Title Insurance Is an Essential Part of Any Sale

In my June 17th column (which is archived at JimSmithColumns.com), I wrote about “title lock” insurance, which is being widely advertised. The headline for that column said it all: “Don’t Fall for ‘Title Lock’ Services. They Are a Waste of Money and Don’t Provide Much Protection.” Unfortunately, some readers thought I was referring to title insurance and asked me if it was really necessary.

Yes, any purchase or sale of real estate should include the purchase of an “owner’s title policy,” typically paid for by the seller. This policy in unlike other insurance policies, in that it is a one-time premium issued by a title insurance underwriter and sold either directly by the underwriter or by a title agency. It insures the buyer of the real estate against any liens against the property recorded with the county clerk and recorder.

If the purchase is being financed by a lender, that lender will require a “piggy-back” lender’s policy (paid by the buyer) from the same underwriter covering the lender against such claims up to the amount of the loan. (The owner’s policy covers the buyer up to the full purchase price.)  Title insurance should provide all the protection a buyer needs.

I also recommend requesting a credit freeze from the three credit bureaus. It costs nothing, and it prevents anyone from taking out a loan in your name and disappearing with the proceeds.

Every year you should get a notification of value from your county assessor. If you didn’t get one this year, you can look up your address on the county assessor’s website to make sure your home is still in your name.

In Jefferson County, you can visit http://assessor.jeffco.us. Use Google to find other county assessor sites.

Don’t Fall for ‘Title Lock’ Services. They Are a Waste of Money and Don’t Provide Much Protection.

Perhaps you have seen advertisements or received a solicitation to purchase “title lock” service. A reader asked me to find out if it was a scam, so I asked my friends at First Integrity Title to check it out. Here’s what I learned.

The premise of the service is that the company monitors your public property information. It is supposed to alert you to changes to your home title (similar to credit monitoring) but is not as helpful or as necessary.

The truth is that it really isn’t as easy to steal your home’s title as they claim. Also, this is a monitoring service only. There is no “insurance” or help if your title is found to have changed, although Home Title Lock’s website does claim to provide a million dollars towards legal fees and costs to defend title from one of these scams. Doing so wouldn’t be terribly risky for the company, since the fraud is so rare and so easy to repair legally.

The reason a scammer would pretend to own your home is to take out a loan against it, pocket the money and disappear. The best target for such fraud would be a home that is owned free and clear. Any lender would require the purchase of title insurance, so if the scammer were successful in fooling a title company to insure that loan, it would be the title company at risk, not you.

Jerry Spaeth, a lawyer and the CEO of First Integrity Title, reported that in 22 years of doing title work, he has never seen a case where someone has been able to “steal” tile and then take out a loan, as they claim. And for only $15 a month, which such services typically charge, it would be difficult to be anything more than a monitoring service. 

It is difficult to find out how many such frauds have been committed, because they would be lumped together statistically with wire fraud and identity theft. 

The likelihood of needing this service is greater if you have several properties that you own, or if you own your home free and clear — and if you are elderly. The victim might not be able to receive the letters from the new mortgage company that a payment is late.

Again, you aren’t going to be getting support from most title lock services. They are just letting you know if something has taken place.

The title policy you received when you purchased your home does not provide protection for a fraud incident after the purchase of the policy. You can, however, monitor your property on assessment websites to verify that you are still the rightful owner.  Every year you should be receiving valuation and tax notices from your county assessor and treasurer. If you don’t get such notices, contact the county to find out why.

If you have a credit monitoring service, as Rita and I do, you would be notified if a new loan is taken out in your name, and a no-cost “credit freeze” with the three credit bureaus would stymie anyone seeking to obtain credit in your name. 

In conclusion, title lock service is not necessarily a scam, but it is questionable how useful the service is if there is little or no protection that comes with it.

Remember that Google is your friend. I found some useful information by Googling “title lock protection,” including a September 2020 piece from Fox 5 Atlanta calling title lock service a “Waste of Your Money.”

I Learned Some Things I Didn’t Know About Title Insurance in a Recent CE Class

I thought I understood everything I needed to regarding title insurance, but I took a Continuing Education class about it last week anyway, thinking I might learn something I didn’t already know. I wasn’t disappointed!

We Realtors trust the title company’s closer to explain the process and the forms to our clients, and for the most part they do. The title commitment documents delivered early in the contract process are long and involved, and we probably pay too little attention to them.

I know that many of my fellow real estate agents read this column, and this week I am writing as much to share what I learned with them as I am with the average home buyer or seller who may find him or herself in a real estate transaction.

