What is Title Insurance? The Real Truth About How Title Insurance Works

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Back when I started my real estate investing career, one of the most confusing things I encountered was title insurance.

When I bought my first house in 2006, my Realtor tried explaining the concept to me on more than one occasion. His explanation was that:

“You need title insurance to make sure nobody else owns the property you’re buying.”

All I could think was:

“Huh? Why would someone try to sell me property they don’t actually own? How is that even possible?”

Even after hearing a few other people explain it to me over the years, I had a really hard time connecting the dots and understanding why this was a necessary expense (and as I reflect back on some of the explanations I heard, I’m not sure these people understood it either). Needless to say, Title Insurance was a pretty ambiguous concept that I struggled to grasp for quite a while.

So what is title insurance? Let’s talk about that.

For most home buyers, it’s okay to get by without understanding title insurance. After all, the average person only buys a home once or twice in their lifetime (if at all) and the reality is, they don’t need to be experts in this realm.

For real estate investors, it’s a completely different story. Most of us are going to be intimately involved with a lot of real estate transactions over the course of our business, so it really is important for us to know what title insurance is all about.

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What is Title Insurance?

To answer this question, let’s start with a quick illustration.


Let’s say you’re in the market to buy a used car.

One day, you notice a nice car parked in someone’s front yard with a “FOR SALE” sign in the window.

The car looks nice, so you walk up to the front door and knock. A man walks answers the door.

You say to him, “Hi there! I saw this car parked in your driveway — is it yours?”

He replies with, “Nope, I have no idea who owns that car…  but I’ll sell it to you for $20,000!“


You can probably spot the problem here.

If you were to fork over $20,000 to this guy, you wouldn’t necessarily “own” the car because he never owned the car in the first place.

Just because you pay money to a stranger doesn’t necessarily entitle you to anything. Unless you have a clear title from the actual owner of the car, you have no ownership to speak of!

Related: Real Estate Insurance 101: How to Best Protect Your Investments

The bottom line is: A person can’t sell something they don’t legally own.

Even though this scenario may sound ridiculous, you’d be surprised at how many times I’ve encountered situations just like this in the real estate business.

The whole purpose of title insurance is to act as a safeguard for real estate buyers, protecting them from problems just like this. There are all kinds of random issues that affect the title of real property, and title insurance is a product designed to give the buyer full assurance that when they’re buying a property from someone, they’re buying it from the actual owner and they are receiving the FULL rights to that property, just as they expected.

A title insurance policy is almost always issued in the full amount of the buyer’s purchase price (i.e. if you buy a property for $100,000, you’re protected for $100,000). If a title defect ever arises and it wasn’t identified during the original title search, you as the buyer will be protected in this amount.

Here’s a short visual illustration of how title insurance works:

Where Do Title Defects Come From?

In the example above, it’s pretty obvious that the seller is knowingly selling something they don’t own. This kind of issue would be pretty easy to spot, but the problem with real estate is that oftentimes the seller doesn’t necessarily know about the title issues that exist on their property (and even if they did, they might not be so kind as to disclose them to you).

To explain where these title issues come from, we need to start with a basic explanation of how a property’s “chain of title” works.

When a property has a clear chain of title, it means that a title professional has been able to find a clear record of all the historical owners of the property, and there is a clear link between the seller and the previous historical owners. They can clearly see when the property has been transferred from one owner to another, what each party paid for it and any third parties that may have had liens, mortgages or other claims to the property.

In most cases, a title search will go back in time several decades to find all of this information and in this process, it’s not uncommon for the title search to uncover some kind of issue that needs to be resolved before the transaction is closed. These issues are most commonly referred to as “title defects” or a “cloud on title.”

Title defects can exist for any number of reasons. Here are some examples I’ve seen in the past:

  • A prior deed has a misprinted or misspelled legal description.
  • An outstanding mortgage hasn’t been “discharged” (paid off).
  • Property taxes went unpaid and thus became delinquent with the city or county.
  • There’s a pending lawsuit or divorce settlement calling the property’s true ownership into question.
  • An owner failed to pay a subcontractor for work performed on the property.
  • The seller “inherited” the property, but there was no legal paperwork to give them the “legal right” to sell it.

In some cases, these issues existed because the seller had purchased the property many years ago without doing their own title work in the first place. As a result, they owned the property for years without realizing there was a major title defect that was preventing them from holding marketable title to the property.

The great thing about title insurance is that when you order a title commitment before closing, it will identify these issues before they become your problem. You can probably understand why it’s important to know about these title defects BEFORE you’ve invested your life savings and paid off the seller.

