Title insurance has the distinction of being the only form of insurance invented in the United States. It was created in the 19th century in response to the unmet need for assurance of title and indemnification of loss caused by errors of lawyers and title abstractors in researching and reporting the status of title.
What is a Title Search?
Before a Las Vegas real estate transaction closes, a title search must be made. No lender will loan money on the security of a property without clear title. Nor should any buyer accept it. And, obviously, the investors funding our Seller Assist Program need to know that the title is good.
So what is title? In a nut shell, title is a bundle of rights in real property. A title search is the process of determining exactly what these rights are and who owns them. This is done by a search of the public record. The buyer, the buyer’s lender, and our Seller Assist funders need to be certain that the person selling the property actually has the right to do so. They also need to know that all the rights to the property (title) that have been bargained for are actually coming with the property.
Here is a simple example. A tenant living in a property under a lease has the right to occupy the property (the leasehold) but has no right to sell the property itself (alienate the freehold). If the tenant fraudulently tries to do so, the title search will show that he has no right to do so.
The title search is carried out by the Title Insurance Company in those areas where the title company has offices. In some jurisdictions only practicing attorneys may undertake searches. No matter how the search is performed, in almost every real estate transaction a title insurance policy will be purchased, usually by the seller, to assure the buyer that valid title has been conveyed.
What is Title Insurance?
Having determined the insurability of the title to a specific property, as a result of the search process, the Title Insurance Company will issue an insurance policy, to insure the existence of the bargained for bundle of rights. In practical terms, this means that the Title Company will defend the title to the property against adverse claims and will pay for any losses suffered by the buyer to the extent of the coverage of the title policy.
Why is Title Insurance Necessary?
For the Seller: No prospective (properly advised) buyer will close on a transaction without evidence that the property is free of title defects. The provision of title insurance provides this evidence backed up by an institutional third party guarantee. Most real estate purchase agreements require title insurance. In fact without title insurance, real estate is virtually unmarketable. The seller needs to be able to provide this kind of guarantee for the buyer that the title he or she is purchasing is free and clear of encumbrances that might affect the current enjoyment or the future sale of the property.
For the Buyer: Title insurance protects the buyer from errors in the public record, defects in title not revealed by examination of the public record, or mistakes in the title search. This protects the buyer from any prior judgments, liens, or other claims that may subsequently be brought against the property. The Title Insurance Company will defend against such (covered) claims and pay up to the amount of the policy to settle them.
For the Lender: The mortgage lender (and our Seller Assist investor) needs assurance that it has a valid mortgage lien on the property. If there are prior claims on the property, it will not and the loan will not be made. Note that the lender’s title insurance is different from the buyer’s title insurance and will not protect the buyer. This is because the interests of buyer and lender are different. However, both policies are normally issued simultaneously.
What Happens in a Title Search
Chain of Title is Established: The chain of title is the history of the ownership of the property and describes who bought and sold it and when up and until the present transaction. This information is normally derived from the public record in the County Clerk’s or Recorder’s Office. It is also contained in so called “title plants” maintained privately by the title companies in such forms as tract books, index cards, punch cards, and computer records.
Tax and Special Assessment Status is Established: This determines the current status of real estate taxes and any special assessments against the property. The search will end in requiring the seller to pay unpaid monies through escrow. Title insurance protects the buyer against any loss from unpaid and past due taxes and assessments.
Field Reports are Made: Oftentimes title companies will send field inspectors to check the property on the ground, verify lot size, see who is in possession, and find if there are signs of easements that are not shown on the public record. If exceptions are found, they are investigated and disposed of. Needless to say, if the buyer is unsatisfied, the sale will fall through.
Name and Judgment Search: This determines whether there are unsatisfied judgments against the seller or previous owners of the property. A judgment is a general lien against the debtor’s real estate, which can be sold in satisfaction. The judgment search will include a search for tax liens and mechanics liens, which may also constitute prior claims on the property ahead of the buyer’s and the lender’s/note investor’s rights. These defects in title will show up in the so called “preliminary title report” and must be cleared by the seller before title insurance can be issued. The name search is simply to establish the identity of the seller and eliminate the relevance of any judgments or claims against persons of the same name as the seller.
When the searches have been satisfactorily completed, the title company will issue a commitment to insure together with any conditions, such as the clearing of any defects in title that have been uncovered during the search. The sales, loan, or note purchase transactions can then proceed.