What’s This Large Amount for Title Insurance?
categories: Buyers
Do you buy title insurance? Should you buy title insurance?
Buyer’s get confused by title insurance all the time and, unless their agent has prepared them, often ask a lot of questions at closing about the cost and necessity of getting it. This is usually an awkward moment because the person answering the question, the closing attorney, also has a substantial stake in your decision. The attorney also has a canned response - and I’ve seen them give a glare to an agent who brings up the topic or asks questions.
I wish this could be a short post, but as I think about it, I’m not sure it can be.
First, what title insurance does is protect you against any flaws in the title of the property you are buying before you buy it. The person selling the property has to actually own it, that is, have title to it. If they don’t own it without other parties having a claim to it, then you can’t buy it without also being subject to those claims.
During the closing process, the attorney hires a title examiner to do a title search on the property. This person goes to the county courthouse (or online) and researches the chain of ownership on the property and any liens filed against the property. If the title is “clean” you can proceed to closing. If it is not clean, then you need to “repair” the title, usually by clearing up any liens by paying back taxes, utilities bills, or anything else that has been “attached to the house.”
Once you have a clean title, you can close the purchase. However, at closing you will see a line on the settlement statement for title insurance. If you are financing the property, you must buy title insurance for the lender. This is called Lender’s insurance and it is paid on the loan amount.
You will also see an amount for Owner’s insurance. This is your coverage and it is based on the sale price, so it is more than the Lender’s coverage.
Title insurance costs around $2-$3 per thousand dollars insured. You have the option of buying this insurance. On a $400,000 house, you are looking at about $900-$1000 for both the lender’s and owner’s coverage.
I believe that most realtors just advise their clients to buy the insurance and be done with it. I never tell my clients to buy it or not buy it; different people have different tolerances for risk. I believe that I’m doing them a better service explaining what it is and how it works if they want to know. I would like them to be clear on exactly what they are buying.
There is an advertisement in a recent National Association of REALTORs magazine by a large, national title company. It is a crafty case of cleaver word smithing, in my humble opinion.
In trying to answer the question: Why buyers need title insurance when they rarely hear about claims, the ad states that “36 percent of title searches reveal issues that are difficult, and sometimes costly, to resolve.”
Fine, but these issues are always resolved before closing; you’re not going to close on a property without clean title. Insurance doesn’t help you clean up the title. The seller has to do that, usually by paying off debts attached to the house. This is a total red herring for title insurance. The company is trying to make it sound like title problems identified before closing are part of the problem. They aren’t, as they are resolved before you close.
The ad goes on to say:
The title insurance industry and the policies we provide ensure that:
- Potential problems are identified before the property changes hands
- Problems are remedied that could keep the new owner from having clear title
- Unforeseen problems, not found during the search, are covered by an Owner’s Policy
Well, the “industry”, that is, the closing attorney in most cases, handles bullet points one and two, as we talked about above. Title insurance handles point three. Period.
What bothers me about this ad is that it wants the buyer to believe that title insurance is doing more than it really is. The only thing that title insurance does is protect you AFTER CLOSING in case there is some issue with title that was not identified prior to closing. Maybe the title examiner made a mistake; it has been known to happen. Maybe a long, lost cousin with a claim to the property shows up three years after you close on it. There are always horror stories (often involving divorce) about unexpected things happening years after you have bought a property.
That is the point: the insurance is there to protect you against the unexpected. You just have to decide the chances of the unexpected happening and is it worth $400-$500 to sleep easy every night knowing that probably your largest investment is protected against future claims? Usually it is, but the buyer’s need to decide for themselves.
A few things to note in the process: If there is ever a claim on your title, the insurance will not pay for any problem that could have been identified (and resolved) in advance with a survey at closing. So, it you buy title insurance, but don’t pay to get a survey (about $300) - or the seller cannot provide a survey at closing, then you may be lessening the value of your insurance.
Also, if you are buying a property with all cash, then the attorney may have a policy that you must purchase Owner’s title insurance. The only reason I can come up with for that is that title insurance is a major income source for closing attorneys. They are paid a commission on each policy. Did you think that you could run a real estate law office on $400 per transaction with the amount of time and energy the staff spends preparing everything, particularly if there are title issues that need to be remedied?
Furthermore, there are details in the policies regarding things like forced removal of existing structures or damage to existing structures due to easement maintenance. Policies vary and there can be deductible amounts, but no one ever reads the policies at closing, so they never really know until they have a claim. I don’t know too many people who sit around reviewing their title policy!
In the end, title insurance exists for a reason: there is some risk involved when purchasing property that the buyer is really getting what they are paying for - that the seller really has the right to sell the property. Now you can decide if for a one-time payment of a few hundred dollars you want protection from that risk.
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