What Exactly is Title Insurance?
One of the great mysteries of real estate transactions is the portion of the deal that involves "clearing title." This is the process by which an attorney makes a determination that the "title" which the seller is offering to sell to the buyer (that is, seller's ownership interest in the property) is free and clear of all liens, claims and encumbrances. Or as they say in the title insurance world, that the buyer is getting "clean title." How is that determination actually made?
Ordering the Title Report
When purchasing a condominium apartment or any other type of real estate, after the contract is signed, the buyer's attorney will call a title insurance company and "order title." Although that process might not start until the buyer obtains a mortgage commitment, if the transaction is subject to financing, the title is usually ordered shortly after the contract is signed. When the attorney orders title, he is asking the title insurance company to search various city, state and county records to determine the status of the title owned by the seller. The results of that search are manifested in a document known as a title report. Under ordinary circumstances, the completion of the title report takes about two weeks. When purchasing a one or two-family house, if the buyer is financing a portion of the transaction, the buyer will also be required to obtain a survey of the land and the structures on the land at a cost of $1,000.00 or more for a standard survey. When a survey is required (which is never the case with condos) the preparation of the title report can take significantly longer depending upon the schedule of the surveyor. But back to condos.
Review of the Title Report
Once the title report is completed, the title company will forward copies of the report to the attorneys for the buyer and the seller and the attorney for the bank that is making the mortgage loan to the buyer. The buyer's attorney will review the report to determine whether any action has to be taken by the seller to "clear title". What kind of stuff appears in a title report that would require action? The report may disclose outstanding judgments against the seller or tax liens which the seller would have to satisfy (that is, pay off ) at or prior to the closing of title. The report may disclose a current bankruptcy filing that may impact on the seller's ability to transfer title. The report may disclose one or more mortgages which the seller will also have to satisfy at closing. In addition, the report may disclose the interest of another party in the unit or an interest of a prior owner that was not properly disposed of when the seller purchased the unit. The interests of any other party other than the seller have to be resolved before the buyer purchases the unit. Any outstanding lien, encumbrance or claim against title that is not resolved prior to closing can create an "unmarketable title". This means that the buyer may be purchasing a title that the buyer may have great difficulty transferring in the future. The report may also disclose violations (that is a breach of a governmental regulation) against the condominium or the unit itself which must also be dealt with at or prior to closing. In most cases, the condominium (usually through its managing agent) will deliver an "indemnification letter" to the buyer and the buyer's bank, by which the buyer and the buyer's bank are indemnified by the condo against the violation. The condo will also promise to "cure" the violation within a reasonable time. Even though the violation will not be "removed" from the title report as an "exception" (and will remain in the report as an encumbrance to title), the parties will go forward with the transaction as long as the condo gives the indemnity letter. There are instances where a violation can actually be a problem, if the condo disputes the violation and does not want to give the indemnity letter. When the violation is against the unit itself, unless there is no financing and the buyer is willing to accept the unit subject to the outstanding violation, the violation will have to be removed before the closing can occur. Don't worry, that rarely happens.
Title Problems...Look to the Contract
As a general rule, once the title report is issued by the title company, any matters which the seller must deal with are usually disposed of in due course. If a hefty financial lien against the seller is revealed in the report, the seller may not want to go ahead with the transaction if a significant portion of the proceeds will be needed to satisfy the financial obligation, such as a federal tax lien. The seller's obligation to satisfy any "objections" or "exceptions" to title is determined by the seller's obligations to do so as stated in the contract between the seller and the buyer. In many contracts, the seller is obligated to do nothing if there is an objection or exception to title. The seller will be given a period of time to cure the objection (30 to 60 days), and if the seller can't remove the objection, either party can cancel the contract. The buyer will then be given the opportunity to take whatever title the seller can give (subject to the objection), but a buyer will rarely take an encumbered title. Some contracts obligate the seller to incur up to a certain amount of money to cure title (let's say $5,000 or more), but that might not be enough to make the problem go away. Since most sellers want to sell their property, they will take whatever action is necessary to clear title, even if it costs a significant amount of money.
What Happens at Closing
One of the unannounced guests at closing is the representative of the title company known as the "title closer". The title closer's job is to review the title report and make sure everything is in order so that the title insurance company can issue a "title insurance policy" to the buyer. The title closer will go through the title report and take out the objections that have been cleared by the seller. This process is called "marking up" the title report. The buyer's bank will get a separate title insurance policy called a "mortgage policy" and the buyer will get a separate title insurance policy called a"fee policy." As a matter of practice these days, the title policy is issued at the closing. That being said, sometimes the actual title policies are issued after the closing and reflect the title as "marked up" by the title closer at the closing. One of the closing cost items that always produces the "deer in the headlights" stare, is the custom of giving the title closer a "gratuity" or "attendance fee" at the end of the closing. This payment, which is usually starts at $150 and goes higher, is given because the title company modestly compensates the closer for attending the closing. I once had a buyer refuse to pay the closer and it got a little ugly at the closing table. Don't make a big deal about it as the it's part of the process of purchasing real estate. The seller will also pay the title closer a "pick up fee" of approximately $200 for each mortgage that the seller is paying off. This fee covers the title closer's efforts to deliver the pay-off check to the bank and record the mortgage satisfaction which the seller's bank will prepare after it receives the check. Remember, be nice to your title closer, he or she can make difficult things go away if they're so inclined.
