Should I buy owner's title insurance?

Maybe this should be rolled into a home buying thread, but I think this is a risk/reward type of thing that FWF is perfect for...

What are the conditions where owners title insurance makes good financial sense? Where does it not? What are the risks of not purchasing title insurance?

I stole some conditions for WHEN it makes sense from another website (see Geo123's analysis of this below)
http://www.stretcher.com/stories/00/000710a.cfm

1. You are not covered under the lender's title policy. Any claims against the title (a forged signature by a spouse at any time in the past, etc.) may leave you homeless and out your equity.


2. Don't count on the thoroughness of the title insurance company. If there was an error in a legal description at some time in the past, it is likely that it was never corrected. A lot of people at the title insurance companies don't really understand legal descriptions and will just use the last one recorded for that property. Your agent probably has a relationship with a local surveyor and can ask him/her to check to see if the description makes sense as a courtesy. I caught such an error this week.


3. Since your land is most likely much more valuable than the structure on your property, it's a good idea to have a legal verification of the amount of land you are actually buying. I checked the area of another lot as a courtesy recently and the broker's estimate (they will never guarantee square footage) was off by about 600 SF. What you pay is usually based in some respect to the square footage of your property and you could end up paying too much. If you have a decent understanding of trigonometry, you should be able to make these calculations yourself. If your lot is bounded by a curve or is an odd shape with a lot of nonparallel lines, it might be tricky.


4. The only way to see if there are any easements (for power poles, water rights, etc.) is by having a title policy.


5. If at any time you need to remodel, build a fence or decide to build a new house, you will probably want one to get a complete (showing all easements) survey to turn in for your building permit.

I personally am leaning towards purchasing it - for #1, #3 and #5 reasons. It sits on 3 acres, but it used to sit on a much larger property which has been subdivided. Also the property/house is over 200 years old - so there certainly is some (remote) possibility for ancient claims coming up.

But on the other side of the coin - what do we pay the attorneys for in their title search? What is the loss ratio for title insurance to justify the $1K+ premium? What cut does the attorney take in presenting this insurance?

We've previously discussed a few owner's title insurance considerations in this and subsequent posts. Although the discussion there most likely won't help you, it is somewhat illuminating insofar as some of the title insurance issues and considerations are concerned.

alchemize said: 2. Don't count on the thoroughness of the title insurance company. If there was an error in a legal description at some time in the past, it is likely that it was never corrected. A lot of people at the title insurance companies don't really understand legal descriptions and will just use the last one recorded for that property.This is absolutely true but if you have concerns about the accuracy of the legal description, in the vast majority of the cases title insurance will NOT help you. In large transactions we often go through great pains to ensure that the legal description is correct and complete (there is a LOT more to it than just giving a metes and bounds description) and tweak it so that we can the maximum protection from title insurance.

The reason that it's done is because just like any other insurance, title insurance is only helpful if it correctly lists what it covers. If the legal description is incomplete, imprecise or is defective, in quite a few cases it will be very difficult to get your claims paid.

Your agent probably has a relationship with a local surveyor and can ask him/her to check to see if the description makes sense as a courtesy. I caught such an error this week.First, you can't check to see whether a legal description "makes sense" without also looking at the survey/plat upon which the legal description is based. It is physically impossible to otherwise check ANY legal description. Second, relying on a surveyor for a legal description is like relying on a secretary to draft a legal document -- they both do it all the time but they must be checked very carefully by an attorney. Surveyors routinely prepare first drafts of legal descriptions and secretaries routinely prepare first drafts of legal documents -- you'd just be insane trying to use those as the final draft. Third, as I mentioned above, there is a LOT more to a good legal description than just a metes and bounds description, so you need to have the full title history to prepare a good legal description.

3. Since your land is most likely much more valuable than the structure on your property, it's a good idea to have a legal verification of the amount of land you are actually buying. I checked the area of another lot as a courtesy recently and the broker's estimate (they will never guarantee square footage) was off by about 600 SF. What you pay is usually based in some respect to the square footage of your property and you could end up paying too much. If you have a decent understanding of trigonometry, you should be able to make these calculations yourself. If your lot is bounded by a curve or is an odd shape with a lot of nonparallel lines, it might be tricky.This is all true but has absolutely nothing to do with title insurance. If you are concerned about square footage and the like, you should get a good survey of the property (preferrably an ALTA survey, since the tiny non-ALTA residential surveys that are done for $300 are often not worth the paper they are printed on; the problem is that ALTA surveys in residential transactions are simply not cost effective).

