You just bought a house and you’re worried that its furnace might not hold out for another winter. Or, the home inspector warned you that the crack in the kitchen ceiling may mean that the roof leaks.
But these concerns are small potatoes compared to what could befall you if there’s a problem lurking in something that is totally separate from the house itself, but an integral part of your purchase: the title to the property.
Consider, for example, a recent case related by Linda Pease, vice president of Chicago Title Insurance Co., whereby a new homowner was shocked to discover his title, or the legal ownership of his property, was marred.
“Soon after the closing of the sale, someone came to the homeowner and said the seller had actually sold to him first. The seller had really made two contracts to sell, and the one that this homeowner had was dated later, possibly making it invalid.”
However, the hapless homeowner did have somewhere to turn, since he received a title insurance policy from the seller when he closed on the property. If he does suffer a financial loss because he doesn’t actually have clear ownership, he should be reimbursed for that loss by the title insurance company.
Title insurance is a standard component in real estate transactions. In fact, when a buyer seeks a mortgage loan, the lender will require that the buyer have title insurance. The lender also wants his own title insurance policy, so that he, too, can be reimbursed for any possible loss due to unexpected claims on the property.
“If you didn’t have title insurance you would basically be taking a huge risk that the seller didn’t have 100 percent title,” says Gerald Marcus, a Schaumburg real estate attorney. “There could be all kinds of liens on the property–mortgages, taxes, judgments, anything.”
Think of title as the actual legal claim to the property. “I always tell people that title is ownership,” explains Wilmette lawyer Charles R. Goerth. The deed is a piece of paper that conveys title from the seller to the buyer, says Marcus.
If a homeowner hasn’t paid taxes, for example, the government could capture its due by putting a lien on the property, meaning that it stands in line to be paid when the property is sold. Before a title company will issue a title policy, it conducts a search of any possible liens or encumbrances on the property.
There is usually at least one lien, notes Douglas Hardy, a Warrenville real estate attorney, because the seller often has a mortgage and/or an equity loan that has to be paid off before the property can be transferred to the new buyer. “It’s the job of the seller’s attorney to make sure that the payoff letters (to the mortgage lenders) are in order, and that they can pass along a clear title.”
Cost control
For the average home buyer or seller, title insurance is just one more expense, and one more element of confusing paperwork. Luckily, after the closing of the sale, most people never give it another thought. Only a tiny fraction of title transfers aren’t “clean,” meaning that there’s a pitfall like the one described above.
If you’re the home seller, though, you may want to give some thought to title insurance before the closing in order to save money. In Illinois, it’s customary for the home seller to pay the lion’s share of the cost of title insurance, covering the one-time premium for an “owner’s policy,” which is given to the buyer to protect against any possible encumbrances on his title to the property he purchases.
The price of the owner’s policy depends on the price of the home being sold. For example, for a policy on a $100,000 home, Waukegan-based Mid America Title Co. charges $460, says Bill Bond, vice president of sales. There’s usually a sliding scale on the owner’s policy costs, with the cost per thousand decreasing as the home gets more expensive. For instance, on a $300,000 home, Mid America Title charges $700, says Bond, and it’s 85 cents per thousand after that.
But Bond readily admits that “prices are sometimes negotiable.” Indeed, there’s considerable competition in Chicago among title companies, and sellers can call for quotes and bargain for discounts. Sometimes, a real estate agent will refer a seller to a title company that is affiliated with his realty company. Usually, home sellers simply let their attorney select the title company.
Now, many attorneys select a company that they have a financial stake in, because real estate lawyers serve as agents for some title companies like Attorneys’ Title Guarantee Fund Inc., Chicago. “Even though my partner is a member of Attorneys’ Title,” says Hardy, the Warrenville attorney, “if a seller requests a certain title company, they have a right to use it.” Recognizing the competition in the title business, Hardy adds: “If the seller has shopped around for the best price, we may try to match the price (at Attorneys’ Title) or order the title through the other company.”
The buyer pays only for the lender’s portion of the title insurance, commonly known as the mortgage policy. The cost for that policy is about $150, regardless of the price of the property. The $150 cost is lower than the owner’s policy charge, because the two policies are usually issued simultaneously by the same company, and the search for clean title has already been conducted in preparing the owner’s policy.
If a homeowner is refinancing, the lender will usually require a new mortgage policy, says Pease. “In that instance, the policy is more expensive, because the title company is starting a search from scratch, and not doing a search in connection with the other owner’s policy.”
Like all insurance companies, some title companies may be more responsive and service-oriented than others, say real estate lawyers. Pease points out that most title underwriting companies (underwriting companies actually pay out claims, agent companies market the title policies and conduct searches) are rated by companies like Standard & Poor’s.
Since sellers choose the title company, buyers can only hope that if they do have a later claim, that the title company will be cooperative. The buyer’s mortgage lender, however, receives his policy from the same title company (the $150 mortgage policy that the buyer pays for) and a mortgage lender will probably voice an objection if the seller uses an unheard of, fly-by-night company, notes Reed Brunzell, a loan officer with Hartford Financial Services, Skokie. Brunzell adds: “There are really just a few title underwriting companies doing business in this area, even though there are many agent companies.”
Sale snafu
A homeowner may be living with a title snarl quite comfortably until he decides to sell and a buyer submits a contract to buy. Goerth relates that he once represented a home seller, and when the buyer submitted a contract and he ordered a title commitment, the new title search revealed there was a problem in ownership that had been undetected for some 20 years.
Relates Goerth: “A house had been built on the lot adjoining my client’s property. But at the time the property was subdivided, the division wasn’t properly recorded for tax purposes. When I ordered the title commitment, a discrepancy was discovered between the property shown on the Sidwell map (maps defining property for tax purposes) and the legal description of the property…. My client had been paying taxes all these years on a small sliver of land that wasn’t really his.”
Before the sale could go through, the discrepancy had to be rectified. “I worked out an agreement between my client and the people next door,” says Goerth. His legal services were paid for by the company which issued the title policy to the owners some 20 years ago.”
Easements
While no buyer will accept title if it is encumbered by a tax lien or other financial claim, they often accept provisions known as “easements.” If a utility company uses part of the property for its telephone poles, for instance, or if a public road takes up a small portion of the property, these public and utility easements don’t usually upset the sale.
Private easements may cause more controversy, says Goerth. Say, for instance, a neighbor’s fence sits on the property. That would constitute a private easement. “The contract states that the seller is going to convey ownership or title subject to certain items, and easements are included in this list,” says Goerth. “When I represent a buyer, I typically cross out all private easements, because I want to see what they are, and whether the buyer has any objections.”
Indeed, unless they are skillful in dealing with legal matters, most buyers and sellers depend on their attorneys to interpret title insurance and related matters. In fact, Goerth notes that when he’s representing a seller he usually receives the actual title policy about a month after the closing. “When I get the policy, I examine it to make sure everything is as it should be. Then I send it to my client, along with a letter reminding him of any easements that he’s agreed to.”