Uh Oh, Problems at Closing
One of the most important things that the title closer does at closing is call the title company for the results of the "continuation search" conducted by a representative of the title company on the day of the closing. Hopefully, this search will reveal whether there are any additional or new objections to title which appear of record since the date of the original title report. This continuation search also reveals the status of the payment of real estate taxes by the seller so that the parties can properly "adjust" for the portion of taxes payable by each party. If the continuation search reveals a lien or encumbrance which the seller did not know about and is unable or unwilling to satisfy at closing, the closing will have to be adjourned until the seller is able to remove such objection from the title report. This scenario happens infrequently with condo transactions...but it does happen. One of the best things a buyer can do to make sure that the seller does not have any undisclosed liens which are not revealed until the day of closing, is to keep his or her fingers crossed or to say a little prayer immediately before the closing begins. Most of the time that works.
Missing an Objection in the Title Report
The other reason why title issues arise at closing, is because a matter revealed in the title report which the seller must address is ignored by one of the attorneys. Sometimes an issue can get brushed aside in the pressure to get the parties to closing. If a matter is disclosed in the title report, however, there is usually plenty of time to get the matter resolved at or prior to closing. In most cases (most but not all), a title issue which is raised in the title report but which is not addressed prior to closing, is due to the "L" word....laziness. Even when a title issue is forgotten until closing, it usually gets resolved at the closing table by the seller giving an undertaking to get something done or by making an additional payment to the title company. Title companies do what they can to be cooperative and get the deal closed because there is a lot of competition out there for title business. When something is left for the last minute, it's almost guaranteed that everyone will be sitting around the closing table for an extra two or three hours. It's painful, but not fatal.
What Does Title Insurance Cost?
Title insurance rates are set by government regulation in New York and can vary by county. For example, in New York County, a purchase price of $1,000,000.00, with a mortgage of $600,000.00, will generate a fee policy premium of $4,508.00 and a mortgage policy premium of $732.00 (for a total premium cost of $5,240.00, excluding other title charges such as municipal searches and other required title endorsements). When you are purchasing from a sponsor (that is a developer of a new condominium building), you may get the benefit of discounted title insurance premiums because the same policy is being written for a large number of unit owners. It is always a good idea to ask the title company to generate an estimated title bill as soon as possible, so that the buyer will be apprised of the expected title charges as soon as possible.
What Happens if a Claim Arises After Closing?
When a recorded lien or judgment is not found by the title company, the holder of the lien or judgment can seek to enforce its rights in the future. Alternatively, when someone goes to sell the property, the new title report may disclose the prior lien that was not previously disclosed. Title companies often work out indemnification agreements to indemnify the new title company against the prior undisclosed lien. In some cases, there can be a serious claim against title that won’t go away by the issuance of an indemnity by the prior title insurance company. More serious undisclosed title impediments can create significant issues and can delay a closing or kill the deal entirely. The claims department of a title company is like the claims department of any insurance company. Title polices have exceptions and limitations, just like any other insurance policy. If there is no coverage for your particular claim, the financial responsibility for removing the claim will fall upon the owner of the property. If it's a gray area, it could take time to get the title company to commit to cover the claim. The good news is that title claims rarely are made in connection with condo purchases. It's probably safer than riding a bike, and no helmet is required at the closing.
What about Co-ops?
Getting comfort that liens or judgments are not outstanding against the shares allocated to the apartment in question is usually resolved by ordering “a co-op lien search”. The entire co-op transaction industry relies on the lien search, but co-op lien searches pale in comparison to a title report and issuance of a title policy. Recently, title companies have been issuing "leasehold" title insurance analogous to the insurance issued in connection with a condo purchase. Those policies are very different and the effectiveness of such policies has yet to be determined. More on lien searches in the future.
Residential Reality: Yes, You Need Title Insurance
If a portion of your purchase price is being provided by a bank, you will have to obtain title insurance or the bank will not go ahead with the closing. There's just no choice. If you are an "all cash" purchaser, you can go ahead with the closing without getting title insurance, but that just doesn't make a whole lot of business sense. Without title insurance, there is no real assurance that the title of the condo you are purchasing will be free and clear of all liens, encumbrances and other seller-related title problems. Those assurances come from the title policy. Buyers often complain that title insurance is a racket. It is. That being said, it's a necessary evil and part and parcel of the closing process. Bring plenty of checks to the closing, you'll need them.