Q) I am in the process of buying a six-year-old home in Fairfax. It is not a typical purchase. The owner is taking back the bulk of the sales proceeds by way of a loan to me. For my protection, do you think I should purchase a title insurance policy? Is there a reissue rate that I may be able to obtain?
A) Anyone purchasing real estate -- whether commercial or residential -- wants to be satisfied that he or she is going to obtain good, clear, merchantable title. Needless to say, a buyer does not want to wake up one morning to find that someone else is claiming ownership to the same property.
Oversimplified, there are many kinds of evidence of title. One can obtain an abstract, which is a history of the title to a piece of property. It usually consists of a summary of the important aspects of every recorded instrument affecting the title. The abstract is always signed by the person doing the title search, and the signature of the abstractor (called the abstractor certificate) can be relied upon by the buyer.
However, the abstractor's certificate is only as good as the abstractor, and, of course, if the abstractor's judgment is poor, or he or she has no assets, looking to the abstractor in the event of a title loss may be time consuming and meaningless.
In some parts of the country, the attorney or title company searching the title may examine the public records and issue a title certificate, which is the opinion of title based on the public records that have been examined. Again, the buyer can rely on the certificate of title, but if there are no assets it is meaningless to try to sue the abstractor for any damages that may subsequently occur.
More important, the abstractor certificate or the certificate of title is only a representation of what is found on the public record. If the abstractor or the attorney searching the title was negligent by missing a cloud that is already on the public record, then the abstractor may be liable to the buyer for negligence.
However, often clouds on titles cannot be found directly from the public record. For example, if Mr. and Mrs. A. sell to Mr. and Mrs. B, who convey the same property to Mr. and Mrs. C, the record will merely reflect the transfers from A to B to C. If, for example, the real Mrs. A. did not sign the deed, but her signature on the deed was forged by Mr. A, the real Mrs. A does have the right to claim her interest in the property as against B, C, or any subsequent purchaser.
There are many defects in title that unfortunately the public records do not disclose. We have already discussed forgery as one defect. Others include the drafting of a defective deed, marital status incorrectly given, or insanity or minority age of a grantor of property.
For example, if the sellers are married, and the wife does not sign the deed, she may have a claim to the property. This is known as the "dower right," which is still valid in some parts of the country, including the District of Columbia.
Thus, many people resort to title insurance to protect their interest and give them greater assurances of clear title. Title insurance is a contract to make good certain losses arising through defects in title to real estate, and usually will protect the purchaser of the title insurance policy for the defects that cannot be found on the public records.
Title insurance companies offer two kinds of title insurance policies. The first is a "lender's policy," which protects the lender against loss to the amount of the outstanding loan. The other kind of policy is the "owner's policy," which is usually issued to the purchaser. The owner's policy is optional, and need not be purchased if the buyers decide to take the risks themselves -- in other words, to self-insure.
Consider the following example. You buy a house for $100,000 and obtain an $80,000 mortgage. The lender's title insurance policy will be for the amount of $80,000, and will run in favor of the lender. The buyer has the option of purchasing additional insurance for the full amount of the purchase price (the $100,000) and this additional insurance is always obtainable at a nominal additional fee.
Many years ago, Sen. William Proxmire (D-Wis.), chairman of the Senate Banking Committee, tried to enact legislation that would require lenders to pay for their own title insurance policies. But the law was never enacted. Thus, at least in this part of the country, the cost of the lender's insurance policy is usually borne by the purchaser. Then, of course, the purchasers can obtain the additional owners' title insurance if they desire.
In your case, you have a dilemma. I doubt that your seller will insist on your obtaining lenders' title insurance to protect the seller for the amount of the loan. They probably obtained the title policy when they first purchased the property, and there should be no reason to insist on another, duplicate title insurance policy to protect the loan. However, since there is no lender's insurance policy involved, you have the choice of taking out a total owner's policy or none at all. The total owner's policy will probably cost you several hundred dollars at least.
It is a difficult decision. Several years ago, the Senate Banking Committee did a study that found that of all the policies in the country, less than one-half of 1 percent had claims filed, and, of course, the payout was even less. Thus, to a large extent it can be argued that there is little need to obtain title insurance -- whether it be lenders' or owners'.
However, a purchaser may want the peace of mind that comes with knowing that there is no risk, and if there is a risk, with knowing that somebody else will help pay for any losses associated with a title defect.
While it may be true that a very small percentage of the title insurance policies have claims on them, the fact remains that claims were made, and the people who obtained the title insurance were delighted that they had purchased the policies.
It should be noted that title insurance is a one-time charge. Often, the insured -- when faced with a claim -- may have to pay his or her lawyer more to clear up the claim than the cost of the initial policy.
Thus, from a practical point of view, you should give serious thought to deciding whether to purchase the full owners' title insurance. It may be that there never will be a risk. However, the fact that the house is only six years old does not mean claims could not be raised for title defects arising more than six years ago. A forger could have been involved in a deed many years ago, which only recently came to light.
About the reissue rate: If a title insurance policy has been obtained on property, and if the new title attorney or title company conducting settlement obtains a copy of the old policy, a reissue rate can often be obtained. There is a very complex formula that looks at the age and amount of the old policy in comparison with the new policy to be issued. However, the reissue rate can save you some money when you pick up your own title insurance policy. It is worth exploring, and you should insist that your sellers provide you with a copy of the title insurance policy that they obtained when they bought their house.
Purchasing title insurance is a decision that only you can make, after you have obtained all of the facts. Discuss the pros and cons with your title company or title attorney before you decide. Benny L. Kass is a Washington attorney. For a free copy of the booklet "A Guide to Settlement on Your New Home," send a self-addressed stamped envelope to Benny L. Kass, Suite 1100, 1050 17th St. NW, Washington, D.C. 20036. Readers may also send questions to him at that address.