In 2020, despite a global pandemic and economic downturn, buyers and sellers came together on more than 6.5 million home sale transactions. While the pandemic added lots of new hoops for real estate brokers and attorneys to jump through to complete these transactions, anyone who has been part of a real estate transaction knows that successfully completing a home sale can involve a lot of complex moving parts, even under the best of circumstances.
One of the most complicated parts of the process frequently involves verifying the owner’s title to the property, to ensure that there are no evident title defects that could impede the home sale — or create cumbersome financial and legal difficulties for the next owner.
Want to help your clients prepare for their transaction? Let’s explore the ins and outs of the title search and title insurance — and look into some of the most common types of title defects that your real estate clients should know.
Title Search & Title Insurance
Title describes the bundle of rights belonging to the owner of the property. In order for a seller to convey those rights, a title search should be performed to ensure that the title that the seller holds is free of encumbrances and defects, and that the buyer will be able to enjoy all rights to the property.
In simple terms, a title search examines public property records on a property to confirm that the property owner has free and clear ownership of the property – and, with it, the right to transfer title to a new owner. The current owner may not even be aware of an old claim against the title. And for prospective new owners, a title search helps uncover old debts from any previous owners that are attached to the property — which can emerge to haunt you because they follow the property. A title search can also help uncover any documents with information about any restrictions on your use of the property.
The terms “clouds on title” or “title defects” refer to anything that might cast doubt on a homeowner’s ability to convey or transfer ownership of the property, which may be brought up in a title search — or revealed after the property has changed hands.
Title insurance provides peace of mind for the new homeowner to say that they are the true owners of the property — and that they can afford to defend their ownership should it be challenged in the future. It is customary to purchase two types of title insurance during most real estate transactions, an owner’s policy and a lender’s policy. The owners’ policy offers financial protection from issues stemming from a broad range of potential title defects, and is usually paid for by the seller. The lender’s policy protects the mortgage lender’s security interest for the life of the loan, and is a one-time expense handled by the buyer.
What Are Common Defects on Title Buyers and Sellers Should Know?
Title searches and insurance are both forms of protection against a number of common title defects.
Some of the most common or difficult title defects buyers and sellers should be aware of include:
Errors in Public Records
The recording process involves filing records and paperwork lodged with a number of different sources, and can often be far from perfect. Simple clerical errors in recording do occur, commonly related to the recording and release of liens against property.
For example, every time a lien is recorded against a property, whether to satisfy a mortgage or other debt, a separate document must generally be filed with the applicable recorder’s office to show that the underlying debt has been satisfied and the lien released. This multi-stage process is fraught with the potential for error. Something as simple as a clerical error can lead to liens or releases being filed in the wrong county, or against the wrong property. These liens can show as valid long after the underlying debt has been satisfied, creating major headaches for both buyer and seller.
Fraud and Forgery
Fraudulent transfers and forgeries do happen, and can result in upsetting surprises for homeowners. For example, forged documents might indicate that a borrower’s mortgage obligations have been satisfied, permitting the borrower to obtain a second loan against the property. Or, a deed may be forged by a person who then sells a loan secured by the deed of trust, leaving an unsuspecting homeowner to discover the cloud on title when the purchaser of the loan forecloses on the property for the nonpayment of the debt.
Similarly, a spouse involved in a family law dispute may forge the signature of an unsuspecting spouse on a document transferring or encumbering title, creating a potential future claim by the spouse who was unaware of the document.
Forged or fraudulent claims are designed to be difficult to detect, and a property may appear to be free of encumbrances or clouds on title at sale only for claims to arise later as holders of debt attempt to collect a debt owed or sue to have their ownership interest recognized.
Unknown or Unsatisfied Liens
Common examples of liens that attach to a property include mortgage liens, mechanic’s liens, judgment liens, and liens related to failures to pay child support or real estate taxes and assessments.
Not all liens against a property will necessarily be revealed even by a thorough title search. Liens that have not been recorded until after the closing date of a previous sale, for example, may cloud a property’s title for future sales. Similarly, a lien that has been satisfied or which has expired, but for which proper documentation has not been filed, may hold up a property sale and create an encumbrance that cannot be easily removed from the property’s title. This can be a problem if, for example, the lienholder has moved or gone out of business.
A title company can act to ensure that any missing documentation is provided and all liens are cleared from the property’s title before the sale closes.
Illegal deeds present a particularly tricky situation in the transfer of property — making what appear to be unbroken links in the chain of title into major issues down the line. If one transaction in the chain of title is found to be unlawful, every subsequent transaction is affected. Because prior transfers will often appear perfectly legal, it can be nearly impossible to detect them before a sale closes — one more reason why title insurance is such an important protection.
If the property was, at some point, included in an estate subject to probate, an unknown heir might step forward even decades after the fact with a demonstrated, legal right to the property.
Easements and Encroachments
Non-financial encumbrances can plague a property’s title as well. Easements, or the right to enter or use someone’s land without possessing it, can have a significant impact on your ability to build on or use a property — and could impact a property’s value.
Depending on the nature of the easement, its existence may or may not be obvious in a title search. A prescriptive easement, for example, can arise out of continuous, obvious use of another property owner’s land for a set period of time, usually five years. These rights can affect the buyer’s ability to improve and build upon the property, but may be invisible at the time of sale.
Property encroachments constitute another form of non-financial encumbrance on title. An encroachment occurs when an adjacent property owner builds something either on or overhanging the property in question. Encroachments can be intentional, but are more often the result of inadvertent error. Nonetheless, they can constitute an impediment to a real estate deal, particularly if they are significant. Understanding and resolving all property encroachments before closing is essential to ensuring that a home’s title is clean and marketable.
Learn More from Your Trusted Title Insurance Company
No matter how seemingly insignificant they may seem to a seller or even a buyer, clouds on title can interfere with financing, insurance, and future property sales.
This is just one more reason why the title company you engage is so important. During the transaction, the title company is an essential partner for you and your clients, who can help ensure that the title being received or conveyed is completely clean, and free and clear of all defects and encumbrances.
Your buyers may never even be aware of how much work is done by the title company to repair clerical errors, clear up murky claims to title, or compile a thorough and accurate title report on their new home.
At Landtrust Title Services it’s all about the relationship. Our empowered title services team encourages responsive underwriting and provides a single point of contact to keep your deal moving, so it’s delivered on time, regardless of complexity. We partner with you, align with your goals, and provide a seamless process to ensure a smooth transaction.