This is the first of a short series of posts about the transfer of property. Other things we’ll look at in this series: deeds, escrow or closing, and tax aspects.
We all pretty much understand insurance, right? There is a risk somewhere in your life (i.e. your car, your house, your life), so you pay someone to give yourself peace of mind that they will cover your rear end if you get in a bind with such risk.
So, what exactly is title insurance?
First, lets define the word “title.” Title, in terms of real estate, is basically the recognized or established right to property. Title insurance protects you against defects or encumbrances in the title that may be discovered after the purchase is already made. However, before any title insurance is handed over, the company that will be providing this insurance will almost always run a title search to examine the title records closely, in order to minimize their risk of loss. (This is how most insurance works.)
Did you know that title examiners search through 40 years worth of public records (deeds, wills, etc.) to ensure there are no defects in title? In most states, that is the requirement. After searching through all of these documents, the examiner writes up a report, called an abstract, which mostly includes the “chain of title.” It basically tells a story of the property… who owned it and when, what happened on it, if anything, whether or not someone has an interest in it, and so on.
If, after investigation of the title, the title insurance company feels comfortable providing insurance in this particular case, it will issue a policy that will insure the property owner against losses arising from title defects (like forged documents, undisclosed heirs, misfiled documents, etc.).
Additionally, title insurance companies typically require a recent survey of the property. A survey measures the boundaries of a property and locates all of the improvements (buildings, fences, driveways). Needless to say, title insurance isn’t something you can just buy on the spot. It takes time for a title insurance company to make the decision on whether or not to insure you. They have to examine the chain of title and order a survey, at the very least.
Now, next time you enter into a purchase contract on a home, and someone asks you if you want title insurance, you’ll be able to make an informed decision!