What Every Realtor® Should Know About Owner’s Title Insurance
Make sure all of your clients are protected
You’re a real estate agent, so you know that buying a home can be overwhelming for many of your clients. Homebuyers can easily feel confused and frustrated by the mounds of paperwork they have to sign. Plus, all the fees associated with closing can sometimes be a surprise even to an experienced buyer.
Owner’s title insurance is one of those items often misunderstood by homebuyers at closing, yet its value is tremendous. As an important advisor to your clients, you are in the position to help them understand the value of owner’s title insurance and the dangers that can be incurred without it.
What is title insurance?
Owner’s title insurance is a policy that protects homebuyers’ property rights. For the same reasons that the bank requires a lender’s insurance policy, a homebuyer obtains owner’s title insurance to protect their legal claims to the property.
How it protects your clients
Say, for example, your client recently purchased a new home from a builder, but the builder failed to pay the roofer. Wanting to be paid, the roofer filed a lien against the property. Without owner’s title insurance, your client would be responsible for paying this existing debt—meaning they’d be paying the roofer out of pocket instead of purchasing something nice for their new home, like new living room furniture. This is just one example of how owner’s title insurance protects homebuyers’ from various significant risks. With owner’s title insurance, your client would be protected from certain legal or financial responsibilities.
Enduring value
The good news is that owner’s title insurance protects homebuyers financially, as long as they or their heirs* own the home. For a low, one-time fee (average of 0.5% of the purchase price), homebuyers can rest assured, knowing they are protected from inheriting existing debts or claims to their property.
State regulations and CFPB
Each state governs title insurance costs and practices within the state. In addition, the Consumer Financial Protection Bureau (CFPB) promulgated certain settlement practices that are binding on financial institutions and escrow agents, as well as fields consumer complaints for violations of the practices. Keep in mind that title insurance industry practices vary due to differences in state laws and local real estate customs. The party that pays for the owner’s title insurance policy varies from state to state, and sometimes even within a state. For more information about title insurance, or to find a company approved to issue an owner’s policy, please direct your homebuyer clients to www.homeclosing101.org.
Free resources for Realtors®
Together, real estate agents, land title insurance professionals and other stakeholders involved in real estate transactions can protect homebuyers and provide them with the peace of mind they deserve during the home closing process.
For more information about title insurance, and to get free resources for real estate agents, visit www.alta.org/realtor.
Washington Realtor Legal Hotline Lawyer, Annie Fitzsimmons, discusses the reasons why the Preliminary Commitment should only be ordered after a listing is acquired. She urges Real Estate Brokers to use the last recorded Warranty Deed as the Legal Description for the period of time between ordering and receiving the Prelim. Once received, Brokers can then use the Preliminary Commitment to establish seller information, tax classification, and encumbrance level, as well as use the Exhibit A Legal Description to prepare a binding Purchase and Sale Agreement.
Identifying Potential RED FLAGS on a Preliminary Title Report
Below is a sampling of items to look out for when reviewing a preliminary title report. These are many of the items that escrow will be identifying as well. Most of them are items that can be addressed, it just may require some additional work or time to clear title for closing.
LACK OF ACCESS – there may be access, but if unrecorded this exception may show.
RED FLAGS – a homeowner’s policy (the MLS agreement default on a residential property) can only be issued when there is actual vehicular and pedestrian access. Meaning, a commitment showing this exception would generally be for non-residential property. Escrow may not be able to close a transaction where access can’t be ascertained.
TAXES – a preliminary title report usually shows the current status of taxes.
RED FLAGS – senior exemption status, open space status, or delinquent taxes.
AGREEMENTS – these usually take the form of road maintenance agreements, mutual easement agreements or improvement agreements and may bind the owner to certain actions. The buyer should review copies of any and all agreements thoroughly.
RED FLAGS – it is the buyer’s responsibility to contact their own legal counsel if they do not understand how the agreement would affect their requirements.
CC & R’s –fairly standard, especially in platted developments. The buyer should read through the CC&R’s thoroughly, especially if improvements are contemplated.
RED FLAGS – some CC&R’s prohibit certain types of improvements.
DEEDS of TRUST – these are fairly common and usually just show that there is a mortgage / note holder to be paid off before a transaction can close.
RED FLAGS – look out for old deeds of trust from previous owners, or, even the current owner that may have already been paid off. Also, watch out for old real estate contracts.
ENCROACHMENTS – sometimes during the title search, it is found that a structure (commonly a fence or a driveway) may encroach upon the subject property. This could mean that the buyer has to take title to the property subject to the encroachment.
RED FLAG – always contact your title officer if you see encroachment language in a preliminary title report!
JUDGMENT / TAX LIEN – these are not standard items to see on a preliminary title report – they are issued by the courts or filed by parties who are owed money and attach to property owned by the debtor.
RED FLAG – these are always a red flag; sometimes judgments can take up to six weeks to get a payoff demand and release from the creditor. Federal tax liens can take even longer. Always contact your escrow officer if you see a judgment or lien on a preliminary title report.
BANKRUPTCY – while not unusual, bankruptcies are not standard.
RED FLAG – all open or pending bankruptcies require the debtor to obtain court permission to sell or to take on new debt. At a minimum, a letter from the bankruptcy trustee will be required to close escrow.
NOTICE OF PENDING ACTION – also known as a “lis pendens.”
RED FLAG – always a red flag! This means someone has a lawsuit pending that may affect title to the property. Always contact your title officer if you see a lis pendens on a preliminary title report.
Whatcom Land Title Recording Department has two runs to the courthouse daily for recording at 10:30am and 2:30pm.
E-Recording is now available in Whatcom County for documents that do NOT require excise or items completed prior to recording. The cutoff time for E-Recording is 4:00pm and the original documents still must be submitted to Whatcom Land Title.
Please visit the Whatcom County Auditor’s Office website for more information.