4. The only way to see if there are any easements (for power poles, water rights, etc.) is by having a title policy.Nonsence. First, a short form residential title policy often used in residential transactions doesn't even list easements and other exceptions. Second, you see easements and other title exceptions in a title report, obtaining which is significantly cheaper than purchasing a title insurance policy (this is because by definition, the title report just reports you various findings but does not insure its accuracy). If all that you want to see is the easements and other matters affecting title, you don't need to purchase title insurance.

5. If at any time you need to remodel, build a fence or decide to build a new house, you will probably want one to get a complete (showing all easements) survey to turn in for your building permit.That's true but also has nothing to do with title insurance. A survey and title insurance are completely different documents, so you can easily get a survey without purchasing title insurance.

P.S.
Bob Hendrickson, the author of the above article, is a real estate agent, which explains all the incredible inaccuracies in the article.

geo123 said: ... I can tell you that as a residential purchaser I would absolutely ALWAYS purchase an owner's policy if I was buying new construction, since it is extremely common to have materialman's liens on those and title policies typically provide good coverage against those. I would likewise ALWAYS purchase an owner's policy if the property I was buying had undergone recent remodeling/renovations, so I wouldn't have to worry about materialman's liens there.

Very well said. I agree.

alchemize said: Maybe this should be rolled into a home buying thread, but I think this is a risk/reward type of thing that FWF is perfect for...

owners title insurance is usually a fraction of a property price. we bought ours to avoid potential hassles due to clerical errors, etc. especially in your case when there's a long history with your property.

geo123 said: wq1113 said: I have to pick one bone with you Geo - surveyors typically use the legal description provided to them. Most are prepared by attorneys, though when land is platted or subdivided the surveyor usually writes a new legal description. While there are still a few old-timers out there, as it pertains to writing legal descriptions the vast majority of modern surveyors have completed extensive coursework, gained the necessary experience and passed a professional licensing exam. The number of incomplete and inaccurate legal descriptions that cannot be physically placed on the ground astounds me. They are typically followed by something to the effect of...prepared by xxx, attorney-at-law. All locations are obviously different, but in my state attorneys and surveyors are allowed to prepare legal descriptions. Most attorneys leave it up to the land surveyor. If I had a dollar for everytime a lawyer asked me to prepare a metes-and-bounds description for a platted lot I'd be a rich man. Not picking on you personally...it tends to be a regional thing.I completely agree with all this, but I think that we are talking about slightly different things. If a surveyor is preparing a non-ALTA residential survey based on a previous subdivision plat, he/she will just use the same legal description as before. For ALTA surveys, however, you cannot do that, so there is ALWAYS a new metes and bounds description that's prepared, since each ALTA survey will be slightly different from each other -- surveyor's pins shift slightly, surveyor's measure things slightly differently, etc... That's the reason, by the way, that with ALTA surveys we also use both a Warranty Deed to convey the property with the metes and bounds description prepared per the new survey and a Quitclaim Deed to cover the difference between the previous vesting deed and the latest survey.

By the way, I also ALWAYS ask the surveyors to prepare legal descriptions for me, since it saves a ton of time and money versus having one of our paralegals doing it. The thing is, I don't remember the last time that I didn't have to change something in the metes and bounds description -- this happens even with ultra expensive surveys prepared by highly experienced surveyors (I am not picking on surveyors -- there are plenty of sloppy attorneys as well). Sometimes the changes are substantive, sometimes it's more of a preference. It is also common for me to request other survey modifications, such as plotting easements, listing title exceptions, showing all the points of ingress and egress, plotting parking spaces, putting surveyor's certification on the survey, etc...

Good discussion. I think that is where our locations differ. In my state, in a platted subdivision Lot xx is Lot xx no matter where the lot pins are (i.e. good luck with unwritten rights). Original corners of the exterior of the subdivision can be another matter. For the most part, a lot in a platted subdivision is almost always described as Lot xx, in YY subdivision and never changes. A metes and bounds description is typically never changed but a survey of the description will show deed distances/bearings, measured distances/bearings and, at times, calculated distances/bearings. It is rare that the description from an original conveyance is ever changed. Once in a while I'll run into a description where they kept the language from the original description and added an "also described as" clause with a new description to explain the intent of a current conveyance. I've done ALTA surveys on residential, commercial and industrial properties throughout my area and have only on one occasion been asked to modify a current legal description. It was a huge industrial project where parcels were not contiguous and a mix of metes and bounds, platted lots and public land descriptions. We ended up describing each contiguous parcel with a new metes and bounds description following the original descriptions of the tracts in the parcel. We didn't do it for the local attorneys and title company - we did it to satisfy a law firm in NYC.

