attached next to your property taxes. If that’s not paid off, then it can become a lien.
Is title insurance necessary?
Yes! Buying title insurance is a no-brainer. Again, the purpose for title insurance is to protect your investment (and your future in your new home) from liens which may come to haunt you from the past.
Back in the old days, before the existence of title companies, home buyers used to roll the dice. They had to ensure for themselves that the title handed to them from the seller was valid. If it was later deemed fraudulent or invalid, well, that would be their loss. A good example is a case that happened in 1868 when, prior to closing the deal on a property, Muirhead (the seller) found a lien on the title and turned to an attorney for legal advice. However, the attorney’s erroneous input was that it was not a valid lien and as a result, Muirhead went ahead and told Watson (the homebuyer) that the title was clear. This turned into the case of Watson v. Muirhead; due to a prior lien on the property, plaintiff Watson lost his investment in the real estate transaction. The Pennsylvania Supreme Court ruled in favor of Muirhead because apparently, he was not liable for his mistakes based on the legal advice of an attorney. In the wake of that ruling, Pennsylvania passed an act that allowed for insurance companies.
Ever since, title companies have become an integral part of the home buying process. If you have any questions, I can help.
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This information, based on New York law, was provided courtesy of The Law Office of Christopher J. Arrigali, P.C. It is intended to inform, not to advise. No one should try to interpret or apply any law without the assistance of legal counsel.