What is title insurance? Why is it important to have it? Even if you’ve bought a home before, you might not know precisely why title insurance was part of the transaction. And you might be surprised to learn it is one of the best investments you didn’t even have to pay for.
To get a better idea of what title insurance is and how it protects home buyers, we turned to David Skarman, Vice President and General Manager of our affiliate, California Title Company. He’s been with the company since the day its Orange County office opened its doors, and is the go-to person for understanding all things related to title insurance.
It is an insurance policy that is issued to a new homebuyer that insures that he or she is buying their property free and clear of any impediments that would have been incurred by the previous homeowner, such as:
The buyer is insured for the lifetime of owning the home from anything in the past. California Title covers about 29 different exceptions, such as fraud, mechanic’s liens, and judgments against the previous homeowner that were never cleared up. Unpaid taxes, around easements, and encroachments and also insured against.A title search is a means of determining that the person who is selling the property really has the right to sell it. Click To Tweet
Title insurance is a line item that is paid during the time of escrow, so the seller actually pays for the buyer’s insurance. If the buyer has a loan, there’s a separate policy called a lender policy that the buyer pays for. If a buyer is going to buy a $1 million home, they might get a $500,000 loan. The buyer, separately from the initial title policy that’s paid for by the seller, will also pay for a lender policy. That’s not insuring that the buyer going to pay the loan, it’s insuring that they will keep it and maintain the vesting that it’s in. If it’s in a trust, it means the buyer is not going to change anything in the trust, such as adding or removing a name from the title.
The homeowner will be responsible for contacting a document-servicing company, estate planner, or an attorney to create or amend the trust. It is suggested to reach out to a title company directly, prior to any recording of a transfer of title, to ensure the party on the title is covered within their policy. If the party is not covered, the title company would have the opportunity to provide solutions, like an endorsement, to cover the party added onto the title, but it will require the title company to record the deed.
The premium is based on the sales price of the home and there is no deductible if you need to use it. It’s a rate filed with the state that the underwriter mandates. An underwriter is a company that evaluates the risk and exposures of a potential borrower. They decide how much coverage the borrower should receive, how much they should pay for it, or whether even to accept the risk and insure the borrower. At California Title, an underwritten title company, they do not file their own rates, instead using what underwriters have filed. For example, if a home sells for $500,000, the premium is about $1,800.
If, years down the line, a homeowner decides to remodel and build a fence, the surveyor runs the fence line and it turns out that the fence is a foot over on someone else’s property. You would have a claim, and California Title pays for that to be changed.
Or, if a homeowner has their house painted but never paid the painter because the job was unsatisfactory, then the home is sold and the painter comes to collect payment, that is covered under the insurance policy.
A title search is not required by state law, however, for the minimal fee that it costs, it would behoove a new buyer to demand to have title insurance. It’s a cheap way of protecting that buyer for the life of owning the property.
It varies, but California Title is one of the few title companies that does not offshore their product, so it takes anywhere from three to five days to conduct the forensic search on the property. With about 60 employees in a secure facility it’s a very efficient process.
They are uncovered through public records, and for the most part, most of the data is public information. For previous ownerships, in many cases title search can go back 30 years to clear title, not just searching the last person who owned be home.
The most common obstacle is a trust because many homes are held in a trust, and title companies have to make sure they are dealing with the person who is actually in control of the sale of that home. In many cases, there are a lot of people on the trust, and the person wanting to sell the home or represent the property is not the person who’s in control. Or, the rest of the people on the trust are not aware of what’s taking place.
Buyers beware. There are a lot of title companies with sales folks who will misrepresent the policies. David advises consumers to make sure they are getting an ALTA (American Land Title Association) homeowner’s policy that covers all 29 of the exemptions that are out there. There’s a shorter CLTA (California Land Title Association) policy that has less coverage and is a bit cheaper but it usually is issued when there has been no improvement on the land. When the land is undeveloped a CLA will suffice, but the ALTA policy is best when it is developed.
In California, title is mostly a seller-driven product, which is odd because it’s a third party selling a product they might not understand. The listing agent usually has control over it, based on the relationship they have established with our company and with the individual sales rep. It could also be a relationship based on a partnership within the real estate company as a provider. But in California, a buyer can definitely request a different title company because the buyer is ultimately the holder of that policy. The seller is walking away, and the title company will hold that title insurance. A title company’s job is to insure that person for the life of them owning that property, which could be a substantially long time.
Cal Title is owned in part by majority shareholder HomeServices of America, so it is an affiliated service of Berkshire Hathaway HomeServices California Properties. Cal Title established its first license in San Diego in 1962 at Terra Title, and has evolved over the years into California Title. Offices are located from San Diego to Los Angeles, but they do insure statewide. Outside of residential, Cal Title’s default focus is commercial statewide. Because of a state mandate, 50 percent of Cal Title’s business is with every other broker that’s out there.