Case Study: Why Owner’s Title Insurance Is Important

Many home buyers wonder why they should purchase Owner's Title Insurance. Afterall, it's anywhere from several hundred to a few thousand dollars, which is definitely not chump change. To be honest with you, most of those who purchase Owner's Title Insurance will never need it.

But the reason why you should always purchase it is because a title issue could cost you tens, if not hundreds of thousands of dollars and possibly your home.

Here's a recent real life example of Owner's Title Insurance coming to the rescue:

My buyer clients submitted an offer on a foreclosure/bank-owned property in Broadlands. The seller, Wells Fargo, accepted the offer and we continued on with the closing process.

At the 11th hour, the settlement agent, Mike McFarlane from Highland Title and Escrow, and the seller's title agent, Samuel I. White, PC, noticed that there was a discrepancy on one of the forms. The form, which was signed by the previous owners (who were foreclosed on), took the wife's name off the deed and gave the husband sole rights to the property. The husband had signed for the wife using a Power Of Attorney. The problem was that the Power Of Attorney was dated the day AFTER the deed was signed. This meant that the deed was invalid.

This presented a huge problem for everyone because it meant that the wife may still have claim to the property. But…that's where title insurance comes in.

Since Wells Fargo had foreclosed on the property and had title insurance on the property, the title insurance company was responsible for previous owner's issue and Wells Fargo and the buyers were off the hook. The sale could go on.

Had the seller not purchased title insurance, the sale would most likely not have gone on and the buyers would have been without a home. In addition, Wells Fargo would have been stuck with a huge legal mess.

Here's another real life example:

Years ago, there was a plot of land in Countryside that was bought by a developer. The developer built a community of town homes which were all sold to home buyers. Once the development was complete, someone contacted the developer and all of the homeowners in that community saying that they had rights to that land and they were illegally on it.

It turns out that this person, a Native American Indian, provided proof that this land was rightfully theirs based on an 100+ year old written contract. In fact, the land the community was on was a Native American Indian burial ground with some of their ancestors buried in it.

The story ends as such…each home owner's title insurance company got together with the other and they ended up settling with the person for millions of dollars.

But what if one of the home owners did not have title insurance? That homeowner would have to come up with their share of the settlement on their own or give up their home, neither of which are good.

As you can see, once a title issue arises, it's usually not small. Though the possibility of it happening is very small, are you willing to gamble your greatest asset and your family's home on it not happening to you? Several hundred to a couple thousand dollars is a small price to pay when compared to what could happen (IMHO).

NOTE: There's a way to save up to 30 percent off of Owner's Title Insurance. Click here to find out how.

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What Is Title Insurance? And How Much Did You Say It Was?!

What Is Title Insurance? And How Much Did You Say It Was?!

You, like many consumers, may wonder what Title Insurance really is and how much it costs. You may also cringe at the cost when you find out what it is. Yes, several thousands of dollars is definitely a lot of money. But it's a drop in the bucket when compared to the loss you could be facing should their be a claim or an issue, which could cost you hundreds of thousands of dollars.

So what is Title Insurance?

As defined by Wikipedia,

"Title insurance in the United States is indemnity insurance against financial loss from defects in title to real property and from the invalidity or unenforceability of mortgage liens. Title insurance is principally a product developed and sold in the United States as a result of the comparative deficiency of the US land records laws. It is meant to protect an owner's or lender's financial interest in real property against loss due to title defects, liens or other matters. It will defend against a lawsuit attacking the title as it is insured, or reimburse the insured for the actual monetary loss incurred, up to the dollar amount of insurance provided by the policy."

In layman's terms, Title Insurance is what covers you against a claim against the property.

The good thing about Title Insurance is that rather than you fighting the claim (which can cost tens of thousands of dollars), the Title Insurance company handles it for you. You don't have to waste your time, energy or money worrying fighting the claim. In addition, if the claim proves to be valid, you will be reimbursed for your actual loss up to the face amount of the policy.

