One of the most frequent questions real estate attorneys hear is, “Do I need title insurance, and if so, why?” The next question, of course, is, “And how much will it cost?”
A title insurance policy covers a number of aspects of ownership important to any purchaser of real estate. First and foremost, it confirms that the seller you are purchasing from does, in fact, own the property. But it covers other matters as well, including whether there are recorded liens on the property, any restrictions on use, and burdening or benefitting easements.
Ownership: Sometimes a person will say, “Well I know the sellers and they’ve had the house for fifty years, I’m not worried about whether they own it.” This may be true, but a title search should bring to light any undischarged mortgages or, perhaps, liens for real estate taxes, or liens for income taxes if the sellers have not filed their annual tax returns. Or, if the property was in heirship in the past, it may be that some heir has a claim of full or part ownership, even if they have not actively pursued that claim. They may not even be aware of it. It is important to know of any such liens, or potential claims, because the property you are buying will be subject to them, even after you buy it, if they are not taken care of prior to the closing. Taking care of them should be done by the seller, at the seller’s expense, and this will only happen if a search is done prior to closing.
Restrictions: A title search will also show any recorded restrictions on the use of property. Many subdivisions and most camp lot subdivisions have restrictions on use, noise restrictions, prohibitions against running businesses on the property, prohibitions against certain kinds or numbers of animals, prohibitions against kinds of vehicles that may be stored on the property etc. The lot may also be subject to a requirement that the owner maintain membership in the subdivision’s homeowner’s association or road maintenance association, including the requirement to pay annual dues. It is important to know what restrictions apply.
Easements: The property you are purchasing may come with a right of way or other kind of easement benefitting the property. For example, if it does not abut a public highway, there should be an easement from the property to the public highway. One of the things a standard title policy insures is access, so this aspect of the property will clearly be researched for you. There may be other benefitting easements. For instance, there may be an easement granting you access to the ocean, or a nearby lake or river, across intervening property. It is important to know the exact terms of these easements, to be sure you are going to be legally protected, and that you understand what you are getting. On the other hand, there may be burdening easements. A neighbor may have an access easement over your driveway in order to get to their property. Or they may have an easement for their power line, or an easement to maintain a well on your property. They could also have a view easement over your property allowing them to see the water. All of these things impinge on your free use of your property to some extent, and it is important to know exactly what you are getting and how it will affect your use and enjoyment of the property.
Any of the above situations is something you would want to know about before purchasing a property. After the closing, it’s YOUR problem, not the seller’s.
Banks Require Title Insurance: If you are borrowing money from a bank to purchase the property, the decision will be made for you: banks routinely require title insurance before they will make a loan secured by real property. However, the title insurance they require is to benefit them only. It is called a Lender’s Policy. The Lender’s Policy is generally only for the amount of the mortgage loan, insures only the Lender, and expires when the loan is paid off. It does not protect you. No money would be paid to you under a Lender’s Policy. However, it is usually economical to purchase an Owner’s Policy at the same time as the Lender’s Policy, rather than purchasing at a later time.
What Does it Cost? The most expensive part of obtaining title insurance is usually the title examination. This includes a detailed registry search relating to many matters, including those discussed above. If the property has been owned by one person for fifty years, then the examination is quick and not expensive. But the title examiner never knows what he or she will find until they start looking. If the property at any time was owned by someone who died without a will and having numerous heirs, for instance, then it can become complicated. If there have been numerous mortgages or tax liens, all these will require further work to make sure the liens have been discharged. If one of the previous owners was a developer or real estate investor, owning dozens of different properties, then searching that person will be much more difficult and time-consuming. These are just some of the reasons that a title examination can cost one person a few hundred dollars and another person much more.
Title Premium is a One-Time Expense. The title premium is usually calculated based on the value, or purchase price, i.e., $x per thousand. So, if the property cost $100,000 and the rate were $3 per thousand, the basic premium would be $300. This is a one-time expense. You pay at the closing, and then your Owner’s Policy will typically cover you for as long as you own the property. You cannot transfer your Owner’s Policy to your buyer when you sell the property, but their title search will be made easier and less expensive if you already have a policy, which can be a selling point.
Conclusion: You may decide you are willing to assume the risk and not get title insurance. This is a personal decision for you to make, based on consideration of all the relevant factors, your economics, and the level of risk that is acceptable to you.
There are two points worth remembering if you decide to take this route, however. First, if you ever plan to borrow against the property, your lender is going to require title insurance at that time. If you have title insurance from the time you purchase it, then only an update will be required later, which will be faster and less expensive. Second, if you are purchasing property that has been through foreclosure in the past few years, be aware that recent cases from the Maine Supreme Judicial Court reveal that there are questionable procedures being practiced by certain national lenders and foreclosing agents, who may not follow procedures and requirements of Maine law, with unpredictable results. An independent title examination, by someone working solely for you (and not someone provided by the seller) is highly recommended.