A Break in the Chain of Title

One issue I’ve encountered more than once in my years of real estate investing is called a “break in the chain of title.” This happens when the title records skip from one party to another without accounting for ALL the previous owners (via deeds, death certificates, foreclosures, divorces and so on).

Let’s say there have been 3 different owners of a property over the past 100 years. If this is really the case, then a title professional should be able to clearly identify them (and in the correct order no less). For example, this is what the chain a title should look like:

Clear Title

When a property has a break in the chain of title, it means the public records aren’t showing the evidence to outline the proper flow of ownership from one owner to the next. So when the chain of title isn’t clear, it would look more like this:

Break in Title

A break in the chain of title is a big problem.

Think about it: how do we know that “Owner B” ever relinquished their ownership to “Owner D?” There is no record of any transactions linking this transfer. Unless we can clearly see where the link is (with all the proper paperwork to support it), Owner D doesn’t technically own anything and if you “buy” this property from them, you wouldn’t own anything, either.

When Title Insurance Kicks in

This is why title insurance is such a valuable tool that’s worth paying for.

Simply put, title defects are unacceptable. When you order title insurance, you don’t have to worry about doing the mind-numbing work of finding these for yourself. You’re paying a title professional find these problems for you and when they do, they’ll list them as “exceptions” on their title commitment (i.e. we will insure your clear title to this property except for this issue).

No title company in their right mind is going to give you a title insurance policy when there are known title defects lurking in the background. Instead, their “title commitment” is their chance to notify you if there are any problems and what they are, so you can get them resolved BEFORE you close on the deal and those problems fall into your lap.

When title defects exist and they get resolved, the title insurance policy will insure over these problems because they’ve established that the problem has been fixed and you are indeed buying a clear and marketable title to the property (i.e. the seller does have the legal right to sell it to you).

If you try to purchase a property WITHOUT doing any title work, you could find yourself devastated by the consequences of an unknown title defect. Can you imagine learning about a serious title issue after you’ve paid an unspeakable sum of money for something that you don’t hold clear title to? It’s a real estate investor’s worst nightmare — so unless you’re perfectly fine with this kind of risk, I wouldn’t recommend going there.

What Happens Without Title Insurance?

The truth is, it’s quite rare for title defects to come back and bite a person in the butt. Even though it’s a very real danger, it’s not a common occurrence.

Why is it so uncommon? Because most real estate transactions don’t happen without title insurance. If a Realtor or Mortgage Lender gets involved with a real estate transaction, chances are almost certain that they’ll require you to use title insurance. They aren’t willing to risk the liability (and you probably shouldn’t either). By default, this ensures that the vast majority of real estate deals across the country have a clear title — because the deals wouldn’t close without it!

It’s also worth noting that even when title defects are found, many of them are curable.

  • Got a subcontractor with a lien on your property?
    • Pay them off!
  • Got a mortgage company who forgot to discharge your mortgage?
    • Call them and tell them to take care of it!
  • Did you inherit a property but you’re missing the proper paperwork?
    • Dig it up in your files and get it recorded!

Even though it’s not uncommon for a title search to uncover the occasional issue, it doesn’t mean these issues can’t be resolved, and it doesn’t mean you shouldn’t pay a professional to find these things (because let’s be honest — they’ll be much better at finding these problems than you will be on your own).

At the very least, you’ll be fully aware of what you’re walking into so you can protect yourself against potential problems.

Related: 10 Great Property Insurance Tips for Landlords to Save You Cash, Headaches, and Time

It’s also worth noting that mistakes can be made, even by a title company. Another benefit of title insurance is that IF an issue ever arises in the future (and it was never disclosed to you through the title commitment), your title insurance policy will allow you to fall back on this policy as a safety cushion to protect you from any liability. If someone ever comes to you demanding compensation to fix a problem that the title company missed, your title company will be on the hook, not you.

If you don’t have a title insurance policy and a serious issue ever arises, you’ll be on your own. Even though this isn’t a common scenario, it is NOT a situation you want to find yourself in — ever.

Is it Possible to Buy Real Estate Without Title Insurance?

Yes. In fact, I’ve done it myself on several occasions.

Why would I knowingly expose myself to this kind of risk?

There are a couple of valid reasons, so hear me out:

  • I was buying these properties for anywhere from $100 – $1,000 a piece.
    • Did it make sense to pay $250 for a policy that only insured me for $100 – $1,000? No. No, it didn’t.
  • I was performing my own title searches for a cheaper price than a policy, and I knew what I was doing.
    • This is something most real estate investors can’t say for themselves, so I wouldn’t necessarily recommend going this route unless you’ve taken the time to understand how to do a title search.

As a personal rule, I always defer to a title professional whenever I’m buying a property with a full market value that exceeds $10,000. This is the point at which I don’t want to run the risk of letting my own stupidity getting the best of me.

