At one time or another, almost everyone who has been involved in the purchase of real estate where a lender is involved has paid for title insurance. What many do not realize, however, is that the title insurance policy he or she has paid for is title insurance for the benefit of the lender only (known as a “lender’s” title policy). A lender’s title policy provides protection to the lender up to the amount of the loan. In the event of a claim, the title insurance company will cover the lender’s loss, acquire the note on the property, and enforce payment of any remaining balance from the borrower. By contrast, an “owner’s” title policy will protect the buyer of the property as well.
In today’s real estate market, where approximately 6.1% of the mortgage loans in the Cincinnati metropolitan area are delinquent by at least 90 days (according to data gathered by CoreLogic), there are more foreclosures than ever before and more real estate purchases involving foreclosed real estate. Nationwide, lenders foreclosed on over 92,858 properties in July 2010, up 9% from the previous month. Master Commissioner sales in Kentucky and sheriff’s sales in Ohio may remove most liens from real property, giving the purchaser a false sense of security. However, many of these properties may have considerably more title issues than the average real estate transaction and the need for an owner’s title insurance policy is even greater.
One of the reasons for this is that, with the significant increase in foreclosures, more and more foreclosure work is being handled by attorneys and title examiners who are overworked and under-qualified. This can lead to problematic foreclosures that leave significant liens on the property. Even when the work is performed at a high professional level, however, there nevertheless may be title defects and other hidden hazards in the title that are not uncovered during the normal title search process.
Some examples of such title defects and other hidden hazards (which are beyond the scope of a reasonable search of title records) are forgeries, fraud, errors by the Clerk’s office in the recording of deeds, mechanics liens, defective foreclosures, faulty surveys, misinterpreted wills, conveyances by a minor or a mentally incompetent person, undiscovered heirs or ex-spouses who return to claim an interest in the property, or deeds delivered after the death of the property owner.
Unlike a lender’s title policy, which protects the lender’s investment in the property only, an owner’s title insurance policy protects the real estate buyer’s interest in the property from these types of potential issues. To illustrate, say a buyer purchases a property for $1,000,000 and borrows $800,000 from his lender to fund a portion of the purchase price. The lender places a mortgage on the property and requires the buyer to pay for a lender’s policy in the amount of $800,000 to protect its interest. Any hidden defect in the title that may later appear will only protect the lender’s interest up to $800,000. However, the cost of such hidden title defect may well exceed $800,000. If the buyer had purchased a $1,000,000 owner’s policy at the closing, his investment in the property would have been protected up to the full policy amount.
The one-time cost of an owner’s title insurance policy is minimal when purchased at the same time the lender’s title policy is purchased, because the title insurance company sells the policy to the owner at what is known as a “simultaneous issue rate.”
Because many of the claims related to title defects involve multiple parties and can go back several years, they can be very expensive and time-consuming when the buyer is not properly insured. An owner’s title insurance policy protects the buyer from a loss that might result from the types of title defects previously discussed, up to the policy amount, and will also cover the payment of legal fees the buyer incurs in defending his or her rights.
Real estate foreclosures present potential opportunities for investors to reap profits so long as buyers take reasonable precautions and exercise proper due diligence. An owner’s title insurance policy is a good way to protect one’s investment and should be considered by all purchasers of real estate, regardless of whether the property is distressed.
Jack Gatlin regularly practices in the areas of real estate, civil litigation, debtor/creditor law, commercial transactions, family business planning and probate. For more information on title insurance matters, please feel free to contact Mr. Gatlin at (513) 768-9710.