Buying without Title Insurance... kind of

12 Replies

I am purchasing a condo in a complex where I already own one. The seller is losing money on the deal and is not willing to pay for anything, including the $2,000 "Owner's Policy" from the title company. This is generally paid for by the Seller, but it now falls to me.

I am planning on purchasing the "Lender's Policy", which is required here, and normally paid for by the buyer. It runs about $1,500 and my understanding is that it insures the lender's portion, ie 75% of the purchase price.

So I'm trying to figure out if the "Owner's Policy" is worth the $2,000 price tag. I thought the Owner's Policy only covered the buyer's portion of the home, ie 25%, so I am confused as to why it is more expensive.

I also don't understand why there are two separate policies, presumably when there is only one title search performed. What is driving the cost?

And why didn't my title company tell me that the Owner's Policy was optional? They had a hard time admitting this, and finally came up with a waiver that I will need to sign if I chose to decline the Owner's Policy. This title company is a reputable one, and they appear to be simply pushing the industry standard -- ie promoting fear -- when it comes to the Owner's Policy.

BTW, nothing came up on my other condo's title search, so there doesn't appear to be any historic issues with land ownership. The seller bought directly from the developer, so I think the only risk is a potential title issue related to him. If that is the case, wouldn't/shouldn't the title company find that while doing the search for the Lender's Policy?

Can anyone shed any light on this situation?

Thanks in advance!!

State law sets policy premiums. You are crazy to buy without a title policy in my opinion.

Owners policy protects owner from title claims up to purchase price. Premium is calculated based on purchase price.

Lender policy protects lender from loss of collateral due to title claims up to loan amount. Premium is calculated based on loan amount.

So in the case of a total loss, title company pays you for lost title and lender for lost collateral. You get the purchase price back and the lender gets the outstanding loan amount back.

Buying a lender policy only with a total loss would result in the lender being repaid and you getting nothing. If you are ok with walking away from your down payment and any principle pay down (read equity) incurred on the note them go ahead and take the risk. In addition, if something comes up you are stuck with the legal fees to fight a title claim because you didn't buy the policy.

You may think the risk is minimal but things happen all the time. I have closed 30 houses without an issue and two weeks ago my title company missed a conveyance in the deed search. Without insurance I would be out the 40k purchase price. I can imagine having that issue with a 200k house. If you are ping to play with real estate at least protect yourself from other peoples errors.

Thanks for that explanation. Why is there double coverage, though? If there is a problem with the title within the first months of ownership, and using your 200k example, would the title company really pay me 200k and also pay the lender 150k? I thought the Owner's Policy covered only the owner's investment, and I suppose I thought the equity balance would slide between the lender and the owner, as the mortgage is paid down.

@David Jackson, I understand everyone says you should be title insurance for protection, but I always question its value when the process looks at all the possible threats and then makes those exempt. Wouldnt those be the most likely things you would be worried about?

would the title company really pay me 200k

Generally no, they will fight in court or spend the money fix the title. Most title issues are not a case of the property gets taken away, it is usually something like spending money to pay off a judgement.

I never really thought about the double coverage before. I can't imagine in a worst case scenario they would pay out double.

but I always question its value when the process looks at all the possible threats

IN theory a title search should find all threats, but what if it doesn't. Title insurance is you assurance that the title work was done properly.

Generally I would always get title insurance. However if There is some title defect and I am not concerned about that defect I may take a property without insurance. That is because I know and understand the risk; and I am willing to take that risk. - Ned

Recently had an acquaintance, who bought a 6 year old house. A year later, an heir who had partial ownership back when it was a vacant lot, pops up and says his sister forged his name on the deed to the builder (which apparently happened somehow), so your house is on my land, pay me. This is where title insurance comes in. Feces occurs.

Okay, okay. I hear you. I will get it, but I'm not going to pretend to be happy about it! I can't shake the feeling that this is bit of a racket, especially given a) the infrequent issues and b) the low, low cost of fixing the majority of problems. I shall grumble grumble grumble at the closing and sign and pay anyway.

Thanks for the advice. : )

Paying the lender policy and the owners policy is not double paying. When you buy property you own the property. I something happens that causes you to lose title you are out the property. Not your down payment on the property. Your cash outlay isn't the only thing you lose. You lose property, which is one of the most historically protected asset. Historically, property meant much more than the cash you spent to buy it.

You buy two policies and each pays out. It appears to be double payout but it is two different parties with different insurance interests in the property. An owners policy is always optional but the title company will require you waive coverage in writing to protect themselves.

I bought a house 6 months ago from the executor of an estate. Two weeks later my buyers title company figures out that the will was probated as a minument of title (google it and you will still not understand it) rather than a full blown probate. Essentially the property was not the executor'a to sell and her deed conveying the property to me was invalid. Title claim was required to recover funds because they couldn't track down the two brothers and their wives.

And for your knowledge, the guy researching your chain of title is some kid who graduated from law school who didn't have the grades to get a job at a law firm. It's the kids first job ever and he has no clue what he is doing other than trying to get through the 15 files assigned to him that day.