The first thing we need to know is that title insurance is not a guarantee, it is an indemnity against covered losses. The “owner’s policy” insures against a covered loss; it does not ensure that there will not be a title challenge or a loss. As our class instructor, Doug Barber, pointed out, title insurance companies are like other insurance companies in that they are diligent about paying only for those claims which are for covered risks.

(Having been told that title insurance is not a guarantee, I find it interesting that Colorado’s leading and home-grown title company goes by the name of Land Title Guarantee Company.)

Fortunately, most title companies are pretty thorough in their title searches — which I have learned they typically outsource to highly skilled companies who do the title searches for multiple insurers. Nevertheless, a claim could arise, and it’s important for us agents and Realtors to be aware of that possibility and take reasonable care to warn our buyers and sellers of that possibility.

We agents like to describe title insurance as a policy that guarantees the buyer is obtaining a property “free and clear” of any claims or liens against it. That, however, is an overstatement, our instructor told us.

One mistake that we agents make — although it has yet to bite me — is to take the word of our sellers as to the ownership of their property. We should not, as most of us do, simply assume that the assessor’s database has it stated correctly. Instead, we are advised to obtain an “Ownership and Encumbrance” report from our preferred title company at the time of signing a listing agreement for a property. If the property is owned by an entity — a corporation, a trust, an LLC, a partnership, etc. — it’s essential to obtain written evidence of who is authorized to sign for that entity.

When the owner of a property dies, the deceased’s estate could be the seller, in which case there is a “Personal Representative” who signs for the estate, but don’t take someone’s word about who the PR is.  Trust but verify!  If the property has been inherited, then the heir is now the seller, not the estate, but that should be documented by a decree from the probate court.

Divorces can be really tricky, and it’s best to obtain a court decree or signed separate agreement requiring or authorizing the sale of the property.  One thing I didn’t know is that if a husband or wife inherits money during the marriage and uses it to purchase a home, the portion of the purchase price paid for with the inheritance is separate property, not marital property, in case of a subsequent divorce, although the increase in value of the property during the marriage is marital property subject to equal division upon divorce.

Another thing I learned: A minor cannot buy or sell real estate. Legally, they are considered incompetent until they are 18.

The title insurance policy only insures the buyer of the property up to the price he or she paid for it.  Thus, if you purchased a home in the 1970s for $30,000 and it’s now worth close to a million dollars, your title to the property is only insured up to $30,000 in case of some unexpected claim against your ownership.

When a property is owned by more than one person, they can hold it as joint tenants with right of survivorship — the most common form of title — or as tenants in common. As joint tenants, each person owns 100% of the property, and if one of them dies, the surviving person now owns that 100% by him or herself. Tenants in common each own a stated portion of the property. So, for example, if a couple owns the property 50/50, either person can sell their interest in the property without the consent of the other person.

Our instructor pointed out that, from an estate planning perspective, it might be wise for a couple who bought their million dollar property for $30,000 to switch to tenants in common. That way, when the first partner dies, the other partner can inherit that half interest at its stepped up valuation at the time of death, significantly reducing the capital gains liability if that surviving spouse were to sell it — something I hadn’t considered before.

‘Deed’ or ‘Title’ — Homeowners Are Confused About Ownership Instruments

You can blame “Monopoly” for some of the confusion. That board game taught us all that there is such as thing as a “deed” to a property. With a “deed” to Boardwalk and some houses or a hotel on it, you could charge rent to those who landed on it — and hopefully win the game.

Meanwhile, the Department of Motor Vehicles has taught us that there is such a thing as a “title.” Meanwhile, when you purchase a home, you receive a “title policy” which guarantees “clear title” to your property.

But surprise! There is no such document as a “title” to your home the way there is a title to your car. There is a document called a “deed” but that is the document which transfers ownership, it is not proof of ownership. Sorry, I know this is confusing!

So where is the proof that you own your home? It is held by the Clerk & Recorder of your county, and it’s based on the most recent deed recorded with the county. The only proof that Rita and I own our home in Golden is that the most recently recorded deed transferred the property to us. There is no other document which we have or can produce to prove we own our home.

Last year the state-mandated contract for the purchase and sale of real property changed the way deeds are specified. The agent preparing the contract specifies whether the buyer wants to obtain ownership through one of several deeds.

First is the “Special Warranty Deed,” by which the seller warrants that he is transferring ownership of his property free of any known lien or claim of ownership during the time he/she or they owned the property. That is the most limited type of deed.

The buyer might, however, demand a “General Warranty Deed,” by which the seller is warranting that there is no other claim of ownership (or lien against the property) going back to the beginning of time. 