For 99.99% of real estate investors, title insurance is going to be a MUST on every transaction they close (and if you’re working with a Realtor or Bank, you won’t have much of a choice in the matter). In almost every case, title insurance is going to be an extremely wise and worthwhile investment. It also takes a lot of mind-numbing and time-consuming busywork off of your hands. This is work that legitimately ought to be done on every real estate deal, so as long as someone needs to do it, you might as well pay a very reasonable price for a professional to do it for you and make sure it’s being done right.

Investors: What has been your experience with title insurance? Have you ever purchased a property without it?

Leave a comment below, and let’s discuss!

About Author

Seth Williams

Seth Williams (@retipsterseth , G+) is an experienced land investor, commercial real estate banker and residential income property owner. He is also the Founder of REtipster.com - a real estate investing blog providing real world guidance for part time real estate investors.

68 Comments

  1. Silvia Durango

    Glad you posted this. I really thought I understood title and always felt that I could do the search for liens on my own because the properties I’m-buying are so low.

    Yet, If you try to work with realtors, they want title insurance in order to sell it. If you already went into contract with the seller, and deed has not been recorded, can you still get Title insurance?

    • Seth Williams

      Hi Silvia, if the deed isn’t recorded yet (i.e. – if the transaction isn’t of public record yet), you should be able to at least order a title commitment on the property. The title commitment will tell you all the conditions that need to be met in order for them to issue you an actual title insurance policy. As long as you’re able to meet those conditions (and you’re okay with all of the exceptions they list on the policy), you should be able to move forward.

      Good luck!

  2. cheryl c.

    Title insurance is a must. Period. Also, don’t confuse a “Lender’s Policy” with an “Owner’s”. Your lender (not your realtor) will require a policy to protect their interests; this does not protect you. In my jurisdiction these are two separate policies. You must buy the “Owner’s” policy for your equity to be covered and your exposure/ equity increases as the lender’s decreases (due to loan paydown/amortization). The premiums are pretty outrageous considering the insurer’s risk (you can and should ask for a discount or re-issue rate) but you MUST buy it. As a former RE attorney, I could tell you stories all day long…

    Don’t worry too much about knowing all the in’s and out’s – just buy it and keep the Policy in your files.

    • Seth Williams

      For the most part, I would agree with you Cheryl. I think there are some circumstances (albeit, very rare circumstances) when a buyer can justify going without title insurance (that is, if they’re buying for cash, the purchase price is less than $1,000, they’ve looked over the title history first-hand, they understand what they’re looking at, no title issues appear to be present AND their future buyer is also okay with this approach).

      During my years in the real estate banking industry, I’ve seen my share of title disasters as well and I know it’s DEFINITELY important to have title insurance as part of the transaction. Especially considering that most people don’t even understand the mechanics of it and what constitutes a problem – it really is wise to pay a professional to handle this and make sure all parties are clear to close.

      • cheryl c.

        Seth, I agree with you on very small purchases. I’ve bought some lots real cheap at Tax Sales where I did not buy title insurance – we’ll see what happens if/when I sell them.

        I should also point out that different states have varying procedures and lingo – ex. NY uses Abstracts and I have no clue how that works. Here in Virginia, whether the seller had purchased title insurance or not has absolutely no bearing on a purchaser. Also, like in Florida, you only need to use a Title Company (not necessarily an Attorney) for your settlement/closing.

        • My concern about not having the title checked by a pro is what happens when it is time to sell the property and the buyer’s title company discovers issues. I would rather deal with that going into a deal not out of it.

    • Erick T.

      The distinction between an Owner’s and Lender’s policy needs to be mentioned in the original article!

      The owner’s policy is an “optional” fee in the closing process, and if people don’t know what it does they might opt to save the money.

  3. David Krulac

    We could talk for hours on title insurance….

    After being involved in over 800 deals, there was only once that title insurance paid a claim.

    Title insurance is the only insurance for past events. It would be like getting car insurance that only covered accidents that already happened.

    Tittle insurance excepts events that they don’t want to cover, so coverage is not for every event. Typical exceptions are for :things not of record”. which means events that can not be determined by a title search at the courthouse.

    Title insurance here in PA is regulated by the state Dept. of Insurance and all carriers have to charge the exact same premium. In the name of consumer protection, no discount ting is allowed by law.

    Most of the time the title insurance does not protect the buyer, because they only buy coverage to cover the mortgage. So if the property is bought for $100,000 and mortgaged for $80,000, the lenders coverage is only for $80,000 and not the purchase price. Most buyer buy this cheaper coverage to same on the premium costs.

