Title Insurance
Title insurance companies play a dominant role in all real estate transactions in California. From time to time a California real estate licensee will have a client from a state in the eastern United States where lawyers have a much greater role and title companies have a lesser role. In these states, lawyers prepare Abstracts of Title and closings involve all parties converging in one place where documents and money change hands. Such states are now few and far between and in most states including California closings are handled by title and escrow companies. The role of the title company goes far beyond the issuance of a title insurance policy and the title company literally closes the transaction by handling the money, recording grant deeds and deeds of trust at the County Recorder’s office and issuing the policy to the buyer at closing.
A title insurance policy is essentially a contract of indemnity which guarantees that the title is as reported. If there are unreported defects in title and the policyholder is damaged the company must indemnify the insured up to the face amount of the policy. Title insurance is unique in that there is a one-time premium imposed at the time of the transaction and there are no annual renewal premiums even though the policy remains in effect as long as the insured owns the property.
Title companies are invaluable in helping both the real estate agent and the client with regard to the following types of issues:
Answering questions about items on the Preliminary Title Report (“PTR”)
Obtaining copies of underlying documents.
Plotting easements
Advising as to requirements for the removal of certain exclusions and exceptions which are shown in the initial PTR.
Dealing with title transfer issues including the proper handling of transactions involving, estates, trusts, partnerships, corporations and other forms of ownership.
Once an escrow has been opened there are several phases of the title company’s involvement in the transaction. The first step is the issuance of the PTR which is submitted to the buyer for review and approval. Many buyers have no idea what to look for in a Preliminary Title Report and will look to their real estate agent for guidance. The items set forth in the PTR can be divided into: (1) normal items such as taxes, encumbrances which the seller is going to pay off, CC&R’s if applicable, and public utility easements; and (2) “red flag” items such as abstracts of judgment, tax liens, child support orders, private easements, and covenants regarding public improvements. As to all questionable items, copies of the underlying documents should be ordered from the title company.
Real estate agents should not hold themselves out as authorities on complex title issues and should refer the client to the title officer to answer questions regarding the PTR and should urge the client to consult a private attorney if any questions have not been answered to their satisfaction.
The next step in the process is to “clean up” the title if necessary. This involves getting appropriate assurances that any liens, judgments or other monetary encumbrances will be removed prior to the close of escrow.
Sometimes the seller is “upside down” and the monetary encumbrances exceed the seller’s equity in the property. It is imperative that a seller who knows that there is insufficient equity include a short sale contingency in the Residential Purchase Agreement (“RPA”) by incorporating a Short Sale Addendum (“SSA”).This Addendum makes the close of escrow contingent upon the lien holders agreeing to reduce their pay off requirements enough to allow the seller to close without bringing money into escrow and without reducing the costs of sale including real estate commissions. Thus this clause protects brokers as well as the seller. Without a short sale contingency a seller who cannot persuade his lenders to reduce there demands will be in breach of the RPA by virtue of his inability to deliver clear title free and clear of all monetary encumbrances. As long as the property is being sold for fair market value the lender will usually agree to the short pay since the alternative is to foreclose and perhaps end up with the property on their books which is very disadvantageous from a banking standpoint. Sellers finding themselves in this position need to consult with a tax professional since, among other things, the forgiveness of any debt by a lender may be deemed to be taxable income. They may qualify for relief from any tax consequences under the Debt Relief Act of 2007 or the insolvency provisions of Section 108 of the Internal Revenue Code, however these provisions may not apply to any given situation and it is imperative that they get professional advice from a qualified tax expert.
After the buyer has either approved the PTR as is or all disapproved items have been deleted the final step is the issuance at close ofescrow of a policy in the amount of the purchase price insuring title to the buyer subject only to approved exceptions. The RPA now automatically provides for CLTA/ALTA homeowner’s policy which is a significant upgrade from the previous standard ALTA-R policy. This policy includes eighteen additional coverages beyond those included in the ALTA-R policy. This additional coverage includes such matters as building permit violations, violations of CC&R’s, encroachments, adverse possession, prescriptive easements, mechanics’ liens and forgery. Some of the items covered even apply to matters which arise after the date of the issuance of the policy. Many of these additional items are subject to both deductibles and maximum indemnification liability. For example the coverage for building permit violations typically has a deductible of $5,000 and a limit of $25,000. This additional coverage is a significant benefit to the homeowner who as an example discovers that the downstairs “granny flat” constructed by a prior owner without a permit is in need of mandatory corrective work to obtain an after-the-fact building permit from the jurisdiction where the property is located. If the work costs $25,000 or less the homeowner will be covered subject to the deductible. If the work costs over $25,000 the title company will contribute the policy limit and at least significantly reduce the economic burden faced by the homeowner.
ALERT: If you are a buyer or an agent for a buyer make sure that the policy to be issued is a Homeowners Policy with the additional coverage referred to above. Beware of “Western Regional Exceptions” which eliminate some of the items covered which can occur particularly in the sale of a bank owned (REO) property. Less than full coverage should be “countered out” or at least the buyer should be aware of the limitations and contact the Title Officer with any questions.
Sellers and buyers often question why they are required to fill out a Statement of Information for the title company setting forth their social security number, prior addresses, and other personal information. This information is needed so that the title company can see if there are any “floating” liens that might attach to the property. A “floating” lien as opposed to a property specific lien which includes a description of the property arises out on an obligation of the buyer or seller such as back taxes owed or a judgment which has been rendered against them. If a state or federal tax lien or an Abstract of Judgment is recorded at the county recorder’s office it will “attach” to any property acquired or sold by the debtor. The Statement of Information helps the title company determine whether or not the person named in the judgment or tax lien is indeed the same person involved a particular real estate transaction.