We're splitting hairs, but my point is that a survey here is an interpretation (i.e. opinion) of the description. The original description is usually the best evidence of the intent of the parties. When it's all said and done, we offer our professional opinion of a description and it's up to the courts to rectify any conflicts.

wq1113 said: Good discussion. I think that is where our locations differ. In my state, in a platted subdivision Lot xx is Lot xx no matter where the lot pins are (i.e. good luck with unwritten rights). Original corners of the exterior of the subdivision can be another matter. For the most part, a lot in a platted subdivision is almost always described as Lot xx, in YY subdivision and never changes.Yep, an excellent discussion! It's not about the locales having different practices, it's about the types of properties being surveyed. If you are surveying a lot in a platted residential subdivision, then in every jurisdiction I have ever dealt with you will most likely just refer to the Lot # as set forth on the recorded plat. In very large deals, however, it is highly unusual to be dealing with just a few lots in a platted subdivision -- in most cases there is no plat. Further, even if for whatever reason there is a plat, in very large deals I, as lender's counsel, would never allow a surveyor to just describe our multi-million dollar collateral as a lot on a plat without taking new measurements and giving me a new metes and bounds legal.

We're splitting hairs, but my point is that a survey here is an interpretation (i.e. opinion) of the description. The original description is usually the best evidence of the intent of the parties. When it's all said and done, we offer our professional opinion of a description and it's up to the courts to rectify any conflicts.Right, and as a lender's, borrower's or developer's counsel, it is my job to prevent it from ever getting to the courts. Hence, the reason that in the vast majority of large deals I wouldn't accept an ALTA survey without a new metes and bounds description and/or one that doesn't show easements, exceptions and the like. One of the reasons that I routinely require these things is not just to ensure that we are in fact getting the property that we think we are getting; another major reason is to remove a number of title exceptions, so that my client can receive the best and the most comprehensive title insurance coverage possible. The title protections associated with a property just described a Lot X on a platted survey are FAR inferior to those associated with a new ALTA survey prepared to my satisfaction with a new metes and bounds legal and with a number of title exceptions negotiated out to my satisfaction. There is a reason that we are an elite firm and charge the big bucks

MrKlick said: IMHO title insurance is pretty much a scam based on heavy kickbacks to the brokers who steer you into it.Did you confuse title insurance with some other type of insurance? Title insurance is anything but a scam and noone is ever "steered to it" by brokers. In fact, loan brokers receive absolutely no commission based on your decision to purchase or to stay away from title insurance.

You probably can't avoid paying for a minimum, but to buy extra is just plain silly.There is no "minimum" that you are required to buy. Owner's title insurance is ALWAYS optional. Further, as I explained above, there are certain circumstances (new construction or recent remodeling) under which it almost always makes a lot of sense to purchase title insurance. Beyond that it is a case by case decision for me not because it is a scam (it's anything but a scam) but because there are plenty of other ways to ensure clean title.

Lots of interesting stuff on the net, for example, http://www.latimes.com/classified/realestate/buying/info/la-fi-titleinsure20jul20,0,4800545.storyWhat does this article, which has to do with a quest to lower title insurance premiums, have to do with whether purchasing owner's title insurance is a good idea?

Just as a way of balancing this thread, I thought I would post a very positive story about title insurance. I just closed a transaction on Monday where I represented a large bank in connection with an acquisition and development loan. It was a pretty complicated transaction, which involved two large banks, 6 different law firms, 3 different states and about 20 lawyers. The seller of the property, a very powerful company which is used to getting its way in negotiations, was selling the property to another company and was then leasing a portion of it back. My bank client was providing a loan on the property.

The seller's very aggressive lawyers had pre-negotiated a lease with the purchaser, which contained a very seller/tenant-favorable form of SNDA (subordination, non-disturbance and attornment agreement). They also insisted on recording a memorandum of lease evidencing their lease with the purchaser and included it as a permitted exception to the limited warranty deed that they were providing to the purchaser. They also insisted on recording the memorandum of lease together with all their acquisition documents, so that it would be recorded before the lender's mortgage.