    I wish title insurance only costs $250. Here in PA, the smallest coverage is $30,000 which costs about $500. Premiums rise after that depending on the value of the policy. I’ve paid thousands in title insurance premiums for 1 property.

    The tittle insurance is only valid as long as you own the property. In Sept. I owned a property for 9 days. I requested title insurance because the property had been through 2 foreclosures. I paid for title insurance. My buyer again paid for title insurance again, as my 9 day old policy ceased to be valid after I ceased to be the owner. My buyer rehabbed the property an sold it 60 days later, and the new buyer bought title insurance again. Three title insurance policies on the same property in 69 days.

    Title insurance is very lucrative for both the agent and the underwriter.

    Title insurance claims are seldom paid. They will often times depend against the claim, but their reputation of being stingy on paying also helps keep pay out down.

    Estates are particularly trick since PA has a state inheritance tax that starts at dollar one, no exemption. So almost all real estate being sold from an estate owes PA state tax even if not recorded.

    Welfare, Medicare and nursing home liens are also frequently not recorded, but are liens against all real estate and have a 5 year “look back” per Federal law.

    Mechanics Liens, in PA can be recorded up to 6 months after the work or materials were supplied. So often times these liens have not been recorded, then the property is sold and then the Mechanics Liens are recorded essentially against the property and the new owner. Also Mechanics Liens can be recorded by sub-contractors, even if the owner paid the general contractor and he didn’t pay the subs. You could end up having to pay the subs twice.

    One time on a property being sold by me the title search revealed that an 1898 deed to the property was supposed to have 4 heir signatures and only had three and they would not issue title insurance and the buyer wouldn’t buy the property. That missing heir from 1898 surely has ling passed by there is some risk that a descendant could emerge.

    Another time after one attorney did a Quiet Title Suit, another attorney handling the settlement for the buyer refused to issue title insurance. We resolved the problem by having the first attorney issue hos title insurance.

    Sometimes national searches need to be done to locate missing heirs. Heir hunting sometimes is easy, some times not so easy. The hardest searches are for people with the most common names. Try locating a specific John Smith sometime.

  4. margaret smith

    Seth, this is awesome! People don’t understand it, so they don’t think it is important. I want to sound out a warning about bank-owned foreclosure property. In 2008, I bought such a property,and the foreclosing bank insisted they would choose the closing agent, and they would do the title work and pay for the title commitment. Well, I thought that was just grande! Freebie for me, I thought. I spent way too long and too many months rehabbing the house, finally had a contract with a buyer who was getting a mortgage. Last item buyer’s mortgage bank did before closing was to pull title- and LO! there was a missing “Satisfaction of Mortgage” from 5 years before. My buyer walked. I had a cloud on the title, and a house sitting there with holding costs and no way to sell it. My title insurance company would talk to me, but not give me a name, a claim number- nothing. After 6 weeks I had to hire an attorney. Selling banks do lousy title work just to get rid of the property– and you can get stuck. DO YOUR OWN title work, regardless. Worth every penny!

    • Seth Williams

      WOW, that’s a crazy story Margaret! I would’ve been beside myself in that situation.

      That sounds like a painful lesson, but I guess it goes to show the importance of understanding how title insurance works. Better to be well-informed than to get stuck with that kind of title issue at the 11th hour, when you least expect it.

  5. Amy A.

    I purchased a house at a foreclosure auction and purchased title insurance at closing. When I had the home renovated and under contract, the buyer’s title company found that a small strip of land had not been conveyed years earlier. This strip of land was necessary to meet zoning setback requirements. I called the attorney who issued the title insurance to me many times. When he finally called me back, he admitted that they hadn’t sent in for the title insurance that I had paid for! I was running out of time to get this house sold!

    My buyers’ title company sent me a quit claim deed to get the original owners of the strip of land to sign. They were divorced and had been foreclosed on, but still lived locally. I tracked down their phone numbers on the internet and they said they would sign. They waffled at first, but I explained that because they owned it still they might owe back taxes on it. That got them to sign! I found a young guy who was a licensed notary and paid him about $30 and we met one owner at the grocery store and the other at his home
    .
    I never went after the attorney who messed up. He also did the original title search that missed the strip of land! It was very stressful but turned out ok. It would have been very bad if I couldn’t find the original owners!

    • Seth Williams

      Holy cow, that sounds VERY stressful Amy! I’m amazed at the lack of competence some of these title companies and attorney have (that’s another lesson worth noting – they definitely aren’t all created equal and it pays to find a good one to work with long-term).

      I’ve had to deal with similar issues that required a lot of unusual running around to get things signed and wrapped up. It’s definitely NOT the way you want these closings to go, but I’m really glad you were able to get your situation resolved. What a relief!

