Title Always Important, Even in Real Estate

Buying a home today can present challenges that didn't exist in the not-so-distant past. Foreclosures and short sales have taken what used to be a fairly smooth, straight road to the closing table and added twists and turns and a few potholes.

If you’re purchasing a distressed property, title and title insurance are terms that you should become familiar with. You need to know what your options are, and understand their differences between the two.

In a traditional real estate transaction, there are two parties to the transaction: the home buyer and the home seller. The buyer and seller negotiate the terms of the offer, come to a "meeting of the minds," and sign and execute a contract for the sale of the property.

In a short sale real estate transaction, in addition to the buyer and seller, you have a third party to the transaction: the mortgage lender. The buyer and seller negotiate, come to terms, sign and execute the contract, and then the contract (along with the seller’s short sale financial documents) is submitted to the lender for their approval.

With a foreclosure, bank-owned, or REO real estate sales transaction, you have a home buyer and the bank foreclosing on the asset or home, which is the seller. The home buyer submits a traditional "as is" real estate purchase contract to the listing agent who represents the bank. The listing agent then submits the terms of the contract to the bank, and the bank uses those terms to generate a "counter offer" to the buyer that includes several addenda that are intended to protect and favor the bank’s "upper hand" throughout the closing process.

With all three types of real estate transactions, a title company/agent oversees all the closing details and serves as communicator and facilitator between the buyer, seller or bank, mortgage lender (if the buyer is getting a mortgage), the condo or homeowner’s association, and various other service providers, such as surveyors and pest companies. Among other duties — such as holding and managing escrow monies and researching the status of real estate taxes, utility bills, and association fees — perhaps the most important is the action of researching the history of ownership or "chain of title" to determine what type of liens, complications, encumbrances, or claims might exist on the property. The title agent would then issue title insurance and convey that document with evidence of ownership (also referred to as "title") to the new buyer.

There are two ways to convey title: "marketable" or "insurable."

Marketable title is delivered to a buyer when a title agent insists that the title to a  property that may or may not have outstanding liens, encumbrances, or violations is delivered to the buyer only after any outstanding issues or "clouds" have been addressed and cleared. With traditional real estate transactions, the type of title that is normally passed to the buyer is "marketable title."

Insurable title is issued when there may be complicating issues with the title to the property such as unreleased liens, deed related matters, etc., that cause an encumbrance on the title. The title company assesses the risk and assumes that risk insuring the transaction despite the defects or encumbrances. Special or non-standard exceptions and diminished title insurance coverage could be a reality with "insurable title." With foreclosure or REO real estate transactions, unless the buyer requests to pay for title costs and insurance, the type of title that is normally passes to the buyer is "insurable title."

The buyer of a property that is sold with "insurable title" could run into difficulty and complications down the road if they decide to refinance or sell the home. The "defect or cloud" left on the title when they bought the home will need to be cured before they can close the new real estate transaction or refinance. 

If a buyer chooses not to make waves during contract negotiations and agrees to allow the bank to use their title agent and issue "insurable title," it would be a wise move, at the very least, to get an independent title agent to do a title search first to uncover any issues that they might be dealing with in future.