You are crazy to buy without title insurance. Even a fraudulent claim can cost tens of thousands to defend. Unless you know exactly what you are doing and are prepared to lose your investment I would strongly suggest title insurance. But at the end o the day it is def your call.

Your state determines the price. The title company does not. You can tell the title company to prove the actual cost of all the other fees they charge and they have to prove to the penny or pay you back. Do that if you want to get under their skin.

Originally posted by Delin Wareham:
Thanks for that explanation. Why is there double coverage, though? If there is a problem with the title within the first months of ownership, and using your 200k example, would the title company really pay me 200k and also pay the lender 150k? I thought the Owner's Policy covered only the owner's investment, and I suppose I thought the equity balance would slide between the lender and the owner, as the mortgage is paid down.

Even though you will be paying for the lender's policy, it does not cover you. In fact, it has nothing to do with you. There is no double coverage. It covers the lender, not you, in the event there is a title issue in the future. Lenders require a special lender title policy in case someone with a title claim goes after them. The cost of the lender's title policy is usually a cost to a borrower. There is no equity sharing or any such thing in this scenario. The insurance amount is based on the lender's risk should there be a claim. It's not based on paying off your mortgage.

You need your own policy. Since the seller can't pay, you'll have to pay. It insures you should there be a claim up to the amount of the purchase price. Do not foregoe insurance. You are not in a position to determine the risk. If you think you will re-sell or re-finance in the next few years, ask to purchase a binder policy. This is an additional fee (10% where I am). If you sell, the cost of the new policy will be based on the difference between your purchase and your sale price, which is a significant savings. I buy title binders for almost every property I buy.

Title companies are not good at explaining this. Additionally, most title companies that provide escrow services do so in order to sell title policies. They don't make that much money on the escrow, they are insurance the business of selling insurance.

Early VW Beetles did not have fuel gauges but rather a light to indicate that you are out of fuel. These became known as 'idiot' lights because the car owners, out of gas and stuck on the side of the road, regretted not having paid better attention to the red light ("what's that red light mean?").

I bought my first two equity purchase deals from homeowners with benefit of title insurance. First one had a $5.000 lien that I had once hired an attorney to put on it when I was President of the same HOA! What was I thinking?

On another deal, I had refinanced after acquiring and paid for lenders title policy when I got the new loan. Sure enough, some time later one of the old seller's attorneys had a lien for which the lender's title company advised me that, if I did not pay, they would, then go after me! I, of course, was outraged but learned that they had me by the gogo's.

Later, I turned lemons into lemonade and decide to become a student of title theory. And then a teacher of it (to attorneys, coincidentally).

Nowadays, I profit from a strong understanding of title and application of the law in my state. I consider probate to largely be just another title issue.

Buying an owner's title policy at acquisition ought to be an essential (read that cheap) part of an owner's budget, unless you have some title expertise and the risk/reward ratio makes sense for the venture.

And when the red light comes on, it's usually too late.

The loss recoverable under an Owner's policy and a Lender's policy are different.

You buy a property for $100k and take out a $75k loan. You buy a policy for the lender because you have to in order to get the loan but don't spring for the Owner's policy.

A year later you go to sell the property and the new title search turns up a $5k judgment against your seller that pre dates your purchase so you can't close on your sale. You don't have a title policy so you can't file a claim. You call your lender that you are paying each month and complain. Your lender gets concerned and files a claim under its policy. The title company will confirm that the loan is current and will tell the lender to give them a call when the judgment creditor tries to levy on the property, until then the lender does not have a loss so the title company doesn't have to do anything. As far as you not being able to close, too bad so sad. On the other hand, if you had bought the Owner's policy, you could file the claim, and if covered, the title company would have to do something about it.

@Delin W.

I always recommend buying title insurance. Of the many hundreds of properties that I have bought, I actually got paid for exactly one title insurance claim.

Title insurance is the only insurance that only insures event that happened in the PAST. Think about it car insurance and homeowner's insurance are all about future events.

I buy property at foreclosure auctions, many where payment in full is made on the spot. There is no title insurance issued by the Sheriff, so I've bought property without title insurance, I do NOT recommend that you or anybody do that. Do what I say, not what I do.

It seems like foreclosures always have a story, sometimes the most bizarre and unusual. One such story involved a property that the owner was imprisoned for arson on his own property. The law says that you can not be enriched by your own criminal actions, so the insurance paid off the mortgage holder(s) but not the owner. One of the mortgage holders claimed that they had no records of being paid by the insurance company which went out of business many years earlier. They wanted an astronomical amount of money including decades of late fees, interest and of course the original principle. Their demands exceeded the value of the property, it wasn't even close. If title insurance had been, presumably they would have paid. Over the years there were some equally unusual situations where if title insurance was available they would have paid/defended the title claim.

Somebody I know owned a property for like 50 years and when they went to sell it there was a real estate bill unpaid from 1910 that was owed including late fees penalties and interest. Fortunately the 1910 tax bill wasn't much money and there was no title insurance involved.

In a case where I bought a property got title insurance owned about 5 years and sold it, there was a title claim uncovered by my buyer's title search. No problem, I'll just file a claim with my title company and they will resolve, after all that's what I paid the thousands of dollars for. Not so fast. The title insurance company went out of business and my title insurance was worthless.