      • Amy A.

        Exactly! Years ago I had a lender at a local bank require that I use a certain title company. I didn’t understand why I couldn’t simply use the least expensive one. Now I get it! I now do all my business with that one title company. They even give me free legal advice sometimes. It’s definitely worth building a relationship with a local title company/attorney!

        • Seth Williams

          Couldn’t agree more Amy. I’ve seen some pretty ridiculous mistakes in the paperwork at some of my closings (and I’m just lucky I was paying attention and knew what to look for before it was too late)! I’ve definitely made a short list of the title companies I’m willing to work with, because at least a handful of the ones I’ve worked with have completely lost my trust.

    • James Syed

      Hi,

      If you had title insurance, you should have been covered and shouldn’t had to look for previous owner and all that. The attorney who messed up, his title insurance provider should either paid for the missing land area or corrected it by contacting appropriate parties.

      Thank you for sharing your experience.

  6. Mark Lenox

    Mr. Williams,

    Thanks for the very thorough explanation. It is a nice summary of what title insurance is all about. My main gripe about having to pay it is this: if there is a title defect, someone somewhere is responsible, and guess what… it isn’t me. I think it is lousy that this has become necessary. Just my two cents.

    • Seth Williams

      I can certainly understand your gripe Mark, I feel that way too about a lot of this.

      When you think about it though… it’s a similar story with almost any insurance product. Whether someone burns down your house, someone hits your car on the freeway, you get killed by a freak accident or someone sues you for a completely illegitimate reason… there are ALL KINDS of instances where disasters can happen to us even though they aren’t necessarily our doing. Nevertheless, we still have to protect ourselves from the endless number of irresponsible people out there – many of whom can encroach on our lives if we’re not careful.

    • cheryl c.

      I’m certainly not, although I think that the premiums are way too high. In some of the examples given, where people with an owner’s policy have had problems getting a resolution from the title company (a mere “agent”), I would have (and have) gone over their head and directly to the Underwriter – usually a National Company with regional offices. I’ve never had an issue with an Underwriter taking care of what a lazy agent won’t. That said, I’ve used the same excellent Title Company for almost 25yrs.

      As to the guy who didn’t pay the premium in to get the policy issued – just plain illegal – call the Underwriter and they will cover you and pull his license.

      • Seth Williams

        That’s a great point Cheryl. This is one of those areas I’ve never even experienced before. Title insurance claims are so rare, most people have never run across, which makes it difficult for most people legitimate advice based on their own experience. That being said, I think you’ve got a great point. The underwriter should be able to handle the fallout from a title insurance claim, so this is probably a great protocol to follow if/when the issue comes up. Thanks for chiming in!

  7. Could anyone give an explanation of ways to save money with title insurance, such as simultaneous issue of the owner and lender title insurance policy or reissue savings from using the last known title insurance company? Anyone familiar with this?

    • cheryl c.

      You can simply ask for a discount and shop around (these fee’s are not “fixed” in Virginia), but, generally this is more available if you give them a lot of business. A re-issue rate should definitely be asked for, but will depend on how long ago that policy (your seller’s policy) was issued and will require the seller to, minimally, pull their HUD-1 and sometimes produce the actual policy. When I sold my personal residence in 2013, I told the buyer’s agent to request this and that I had the policy in hand. This was a nice (after the contract) savings that the agent could present to their buyer and, basically, take credit for and thus look very good and competent.

  8. Karl James

    Great info as always, Seth. Keep the articles coming!

    I’ve ran across a couple places that could be helpful to BP’ers in more ‘challenged’ situations. First Tax Title Services (which you and others have mentioned on BP before) can help with title insurance on tax deed properties. Then, when talking to Bruce at Tax Title Services, he referred me to Nick Thomas at Boston National Title / Pantheon National Title for possible assistance getting title insurance on properties in Texas having a Quit Claim deeds. I haven’t bought such a property yet – usually just skip over them when looking at properties. But, Nick and his manager for the Texas market, were receptive to talking about it on specific properties. Most Title Companies I’ve talked to say “Nope we don’t do that – you won’t able to get title insurance with a Quit Claim deed.”

    • cheryl c.

      Some seller’s specify Quit Claim instead of General Warranty because that don’t want to be on the hook for clearing the title of issues they may or may not be aware of. I just put in a clause that title must be “insurable” or purchaser can walk, receiving earnest money refund. In my experience (Virginia), there is no problem getting title insurance on a property conveyed by Quit Claim (provided clear title).