Title Insurance is divided into two parts, Owner's Title Insurance and Lender's Title Insurance. Let's look at the difference…

Lender's Title Insurance

• Covers the lender's interest in the property (if the loan is for $400K, it covers the lender's interest up to $400K)
• As a borrower/buyer, you are required to purchase it in order to receive financing
• Unless you're not getting lender financing, there's no getting out of this one. And the lender always passes the buck to the borrower/buyer (sorry folks)

Owner's Title Insurance

• Covers the borrower's/buyer's interest in the property up to the purchase price (if the loan is for $400K, but the purchase price is $500K, it covers the buyer all the way up to $500K)
• This type of Title Insurance is optional. It's up to you whether you buy it or not, but it's strongly recommended (I'll cite examples of why in a future post)

In addition, there is what's called "Standard" and "Enhanced" Owner's Title Insurance. Depending on who the Title Insurance provider is and what their coverage is like, you'll want to go with either "Standard" coverage or "Enhanced" coverage.

"Standard" coverage typically covers you up to the sales price at the time of settlement. If you bought the property for $500K, but it's worth $650K in 7 years, you'd still only be covered up to $500K. If there was a claim up to the full market value of $650K, you may be liable for the difference of $150K.

On the other hand, "Enhanced" coverage does cover the appreciation of the property up to a certain amount over a certain time frame. You'll typically see language similar to,

"The property is covered up to ____ percent appreciation per year over ____ years."

Also, most "Standard" policies do not cover Mechanic's Liens while "Enhanced" policies do. Mechanic's Liens are liens put on the property by contractors that claim to not have been paid by the previous owners/builder whom they provided services for. These are the most common types of liens found on properties.

What's important to know is that these types of liens follow the property, not the owner. So if the seller skipped out on their tab to the carpenter who fixed the deck as part of your Home Inspection contingency, you would be liable for it (unless you had Title Insurance that covered Mechanic's Liens).

So how much does Title Insurance cost?

Typically, Title Insurance is calculated as a dollar amount per $1,000 of the loan amount and/or purchase price. Generally speaking, Title Insurance (Lender's and Owner's combined) costs about 0.5 percent of the total purchase price*. For example, if the purchase price is $500K, the cost would be about $2,500.

*Please note that these figures are general. The actual cost depends on who the Title Insurance provider is, their specific rates and what type of coverage you get, "Standard" or "Enhanced". Shop around and compare rates and coverages if you can.

So, that's Title Insurance and the costs involved in a nutshell. If you have further questions or concerns, don't hesitate to contact me.

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Case Study: Why Owner's Title Insurance Is So Important

How To Save 30 Percent on Title Insurance When Buying A Home or Refinancing

All home buyers have fees to pay associated with the purchase of property of which Title Insurance is a part. And it’s expensive. Based on a $450,000 property (the median sales price of a home in Ashburn, Virginia), the cost is around $2,000 (about $1300 for the lender’s policy and $700 for the owner’s policy).

Would you like to keep some of that $2,000 in your pocket? You may be able to if you can get the re-issue rate on the owner’s policy, which is 30 percent less than the regular cost.

In order to get the re-issue rate, the Owner’s Title Insurance policy that the current owner has can not have been issued more than 10 years ago. If seller doesn’t have an Owner’s Title Insurance policy or if it’s more than 10 years old, you’re out of luck.

To make sure that you don’t lose out on the savings, write it into the purchase offer. If you’re in Northern Virginia and using the "Regional Sales Contract"*, you can add the appropriate verbage in "Other Terms" (paragraph 34). If you’re curious as to the proper verbage to use, check with your agent or real estate attorney.

If using a real estate agent, your agent should have already checked if the sellers bought the house less than 10 years ago and if so, addressed this with you prior to submitting your offer. If they haven’t mentioned it, bring it up.

A few minutes worth of work. A few hundred dollars saved. Not a bad hourly rate!

Note - You also get the reissue rate if you’re refinancing so don’t forget to double check on this with your settlement agent prior to closing on your refi.

*The "Regional Sales Contract" is widely used by real estate agents in Northern Virginia. Your specific agent and/or area may use different forms.