Title Insurance Tips and Pitfalls
Real estate title insurance is an important part of most real estate closing transactions. As the name implies, it insures the title of the property for the benefit of the purchaser. Title insurance is a protective measure to insure your ownership interest in real estate. However, it does not insure every possible situation that may threaten your title, and there are extensive "exceptions" in every policy.
When a buyer is engaged in the closing process, they will at some point receive a "title insurance binder" or "commitment." This can be a very thick pile of paper and will contain a lot of information about the past history of the ownership of the property.
Tip: READ it!
Yes, there will be a lot of boring stuff. There will also be some very old stuff going way back in history, sometimes even to the original land grants. There is little or nothing you can do to dispute any of this information or get changes made, so why read it?
There can be mentions of old deed restrictions that carry forward to all subsequent owners, and you are subject to obey them. In more rural areas, there have been owners who placed deed restrictions on sale that restrict how the land can be used. One example is a restriction as to the number of trees that could be cut down by future owners. This may seem like a small thing, unless your plan is to clear a chunk of land for growing crops.
If you do it anyway, will you get called on it? Maybe not, unless there are heirs to the original owners who value their memory and wishes. However, when you go to sell, there can be issues with your violation and the new buyers' ownership rights.
More common are homeowner association and subdivision restrictions.
You have driven through the neighborhood and like it. You love the home. You are enthusiastic about moving in and enjoying your new home. One of your first purchases after move-in is a nice wooden storage building that will house your camping and boating gear. You get it all set up and then you get a letter from the homeowner association that you must remove the structure, as it isn't allowed or the roof is visible above the privacy fencing.
Believe it or not, there are members of these neighborhoods who drive around and watch for violations. One owner who did read the restrictions in the title binder document still got a less than friendly letter. He owned a boat, and knew that he couldn't park and store it anywhere on the property where it would be visible. He sacrificed his car to the weather to keep the boat in the garage. However, when he decided to sell, he called a boat trading magazine to list it. One of their services was to send a person over to take photos of the boat. An agreement was made for the owner to leave a check in the boat glove box and park the boat in the driveway on the day of the photos.
You guessed it. The letter arrived the next week, even though the boat had only been out one day and was promptly returned to the garage.
The owner wasn't happy with the tone of the letter about how "good neighbors" should behave, but all was done and really there was no action to be taken.
This story is one of tens of thousands every year, from tall grass complaints to forced removal of exterior landscaping or home color choices. With this in mind, read the documents that are attached to the title insurance binder, as they can bite you later, reducing your enjoyment of your property.
Pitfall: Not Understanding Exceptions
There will be a section of the binder or commitment that will state what is NOT covered by the policy. Often the buyer doesn't understand that there can be severe limitations or issues that can be in this section. There will always be certain things excepted from coverage, including:
- No claims can be submitted for coverage based on encroachments or activities related to legal exercise of access or easement rights. An example that has been a problem for some owners involves utility easements. We all need electricity, water, sewer and often gas lines serving our property. These easements granted to utility services allow them to come onto the property and dig, construct and repair their lines and infrastructure. When you have an easement that involves 10 feet along one property line, this means that anything you build or install on that 10-foot piece of land is at risk of damage or more. If you put in a concrete patio that extends into this area, it could be broken up by a utility to get to their lines or piping.
- No claims can be submitted for stated items on surveys or in deed restrictions or other items specifically recorded in county records. One example was an access easement granted to a next door neighbor to repair an existing septic system leach field that encroached on the property. The new buyer was not happy when the next door neighbor had to take out part of their garden to replace leach field piping. However, it was in the exceptions and not a claim that could be filed for compensation.
Those are a couple of many examples of exceptions to coverage. Reading the exceptions is very important. It is unlikely that there will be anything there that will alarm you, but you should know what they are to avoid problems later.
Tip: Understand the Coverage
Certain aspects of title insurance are regulated by the individual states, so you will want to understand the rules of the state in which the property is located. A good example is the tiered title insurance available in New Mexico. In an effort to make policies as affordable as possible for sellers (negotiable, but sellers usually pay premium for buyers), New Mexico excludes survey coverage from a "basic policy."
A buyer who wants any errors that may be discovered in surveys to be covered if the buyer's ownership is threatened, would have to buy extra coverage. This is advisable, and your real estate agent should say so. Sometimes they don't bring it up, and this can be a big problem later, though rarely. One instance was an error discovered when the neighbor did a survey and 12 feet along the property line belonged to the neighbor. The supposed owner who lost the 12 feet lost a whole line of trees planted years earlier as well. It was not covered, so no compensation came their way.
Pitfall: Relying on Others to Advise Instead of Reading
READ the title insurance commitment and ask as many questions as necessary to completely understand your coverage, as well as what is not covered. Relying upon the title company or real estate agents is at your own risk.