    • Seth Williams

      Thanks for sharing Karl! I’ve experienced the same thing (where most title companies won’t even consider working with a quit claim deed). I can understand their reasoning on some level, but honestly – if they’re able to tie up any other loose ends in the title history, I’m not sure what the big deal is. It’d be good to know someone who is at least willing to think outside the box and be accommodating when the request is reasonable.

  9. Andrew Kniffin

    Seth – one item not discussed was the reasonable COST of title insurance. Are there any rules of thumb for when a quote costs too much?

    I just bought my personal residence and was told I MUST buy Owner’s Policy. Moreover, they gave me only one option. I have no idea whether this rate was price competitive, or what rate another insurer might have quoted me. This is the reason that the Title Insurance industry feels like a giant scam to me: it is opaque and feels like a last-minute, high-pressure, fear-tactic hard sell.

    I would trust it more if there was an option to shop 2 or 3 title insurance providers rather than being given one at closing and being told I’d be a fool not to take it.

    • Seth Williams

      Hi Andrew, from what I know about this, the cost of title insurance depends largely on what state you’re in and which underwriter is being used to insure the title.

      There are a few major underwriters that most title agencies throughout the country ultimately use (i.e. – First American, Fidelity National Title, Stewart Title, etc). These are the big boys who do the actual “insuring” at the end of the day. On a few occasions, I’ve seen the price on some commercial policies change dramatically with a simple switch from one underwriter to another. That being said – most of the time I think their pricing structures are pretty similar in nature.

      Nevertheless, if you ever feel like you’re getting a bad deal, you can always ask your title company if they can try using a different underwriter. I’m not sure it will result in much of a price difference, but if you’re really desperate for another option, there’s always that outside chance and it doesn’t hurt to ask.

  10. Curt Smith

    I’m surprised no one offered title search services you migtht buy before you buy. IE in the note tape business you need to find good enough title situations out of 100 properties in just a few days. Same is in play with buying off auction sites that are doing web based trustee sales. Any tips / costs?

    • Seth Williams

      Hi Curt, are you talking about an online title search service that doesn’t include a title insurance policy (perhaps for the purpose of getting a quicker turnaround)?

      I know I’ve tried these a couple of times, but ultimately found that (in my unique situation) they just weren’t thorough enough to catch some of the real, legitimate issues that existed on the title (I knew this because I had ordered a separate title insurance commitment – just to test the waters). It probably had something to do with the particular county this property was in – as it’s Register of Deeds didn’t do a very good job of making electronic property records available to the public (I’m sure these services probably work in lots of places, just not the place I was trying to do it).

      Personally, if I needed to go this route, I’d just opt to do the title search myself (because I know what I’m looking for). If timing ever became and issue and I couldn’t get the data I needed soon enough, then I’d probably just pass on the deal altogether. There’s no way I’m going to buy a property if I can’t make an informed decision based on legitimate data I can trust (but that’s just me).

  11. Title insurance doesn’t save you from doing your own due diligence. Having been bitten, I now visit the County or City in person for every property I buy. I want to know the permit history of the property – are there any open permits? What about code enforcement cases?

    Let me tell you the story of Property A. Property A is a 20-unit apartment complex. In the year 2000, the owner of A decided to build a free-standing 3-story steel staircase. A massive structure. He went down to the City, which issued an owner-builder permit for this staircase WITHOUT ANY PLANS OR DRAWINGS. The owner had the staircase built. The City inspector came out and said “that’s not up to code”. The fault was such that the entire structure needed to be demolished and built anew.

    The owner did not rebuild the staircase. He did nothing. The City did not enforce it. Instead, he sold property A to somebody else. In 2006, I bought it. Of course, I had title insurance. Big deal.

    Last year, Code Enforcement did a paperwork search and discovered that unsigned permit. Now, the City wants me to fix it. I have one tentative quote of $60K to accomplish that. An awful lot of money to spend on a property with negative cash flow.

    So, lesson learned. From now on, every property – without exception – will see me at the local Building department to look at the file.

    It’s a good argument for investing close to home. Or at least in one place. You get familiar with the peculiarities of local government.

    For example, my home town does NOT allow black ABS piping under sinks. It *must* be metal. Never mind that the black ABS stuff lasts forever, whereas the metal stuff rots out in maybe 5 years.

    And then, there’s windows. Most municipalities allow retrofit vinyl windows to be installed without a permit. Not my home town. Even though there is nothing structural involved – you just mount the new window inside the frame of the old window. Not only do you have to have a permit, but the City will hold you to newer codes – for example, egress requirements. Been there, done that.

    So – from now on – Jerry visits the Building Department before signing on that dotted line.

    • Seth Williams

      Thanks for sharing Jerry. I hear you on the “investing in one place” argument. There are ALL KINDS of weird peculiarities that can come up from one state to another (and even from city to city). Unfortunately, things are never black and white and it’s not always enough to just pay someone to make sure problems don’t come up.

