Title Insurance

Posted by Ric Thom on August 24th, 2010

The other day someone said to me, “I don’t need title insurance if I’m buying property on a real estate contract, do I?” What I wanted to say was, “You don’t need a parachute to jump out of an airplane either, but it’s better to be safe than sorry.” Whether you buy real estate by paying cash, trading, taking out a loan or utilizing seller financing, you should always get title insurance. Murphy’s Law is real. It is true that prior to about 1985 the sellers on real estate contracts wouldn’t give the buyer a title policy until the contract was paid off. This used to be the language:

It is understood and agreed upon the completion of all the stipulations and agreements herein contained, said Owner will, at the time of delivery of Warranty Deed, also deliver to said Purchaser, abstract of title or title insurance, showing said real estate to be of good and merchantable title on the date of the delivery of the Warranty Deed.

This wording caused all kinds of problems like, Where’s the seller 25 years later? Who’s supposed to squeeze the money out of the seller for the title policy? Were there any liens on the property? Were there any Title Defects?

Here is the currently accepted language:

Title Insurance of Abstract-Seller is delivering a Contract Purchaser’s Title Insurance Policy to Buyer or Abstract of Title to Escrow Agent at the time this Contract is escrowed, showing merchantable or marketable title to the Property as of the Effective Date, subject to the Permitted Exceptions, and Seller is not obligated to provide other evidence of title.

But, how can the sellers give a policy when they are not giving legal title until the contract is paid off? The buyer only has equitable title until then. Good question. I wish I’d thought of it.

Here’s what an attorney told me and you should ask your own attorney. There is this thing-a-ma-jig called the “Relation Back” doctrine.

Since the early common law, when necessary to prevent frustration of the intention of the parties to an escrow, the courts have indulged in the fiction that the second delivery from escrow “relates back” in time to the first delivery into escrow, and is given effect from the time of the first delivery… The doctrine has been invoked to validate a second delivery occurring after the death of the grantor or after the grantor becomes insane or is otherwise legally incapable of making a deed. Also, voluntary conveyances of title by the grantor to other parties after delivering a deed into escrow are of no effect, and judgment liens attaching to the grantor’s interest after the first delivery into escrow are cut off by the second delivery from escrow… In short, as a general rule, after the first delivery into escrow, there is nothing that either the seller or buyer can do, voluntarily or involuntarily, to defeat the title conveyed by the second delivery from escrow… the only exceptions are federal tax liens attaching to the buyer’s interest in the property and in New Mexico, mechanics’ liens attaching to the buyer’s interest when the seller had knowledge of the improvements being made to the property, but failed to post a notice of non-responsibility on the property within three days after learning of the work. Both of these liens survive the second delivery from escrow by virtue of statutory law. The IRS lien can also be released with proper notice.

(I actually lifted this explanation out of Larry Buchmiller’s book, Real Estate Contracts in New Mexico. It’s okay—I own the publishing rights.)

So, you see the title policy is effective to the date of the Real Estate Contract and not when the contract is paid off. A title policy will insure you against any defect in title or any unfound recorded claims or liens on the property.