This article is for informational purposes only and is not intended as professional advice; always consult your qualified advisors before making business decisions.
In nearly every real estate transaction, the Seller agrees to provide the Buyer with title insurance – or evidence of marketable title to the property. A title “commitment” is essentially a promise from the Title Company to provide a final title insurance policy after closing and is issued prior to closing while the property is “under contract.” Most purchase contracts will provide the Buyer the opportunity to review the commitment and “object” or even terminate the contract if the title commitment identifies something of concern for the Buyer. In short, Title Commitments and Title Insurance protect purchasers of real estate (and their lenders) against future losses caused by bad title or title defects (outstanding liens, back taxes, etc.).
Most title companies across the nation use standard forms for commitments and polices – these are distributed by the American Land Title Association (ALTA). Every ALTA title commitment covers the following:
SCHEDULE A
Covers the basic terms of the transaction – such as current ownership, the property’s legal description, the name of the proposed insured (buyer), the sales price and name of the lender, if applicable.
It is particularly important to review this information for accuracy – if something is inaccurate or you have questions, contact your broker or the title company directly.
SCHEDULE B
Requirements: This lists the items that must be addressed to convey the property.
Examples include:
a. Paying unpaid taxes
b. Paying off any existing mortgages
c. Releasing any other liens against the property
d. Documentation required from the Seller – this most often pertains to property held in an LLC, Partnership, Corporation or Trust – the title company will need a copy of the appropriate documentation (i.e. Operating Agreements, Trust Agreements, etc.). This provides evidence of who can sign documents and who can authorize the sale of the property.
Exceptions: This section lists the items that will NOT be covered under the insurance policy (thus is not guaranteed to be conveyed to the buyer).–This section should be of particular interest to any potential buyer. Examples include:
a. Minerals
b. Water rights
c. Utility and access easements
d. Existing plat restrictions
e. Other deed restrictions – such as conservation easements, etc.
f. Leases for wind/solar or farm leases that have been recorded in the county record
Title insurance differs from other types of insurance in two primary ways. Unlike other types of insurance, title insurance is not based on the probability of a future event like life or auto insurance. Rather, title insurance is based on the work of an abstractor, one who searches the public records of interests in real property to determine if defects already exist. If the abstractor’s work is accurate and competent, the claims and loss rate for defects in title should be very low. Secondly, a title insurance policy is a one-time premium, and the coverage lasts for as long as the insured has some liability for a title defect.
The face amount of the policy coverage and the associated premium is based on the purchase price of the property. The cost of the premium is most often paid by the seller as they are supplying evidence of clear and marketable title; however, the party responsible for payment is negotiated within the purchase contract. Although title insurance isn’t required to convey real property, it benefits both parties and greatly reduces the chance of having issues arise in the future. It is almost always required by banks when the property is being pledged as collateral for a loan.
In summary, we believe title insurance is a worthwhile investment in all cases and provides both sellers and buyers with peace of mind when selling/buying real property. If you have any questions, please feel free to contact us!
