Do I need title insurance?

Question

I've had a title search done on a house I bought with cash from a substitute trustee auction.  The title search came up clean. My plan is to hold the house and let a relative live in it.  At some time later I might want to rent to non-family or sell.

I'm wondering if I misunderstand what title insurance does and if I even need it.

Thanks - yes, this is a super abbreviated version of

https://www.biggerpockets.com/forums/311/topics/301827-total-newbie---need-help-with-title-insurance

Russell Brazil · Answer

There are properties I get title insurance on, and properties I do not. However I work full time in real estate and am well aware of the risks of when I do not get title insurance. Where you mention trustee and auction, I am assuming this property was a foreclosure...that is one of the instances where I do get title insurance.

Michael Dake · Answer

Keep in mind two things about title insurance and then ask yourself a few questions:

1.  It is insurance, which is defined as a financial product that protects against unforeseen future losses that would exceed your ability to absorb.  That is, if you can afford to replace the  asset covered by the insurance, an insurance policy may not be needed.  (It would probably be a waste to insure a flip phone purchased from a gas station, but it would probably be a good idea to insure a brand-new iPhone that you borrowed money to buy.)

2.  The type of deed that documents the transfer of title to the land determines what the deed grantor is warranting to the grantee.  A trustee deed generally warrants only that the trustee did not take any action to impair the title and that the trustee is not aware of anyone else impairing the title while the trustee held it.  That limited warranty is part of why trustee sales are discounted: the title is less valuable because it has risk associated with it.  With a general warranty deed, which is the norm for open-market, arms-length transactions in most states, the grantor warrants that he or she has free and clear title and promises to protect future owners against any adverse claims arising from any prior fact, going back to the beginning of time.  That is a pretty valuable statement.  But that is likely not what your deed says.  You likely have a deed that says "I didn't do anything and I don't know what happened five minutes ago."  Anyone you subsequently sell to is going to want a general warranty deed from you, but you have no idea the "hidden history" of the property (deeds do not have to be recorded to be valid, and title searches only cover the recorded records).  That is the risk you face relative title as a future seller.  As an owner, you face the risk that someone with a prior deed or other interest may appear and challenge your ownership/rights.  You cannot go back to the trustee, since that deed does not warrant anything.

So, what is your view of the risk involved?  Can you afford to lose your investment to a prior claimant?  Can you afford to lose market value or other selling problems in the future due to a cloudy title (trustee deed)?  Can you afford the legal fees that might be involved to defeat a challenge?  What is your risk tolerance?  What is the title insurance premium and what does it cover?

Personally, I buy title insurance on every property I buy.

I am an AL licensee.

Linda N. · Answer

Thanks for laying that out for me Rick. Since there's a 50 - 50 chance we'll want to sell in a few years and would want the sale to be as easy as possible (meaning no owner financing, etc) , it seems to make sense to get the insurance now.  It's nice to know the options.

Rick H. · Answer

I posted in your thread discussion too, as you know.

Getting any kind of insurance after the fact may be avoided if delayed if you are not prevented from receiving the benefits that you wish to receive now.

Essentially, once you have possession you may lease to others and collect rent or occupy yourself without likelihood of interference.

What you will not be able to do without title insurance (marketable title) is sell to a retail buyer or get a loan from a conventional lender.

You could sell with carryback (seller) financing or trade to an investor type buyer, noting that they would expect a corresponding discount on price or terms.

Linda N. · Answer

Thank you for your replies.  I am going to purchase the title insurance - I just wondered if it was really needed.  The initial title search a local attorney did for me before the auction did not pick up any problems, thankfully, the more complete search the title company did also showed no problems.  I thought the risk would probably be worth it since I've watched this house and the owners (the original builders) for over 20 years with no big surprises, the taxes were up to date, etc. Only when they passed were the son's not able to keep up the refinance payments.

The search and premium are $430.  The insurance policy covers the up to date and clear title as found by the search to the cost of the purchase. Otherwise, I am asked to attest that no other actions have been taken that would have resulted in a lien against the property.

I'm guessing that this is typical.

Thank you again for such clear discussions of the issues.

JD Martin · Answer

I would not buy a property that I couldn't get title insurance to cover. I think my last three purchases the insurance cost less than $500 aggregated. That's pretty cheap considering what I spent to buy the properties. I would also keep in mind that title insurance is/can be/should be part of your exit strategy; it is a lot easier to sell a property wherein the buyer is comfortable there aren't any problems because you were already able to obtain insurance, versus having the potential buyer wonder "How come they didn't/couldn't get title insurance?" Personally, I've never asked whether the seller was able to obtain it, because I do that work myself, but my realtor works with other investors that do ask that question on the front end.

Jonna Weber · Answer

Short answer, yes

Jake Thomas · Answer

I won't buy a property that doesn't have title insurance. Even things in the title search don't always come up as they run it weeks before closing usually. I had one yesterday where a lien showed up two days before closing. Typically on the sale the seller pays for this anyways. I always encourage title insurance.

Do I need title insurance?

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