My negotiations with the seller's lawyers regarding an SNDA quickly came to a screeching halt when they categorically refused to entertain any changes to their tenant-friendly form of SNDA and pointed out that the lender had no choice but to go along with that or would have to refuse to provide the loan, which would have caused all sorts of problems, lawsuits, etc... Instead of continuing to negotiate with them, when I reviewed the form of the lease that the seller had pre-negotiated, however, I noticed that it contained a self-subordination clause that essentially provided that the lease would be automatically subordinate to any mortgage on the property even without an SNDA. The language of that clause was sufficiently clear but was not bulletproof. Armed with that I was able to convince a title company to insure my lender-client's mortgage as a first priority instrument and to list the lease as a subordinate matter even though 1) the warranty deed would list the memorandum of lease as a permitted exception, 2) the memorandum of lease would be recorded prior to the mortgage and 3) there would be no SNDA.

At that point I explained to the seller's counsel that we were able to obtain title coverage with respect to our mortgage and no longer were interested in executing an SNDA with them. They immediately freaked out since in a foreclosure the lender could just terminate their lease and kick them out (which would have cost them hundreds of thousands of dollars), re-negotiated the lease with them, etc... So, they asked us to sign an SNDA on our terms, which we did.

For those who were able to follow this somewhat complicated story, the title insurance company's flexibility in this case not only saved the transaction from collapsing but also saved the purchaser/borrower a ton of money in legal fees (purchaser/borrower pays not only its own legal fees but also those of the lender's counsel, such as myself) since I got my lender-client its preferred result without spending a ton of time and money trying to negotiate the various points of the SNDA. By the way, the title company would not have received an extra penny in premiums regardless of whether they agreed to my request above or not. So, as I've pointed out above, in the right circumstances and if used correctly title insurance can be an invaluable benefit. Like all types of insurance out there, however, you have to know when and how to use it and when to go without it.

michal1980 said: What should a newbie buyer be looking for?Consider hiring a lawyer or see if you have a very knowledgeable friend (this doesn't mean someone who has closed on a couple of houses in the past) who can assist you. Other than that, I am not sure if there is a whole lot that you can do.

Dont know if you can discuss, but in your foreclosure case. It seems like the buyer did what they were supposded to, paid lawyers and other professionals, to make sure they are covered. Yet still appear to have gotten screwed on the deal. Is my reading of your story correct?Your reading of the story is exactly correct. My story actually ended up ending well for unsuspecting residential owner: I didn't want the poor guy to have to spend sleepless night figuring out what to do and it didn't make a lot of sense for the bank to foreclose on half the guy's property, so I convinced my client-bank to let me apply some pressure on the closing attorney. After a few terse conversations I essentially forced the closing attorney to pay the bank off (I am assuming that the closing attorney was forced to file a claim with his malpractice insurer in order to get the money to pay the bank off) and the bank released its lien. So, the residential owner now does not have this hanging over his head, I feel pretty good about my good deed and my client-bank is happy that it doesn't have to deal with this.

Form reading your posts on the matter, it seems that, I would personally need to know the fine details behind every part of the transaction to be covered/ make sure I'm getting what i'm paying for.

Yet, when I go say to get my tire changed, I expect the person changing the tire to know what they are doing, and to be responsible if they do not do their job. In your title insurance disccusions, It seems that I would need to go above and beyond just hiring a professional to change my tire, because no matter what the professional did, I could still be responsble for his work?There is a difference here: even though you are paying the closing attorney, he/she represents the lender and NOT the purchaser, so it's very difficult if not impossible for the purchaser to make any claims against the closing attorney. On the other hand, in your tire example the mechanic works for you, so you have direct recourse against him for shoddy workmanship. So, my recommendation is to seriously consider hiring your own attorney who will represent you and assist you with these matters. It is true that in 9 out of 10 times a residential transaction will go smoothly and your attorney wouldn't really do a whole lot. In that 1 out of 10 times when something does go wrong, however, it can get very expensive very quickly if you don't have a professional assisting you. For instance, in the post I linked above I described my own closing a few months ago in which an unrepresented lay purchaser would have had one hell of a time dealing with the issues I mentioned there. Likewise, I also described several methods that I used to lower my closing costs -- you probably have to be an attorney or have one assisting you to identify and maximize these strategies, however.