      Maybe it’s a good rule of thumb to consider the scale of the project and the monetary sum of the investment on each deal. The bigger the deal (i.e. – the more significant it’s importance to your financial future), the more due diligence it warrants.

      Back when think back to when I bought my first duplex (which was a relatively small deal), I wasn’t rich, it was my first deal, I didn’t have the experience and as such – I was VERY cautious about what I was doing. I spent and abundance of time researching everything before I signed on the dotted line and in the end, it paid off. When you know everything there is to know, there won’t be any surprises, but when you go into deals with a cavalier attitude, you’re probably going to get some kind of unwanted surprise, that’s just how these things work!

      Thanks again for sharing your experience.

  12. James Syed

    Great article.

    It happened to me one time that I bought a property and after 5 months when I went to sale it, two leans showed up. They didn’t show up, when I bought the property. I was very lucky that I had title insurance otherwise I would have to pay both leans off before I could sale it. and guess WHAT, the two leans were money than all amount combined.

    I would very strongly advise to have title insurance.

  13. Jeff .

    FINALLY, a blog post with substance. Thanks for not giving us the five trite reasons to buy title insurance or three things that could go wrong, Seth. Well done.

    We’re actually the cause of a cloud as I write this. Last November, we reconveyed a loan (California-speak for issuing loan payoff) that we made on a flip. The buyers of the rehabbed flip are now refinancing their new property and we received an email from their title company showing that we transposed the document numbers on our reconveyance. Thus, our lien against their house is still active. Easy enough to fix because we’re easy to find and happy to sign a corrected form, but what would happen if it were 30 years from now?

    Similarly, some believe if you buy an REO that all prior liens are wiped out due to the foreclosure. Wrong. I purchased one a few years ago and received a panicked call from my agent, when I tried to sell it, that there was a cloud of some sort dating from the 1980’s. I wouldn’t buy a home from my mom without title insurance so this was easily cleaned up with a few calls between my agent and title company and my sale went thru with just this minor hiccup.

    Last, since it was mentioned above, a lenders title policy insures the lenders position (i.e. a first or second position mortgage, etc.) not ownership. Here at least, these are frequently incorporated into the buyer’s policy.

    • Seth Williams

      Thanks so much for sharing Jeff, I’m really glad you liked the article!

      You’ve got some great examples there. I’ve also seen numerous “little errors” in various recorded documents over the years. Things like transpositions and misspellings aren’t terribly uncommon and if they aren’t caught and resolved, they can definitely cause problems in the future.

      It all goes back to the importance title insurance. It’s a great way to rest easy knowing that someone’s got your back in the event that issues come up.

  14. Alex Gruenther

    I had a property in MA in which I bought title insurance for. I listed the house this summer, found a buyer and the buyer found that the builder did not close out his wetlands permit 15 years ago due to a paperwork mixup in the registry of deeds office. Title insurance didn’t honor my claim and I was stuck with about $2k fees closing out the permit. Luckily the builder built the house to plan, otherwise I would have been much worse off. I have a very negative view of title insurance now since there are so many title issues that it does not cover.

    • Seth Williams

      That sounds like a nightmare Alex – I’m sorry to hear about all that trouble. Did they give you any particular reason as to why they wouldn’t honor your claim? If they didn’t list this specifically as an exception in the original title commitment, I’m not sure what basis they would have to deny it. Even if it was some odd-ball technicality out of left field, it’d be good to know what their rationale was (just so we can all watch out for it in the future).

  15. Hi Seth,

    I am based in Australia and I don’t think we have title insurance product available here. I guess its just an opportunity for an insurance provider to offer this product.

    From your knowledge, what do you know is required to offer this product in the market, from the view of the insurance provider?

    Thanks.

    • Seth Williams

      Hi Charles – unfortunately, I’m not entirely familiar with how things work in Australia. As I was doing some research, I did find that title insurance is primarily an American thing – which I found a bit strange. I’m not sure why it would only be a “necessary evil” here in the states and not everywhere (seems like if the problem exists here, it should exist in most countries).

      All this to say, I just don’t know enough to give you any solid pointers on how to go about pursuing this in Australia. Sorry I can’t be of more help!

      • Hi Seth,

        Maybe another to look into why there is a market for Title Insurance in the US is identify what creates the demand for the product. For example Is it because the incidence of title fraud high in the country? Or is it only in particular parts of the country?

        One guess I have why the product is not in demand here is the common process of property acquisition practice here. Property purchases here are done using lawyers or at best legal conveyancers. And their role is to check and verify the authenticity of the title. Still, I would assume you have a similar practice in the US too.

