When purchasing a home most buyers know they will have to pay something called “closing costs.”
Those costs include prorated taxes and insurance, fees to the escrow company for handling the transaction and – the biggest items of all – title insurance.
What is title insurance and why do you need it?
Title insurance is protection against problems with ownership of the property that you probably didn’t know about and that could cost you your home.
When Sylvia and Joe purchased their first home, a 1920s bungalow near downtown Livermore, they didn’t know all the things that could possibly go wrong.
The listing agent had mentioned the seller had a mortgage on the property.
Sure enough, when they got into contract the title company sent them a Preliminary Title Report that showed the seller had a home loan for $300,000 with Hometown Bank and Trust.
It also showed he had a line of credit for $50,000 with a local credit union, a lien for $30,000 with the company that installed solar panels on the roof, and a lien of $45,000 in unpaid taxes.
The report also revealed that PG&E has an easement on a portion of the lot, that the next door neighbor, who can only access his property via their shared driveway, has a legal right to do so in perpetuity, and that the developer had shifted the property’s boundary lines after the initial plans had been filed with the city so now the fence is actually situated on another neighbor’s lot.
The search conducted by the title officer easily revealed all of these debts that had to be paid before the property could change ownership, and the easements and boundary line issues that had been filed.
It took her a little more digging to discover that a lien held by a previous owner had never been properly dispatched – a situation the title officer would need to remedy before close of escrow.
What may not have shown up is that the seller – who held the property as “a single man” – had failed to finalized his divorce, so now his wife would be required to sign off on the sale.
Or that the seller had inherited the property from his father after the estate went through probate court. If, sometime in the future, the father’s signed and witnessed will is discovered it may be determined the seller was not the legal owner and thus had no right to sell the property.
Or that he – or a previous owner – had forged documents related to the property.
Or that some other, unknown lien had not been recorded because of a clerical or mail error.
Tisha Morris, an escrow officer with Orange Coast Title in Pleasanton, has seen a lot of these situations in her 34 years in the business.
“Most of the time title finds these things during their search and the buyers don’t even know about it,” she said. “But even the most skilled title officers may miss things. Filing errors, forgeries, those kinds of things can be hard to find.”
Situations that are uncovered before the sale closes will be handled during the escrow process. Easements and boundary issues are disclosed to the buyers. Liens and judgments are paid off. Errors are “remedied.”
But those unknowns may not come to light until long after the buyers have taken possession, jeopardizing their rightful ownership of the property.
Fortunately, Joe and Sylvia purchased owner’s title insurance, which covers these and other problems that may be discovered after the sale has closed.
The Consumer Financial Protection Bureau describes owner’s title insurance as “protection to the homeowner if someone sues and says they have a claim against the home from before the homeowner purchased it.
“Title insurance can protect you if someone later sues and says they have a claim against the home from before you purchased it. Common claims come from a previous owner’s failure to pay taxes or from contractors who say they were not paid for work done on the home before you purchased it.”
Their lender, of course, required them to purchase separate lender’s title insurance to protect it from these types of claims as well.
Cost is based on the purchase price, in the case of homeowner’s title insurance, or the loan amount, in the case of lender insurance.
“It’s a one-time premium and it’s good until you no longer own the property,” Morris explained.
Customary distribution of fees varies from county to county. In Alameda County, buyers typically pay all title and escrow fees, which can run a few thousand dollars. As with most things in real estate, who pays which fees is always negotiable.
If you are paying title and escrow fees, you can shop various companies and ask for quotes. Buyers usually stipulate in their offer which title and escrow company will handle the transaction.
In Northern California, title and escrow are usually with the same company.
“They are two separate parts,” Morris said. “Title is responsible for research of the property and clearance to make sure the property can convey. Escrow coordinates funds, documents, lender service, buyer and seller services, closes escrow and oversees the recording.”
Title and escrow companies are licensed through the California Department of Insurance (www.insurance.ca.gov) and are subject to the provisions of the federal Real Estate Settlement Procedures Act, also known as RESPA.
There are no required licenses for individual escrow officers or title officers and most, like Morris, learned their business on the job. Orange Coast provides mandatory training for its title and escrow officers, as do many other such companies.
Additionally, many professional title and escrow officers also pursue relevant outside training – in ethics, real estate practices and real estate law, for example.
For more information about title insurance, title searches, escrow services or other real estate matters, contact your local Realtor today.
Cher Wollard is a Realtor with Berkshire Hathaway HomeServices Drysdale Properties in Livermore.