What you need to know, however, is that, regardless of which type of deed is used to transfer ownership, the buyer should receive an “owner’s title policy” (typically paid for by the seller) guaranteeing free and clear title to the buyer. In other words, it hardly matters which type of deed is used to transfer the property. You’re still protected.

Title insurance differs from other kinds of insurance because it has no term. It is a one-time purchase that covers the new owner of the property forever. It never has to be renewed.

Prior to issuing the title policy, the title company does a “title search” looking for any recorded claim of ownership or lien against the property in question. If a claim or lien is not recorded with the county in which the property is located, it can’t be enforced.

It is possible, of course, that a claim or lien might be overlooked during the title search, but it’s pretty rare. I recall once in 1991 I purchased an older (1905) office building in Denver, receiving a title policy from Land Title Guaranty Company. Within a year or so, I was notified of a lis pendens against the property, but the lawyers for Land Title did whatever they had to do in order to clear it, costing me nothing. Since that time I can’t think of any claims against any title policy held by me or any of my clients — and I’ve had quite a few!

There are other types of deeds beside Special Warranty and General Warranty. If the property is owned by the estate of a deceased person, the property is transferred by a “Personal Representative’s Deed.”  If the property is purchased at a foreclosure auction, it is transferred by a “Public Trustee’s Deed.” If a property is purchased out of bankruptcy, it is transferred via a “Trustee’s Deed.” 

A “Quit Claim Deed” is used when real estate is transferred without being sold for money.  For example, if John Doe were to marry Jane Doe and wanted to put a home he owned in both their names, he could “quit claim” it from John Doe (as “grantor”) to John & Jane Doe (as “grantees”). If they divorce later on, John & Jane Doe might quit claim the house to either John or Jane, with or without a monetary settlement on the side.

With such examples, I hope you now understand that a “deed” is in fact an instrument of transfer, and not a title to property.

Because there is no physical title to real estate, the first thing that a title company does when asked to execute a contract to sell a parcel of real estate is to issue a “title commitment,” which is a document asserting who the recorded owner of the property is and to whom it is to be transferred.

There is one other use of the word “deed,” and that’s for the “Deed of Trust” which a mortgage or other lender has you sign when you take out a loan of any kind which is secured by your home. That document is recorded with the County Clerk & Recorder and is the basis for that official to hold a foreclosure auction if you default on the loan.

I am not a lawyer, and I am providing this information as I understand it from real estate classes and from my experience as a real estate licensee. You’ll want to engage a lawyer if you require further explanation, and I, like any real estate licensee, can refer you to one.

Cars Have Titles Which Are Transferred Upon Sale. Homes Do Not. So, What’s a ‘Deed’?

One of my sellers whose closing is fast approaching called me in a panic last week because she couldn’t find the deed to her house, which she thought she’d need to bring to closing.

I explained to her that a deed is not the same thing as a title, and that all she needs to bring to closing is her driver’s license or similar ID to prove who she is.

In fact, there is no “title” to her house. A deed is a legal document which transfers property. It is not proof of ownership. When a deed is recorded by the county clerk, it results in the county changing its records to reflect the new owner’s name, and the deed, once recorded in the clerk & recorder’s database, is then mailed back to the new owner. At that point, it doesn’t matter if you lose or misplace your deed, because the county has the proof of your ownership.

This is different from how motor vehicles are transferred, where you have a title to your car and must sign it over to the new owner when you sell your car. If you lose your title, there’s a procedure for replacing it, but you need that physical title to sell your car.  Not so with real estate.

Many people share my seller’s misunderstanding about deeds And there are different kinds of deeds. The deed used most often is a “warranty deed,” meaning that the seller warrants that they are the owner of the property and, with that deed, transfer it to the buyer.

There are “general” and “special” warranty deeds. I won’t go into the difference here, since the purpose of title insurance is to provide the buyer with a guarantee (regardless of the type of deed) that they are receiving the property free and clear of any claims of ownership or indebtedness by anyone other than the seller.

When a property being sold is in the estate of a deceased seller, it is sold by the “personal representative” of the estate (called an “executor” in other states), and the property is transferred via a “personal representative’s deed.” If the property is purchased at a foreclosure auction conducted by the Public Trustee (who enforces the “deed of trust” securing the mortgage for the lender), then the transfer is via a “trustee’s deed.” 

Whichever kind of deed is used, the fact remains that the deed only exists as evidence of the sale, and it does not need to be presented ever again.

I am not a lawyer, and I am providing this information as I understand it from real estate classes and from my experience as a real estate professional. You’ll want to engage a lawyer if you require further explanation, and I, like any real estate licensee, can refer you to one or more real estate lawyers.