        Thanks.

  16. Sean Williams

    Great article! I ALWAYS make sure my typical buyers AND investor buyers purchase owners title insurance no matter what. Very, very rarely does a title defect come back to the purchaser but I would much rather have that piece of mind and safeguard when purchasing a property. Especially if purchasing from a bank, foreclosure etc.

    • Seth Williams

      That’s a great practice to have Sean, I hope all realtors are as prudent as you are about title insurance (and from what I’ve seen, I think most of them probably are). If I were in your shoes, I’d probably be doing the exact same thing. Keep up the good work!

  17. David Epstein

    So, on the one hand, anecdotes galore. On the other hand, title insurance paid out once in eight-hundred transactions. Sounds like a great deal for the title insurance company. Love to see their P & L statement! Can anyone respond to what I’ve heard: that title insurance is fairly low-cost, but functions as a built-in profit for the attorneys doing the closing? No offense to all the RE attorneys out there; some of my best friends…etc. I just want to know.

    • Seth Williams

      Hi David, I think you’re probably right. Title insurance companies probably do make a ton of profit (as does any insurance company). It’s how all insurance businesses are modeled, the system just doesn’t work unless there are more people paying in than taking out.

      On the same coin, if you never buy title insurance, is it worth the risk of leaving yourself exposed? Is it worth paying $500 to make sure you never have to take a hit and lose your $100,000 investment? Just speaking for myself, even though it’s SUPER unlikely that this would ever happen, it seems like a fair price to pay for the peace of mind, knowing that I’ll never have to deal with that kind of fiasco.

      And keep in mind, it’s not just about the insurance aspect of it. You’re also getting the benefit of having a title professional scour the title history for you (and this is something that most of us just aren’t trained to do). At the very least, you’ll have the peace of mind knowing that someone (who knows what they’re doing) has analyzed the data and made sure you’re clear to close.

      That being said – I understand your issue, I really do. I have this same discussion with my wife every year about dental insurance, health insurance, life insurance, disability insurance, etc… in the end, it’s all a crap shoot. The only way to “come out ahead” is if something really bad happens to you (which is a pretty backwards way of making out well). Nevertheless, it’s sort of like like saving up money for an emergency. Even though it creates some financial restrictions in the short term, it’s not a bad idea to be prepared for the worst case scenario (and in the worst case scenario, insurance has the potential to cover you far better than your life’s savings can).

      • cheryl c.

        I personally witnessed an reo purchaser (who failed to purchase an owner’s policy) get stuck with a missed IRS lien in the amount of 275K – and this was 25yrs ago. Interesting story and, if you knew all the details, you wouldn’t feel too sorry for the guy.

  18. margaret smith on

    Seth- Good points just keep pouring in- a true testament to the importance of your great article!

    Regarding wholesaling: Is it best to get the property under contract, or even under Option- then complete a title search while not actually owning or intending to own the property? I am thinking about starting a wholesaling business, and offering services that my rehabber buyer would want to make him/her more comfortable with the purchase. Wondering how far to go with the title insurance search/commitment.

    Also thinking of offering a municipal lien search for properties I intend to wholesale. I am a hard money lender, and ALWAYS have my client rehabber provide me the results of a title commitment, survey (if there is not a previous survey available), and a muni-lien search before I will commit in writing to funding the deal. Here in FL, this covers governmental liens, code enforcement, permits that are still open, utilities. A muni-lien search can cost as little as $65 from a professional service, and OFTEN yields unpaid bills/fines etc that must be dealt with before closing. The info you get here could well mean you go back to the seller to renegotiate the contract price– downward!

    Am wondering whether rehabbers would see the value in knowing more about the property that is for sale, and buy from a wholesaler who has already taken a chunk of the guesswork, (and paid the fees), to reduce the risk for the buyer?

    PS- Cheryl, you have awesome input!

  19. Hi Seth,

    I just want to make sure I understand the title insurance process. Per a statement above, a wholesaler should get title insurance immediately after the seller signs the contract. Well, my real question is, does the wholesaler accrue this cost or does this cost tie into closing cost in which the buyer can be responsible for? Any advise is great. Thank you.

  20. Hi I have a question If my husband refinanced his home in 2009 and he was the only person on the loan, however we live in Alabama and since we were legally married I was suppose to sign the title and/or deed. But was never told or asked. needless to say my signature is not recorded in the court house. He filed Chapter 7 bankruptcy in 2010 due to an unexpected illness and here it is 2016 and we find out we can’t purchase a home because the previous home paperwork during closing wasn’t done correctly. Would the title company be legally responsible? Thanks any advise is welcomed. Thanks

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