To be clear, I am not trying to drum up business for attorneys out there and, in the past, have thought that hiring one in a small residential transaction might be an overkill. The most recent events I've described in this and the thread I linked above have convinced me otherwise though.

ThursdaysChild said: Haven't re-read all the posts (sorry), but just in case no one has brought this up:

you'll be required to purchase lender's title insurance, but why not negotiate with the sellers to have them pay owner's title insurance for you?Instead of negotiating with the sellers to pay specifically for owner's title insurance, what is often done by buyers is to negotiate a contribution towards your closing costs. You can then use the contribution towards anything you want.

Now, the question posed in this thread is relevant regardless of whether the seller is providing a closing cost credit to the buyer. This is because if you are able to reduce your closing costs (by not buying owner's title insurance, for instance), you'll have more money left over to buy down the rate or to reduce the purchase price.

Snyder81 said: So a little off-topic, but how cheaply can I get Lender's title insurance? I am refinancing with PenFed and my original title company from the house purchase in 2002 has no interest in giving me a "reissue" rate so I'm shopping around for lender's title insurance. I submitted a quote request at www.easytitlequote.com and the confirmation said I'll start getting quotes within 1 day.

I live in Washington State and my refinance amount is $122k. What's the cheapest lender's title insurance I can get?You're going to have to get quotes from the firms that actually insurer title.

How would ANYONE else be able to provide you an accurate estimate of what you'll pay?

bump

InterestedOnlooker said: In this day & age with all the crazazy wheeling, dealing, walking away, & outright fraud that's been going on, I'd venture that owner's title insurance is even more important now than ever.Sorry, I am not following. What does all the "wheeling, dealing abd walking away" have to do with owner's title insurance?

I have somewhat of a related question.

Situation: Short sale, two loans, both from the same lender, but the second loan might be from a different division. The approval letter we received from the lender contains the following language:

This letter will confirm our acceptance of the short payoff on the above referenced property. We agree to accept the proceeds generated by the $500,000.00 "as is condition" purchase as full and final satisfaction on the first mortgage indebtedness on the above referenced property. This agreement is subject to the following:

... some unrelated conditions....

The following closing costs have been approved and should not exceed the given amount:
* Seller agent commission $xxx
* Buyer agent commission $xxx
* Closing and taxes $xxx
* Junior Lien $2500

We will prepare a release of lien and send to the title company for recording.

When asked about the second mortgage, the lender tells us that this single approval letter is enough and they will not issue a separate approval letter for the second mortgage. As things are in a short sale transaction, everyone is on hair trigger and I don't want to prod the lender too hard. My concerns are as follows:

1) Is it reasonable to accept the above approval letter as approval for both mortgages?

2) If this approval letter is not sufficient, and ultimately the lender only sends one release of lien for the first mortgage, is the transfer of title of the property still valid?

3) Lastly, if the transfer of title of the property is not valid, does owner's title insurance cover this defect in title?

On the one hand, I am inclined to believe the lender when they say this is enough, because I don't know that a lender would be so underhanded as to promise one thing (accept short sale as satisfaction for both loans), but then refuse to release the 2nd lien after the closing. But on the other hand, the language of the approval letter makes me really nervous and I need to CMA. But if title insurance is enough of CMA, I am not going to push the issue and risk the lender just walking off and do a foreclosure.

Thanks a lot for the info, geo123.

This transaction truely has me pulling my hair out - why does everyone insist on being so difficult when cooperation is in the best interest of *all* parties? Ok, that's a rhetorical question.

I've received further clarification from the seller's agent, who says he will be beating on the bank to produce the approval letter for the second loan, which the first approval letter does not explicitly address. He assured us that the bank will provide this letter, he just needs to speak to someone at the bank who isn't taking the whole thing personally.

The closing company also said that when they secure the pay-off letters for the two loans from the lenders, it will be quite explicit and clear what the bank wants in satisfaction of the loans. The seller's agent has promised that if the second loan requires more funds to satisfy than that provided by the first approval letter ($2500), then he will pay for it out of his commission, if it is enough to cover.

I guess worst case is second loan does not budge and comes back wanting whole or significant fraction of the remaining balance (unknown to me) which the seller's agent can't cover. But I am at least comfortable that there are checks in place by the closing company and the title insurance issuer that will ensure both liens will be released after closing.

First we were pushing the closing date month by month, now week by week. Soon it will be day by day, and probably hour by hour. Just sad.