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Do You Really Need Title Insurance When Buying Real Estate?

April 27, 2007

By Robert Grubb

At the closing of a real estate deal, most buyers and sellers sign papers and walk away with little thought to one critical factor: title insurance. If title insurance was eliminated, it would make real estate transactions considerably slower and riskier.

Many know little of the value buyers and sellers actually receive from title insurance, but consider this: Recent data, from the Regulatory Research Corp., says that significant title problems occur and need to be fixed on 36 percent of all real estate transactions before the title is even insurable.

Title insurance facilitates the speed and security of real estate transactions. A title on real estate is the right to possession, ownership and use of a property. Sometimes someone other than the titled owner has a legal right or claim to the property, and can claim the property outright or make demands on the titled owner about its use or sale. Naturally, buyers and their lenders want assurance that the seller of a property has "clear" title, and the right to sell it to the buyer.

A so-called clear title is usually not possible to obtain. Title insurance protects buyers and their mortgage lenders by transferring the risk of potential title problems to the insurer, much like other lines of insurance.

Beyond this, title insurance differs from other insurance in several significant ways:

  • Most insurance is purchased annually and covers the threat of a future risk like fire or an accident. Title insurance is purchased once, usually by the seller, to protect the buyer and any mortgage lender for as long as the buyer owns the property. One premium, one time covers the insured parties. A buyer's mortgage lender is covered for as long as the mortgage is outstanding.
  • Most insurance covers the risk of a future event. Title insurance covers the past. The "underwriting" process involved in issuing title insurance attempts to eliminate any potential ownership problem before the buyer takes title to property, thus preventing claims.
When a "commitment to insure" is given by a title insurer, professionals employed by the insurer and their agency search public records and private databases for problems, called "defects" on a property. They identify defects and resolve them before the property transfers to the buyer.

This examination and resolution process is conducted by licensed, experienced professionals who work in the field daily and must meet continuing education requirements annually. The process requires judgment and experience to efficiently handle and resolve title issues.

The 36 percent of real estate transactions unable to be initially insured are usually curable. Beyond major issues, most transactions have several more common defects that need to be resolved. Examples include: mechanics liens, municipal or HOA assessments, encroachments by improvements, tax liens, garnishments, and divorce decrees. Issues like these are resolved by title professionals before a real estate transaction closes.

The process -- search, examination and resolution of problems -- results in title insurance having higher underwriting expenses and lower claim expenses compared to other insurance. In fact, the title industry spends 10 to 18 times the amount in underwriting than it does in claims. Nationally, claims in 2005 were $748 million, about 4.5 percent of premiums.

Since not all information is known at the time of a search, insurance is provided to protect against claims unknown at the time the policy was issued. Claims are common. The extent of the underwriting process limits most of these claims to a small portion of the property value, yet they arise daily.

Title insurance presents very real protection to property owners, lenders and even to the liquidity of the U.S. financial markets:
  • The buyer is protected from the cost of defending against and investigating the intricacies of a claim to resolve unpleasant surprises-all risk of defects are transferred to the insurer at the time the buyer purchases (and usually borrows money on) the property.
  • The buyer's lender is similarly protected. With risk transferred, the sales of mortgages to the secondary market are facilitated, providing a safer investment and liquidity for lenders to make additional loans.
  • Buyers (and lenders) are protected from later claims of prior ownership or control that would seriously jeopardize the transaction itself. Such nightmares actually happen and often lead to lengthy litigation.
  • The seller, though not insured, benefits from the title work, reducing the risk someone will later seek compensation for defects.
Without title insurance, every seller would need to hire a real estate attorney to search, examine and clean up their title prior to the sale of property, then reserve part of the sale proceeds for future title problems. This cost would likely exceed the premiums charged for title insurance.

Title insurance covering both the homeowner and lender for the average home in Colorado is about $935. Commercial properties generally have much higher risks and higher premiums.

You're not required to obtain title insurance if you pay cash for a property. It is most often a requirement of mortgage lenders, and then only for the amount of the mortgage. But is it worth the risk to go "naked"? Obtaining an owner's policy at the same time as the lender's policy will cost very little additional premium and protect the owner for the full purchase price.

With a one-time premium and the risks insurers remove from the ownership of property, title insurance offers a compelling value to everyone involved in the transaction, particularly the insured parties.

Robert Grubb is CEO of Alliant National Title Insurance, a title insurance underwriter based in Longmont. Reach him at 303.682.9800 ext. 300, or via e-mail at bgrubb@alliantnationaltitle.com.

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