Q: May wife and I are buying out first piece of property. It is a unit in a fairly large condominium project, and we are buying directly from the developer. We plan to pay all cash, and since there will be no mortgage, there are no lenders' requirements. Should we obtain title insurance? What other legal protection do we need when we go to settlement?
A: Since you are asking about title insurance, I will not dwell on one of my favortie topics -- namely that buyers should put down as little money as possible into a home purchase. In these days of inflation, it does not make financial sense to keep a lot of equity lying dormant in your property.
However, that is the subject of another column, so lets turn to title insurance.
Like any other insurance policy, title insurances insures against unknown risks. In effect, it is the only legalized gambling this side of Atlantic City.
Title insurances policies protect against matters not on the public record. For example, if Mr. and Mrs. A sell what they claim to be their house Mr. and Mrs. B, and transfer a forged deed, the real owners -- and their heirs -- could claim an interest in the property. The defect, since it involves facts not on the record, could not be found, even by a careful title search.
Land record systems are very archaic throughout the country. The Department of Housing and Urban Development has been struggling for years to come up with a modern system which would protect the validity of titles, yet at the same time cut down the unnecessary paperwork and uncertainties involved with real property. To date, unfortunately, they have had little success.
If a lender were involved in your purchase, it would insist on your obtaining lender's title insurance, and you would have to pay a one-time premium to insure the lender against these kinds of title defects. You would then have the option to purchase additional owners's title insurance, covering the difference between the loan and the purchase price.
However, since there is no lender involved, the entire choice of buying the title insurance rests with you. The lawyer or the title company conducting settlement will guarantee that the title is good on the record between the seller and yourself.
Thus, title insurance will protect you, the owner, against any claims to the property. These claims can develop as a result of forgery, mental incompetence, or just plain errors in searching the title.
Do you need such a policy? To a large extent, it is piece-of-mind insurance. There is a chance of risk, but the risk is minimal. Indeed, in a condominium project, if you are buying from the developer, the risk is even less, since it will be shared equally by all of the orginal purchasers from the condominium developer.
The title companies are anxious to sell this insurance to you because that is how they make their money and you may not get a complete explanation of the pros and cons from them.
In the end, only you can make the decision.
Here are a few suggestions:
Insist on a inflation escalator. In the unlikely event there is a claim, you will be insured to the market value of the property, and not merely the purchase price. You shouldn't have to pay and additional charge for this inflation rider.
Review the title insurance policy in advance. The title company or the title attorney sould be able to send you a title blinder, which indicates the status of title. You will find two basic parts in the title policy. Schedule A gives the extent of insurance coverage, and Schedule B spells out the exemptions from coverage.
Unfortunately, Schedule B taketh away a lot more than Schedule A giveth. Ask your attorney or title company for a careful explanation of each of the exempted items in Schedule B. Many of the Schedule B exceptions can be deleted as settlement.
Inquire about a "re-issue" rate. Many title companies and title attorneys will give you a reduced rate for title insurance if the property you are purchasing has changed hands only recently. Your condominium may fall into this category. And remember, the re-issue rate need not be available only from the attorney or title company that settled on the property previously. If your seller has a copy of the title policy, any settlement attorney or title company should be able to offer you the re-issue rate.