Archive for September, 2011

No Title Insurance?

September 15th, 2011

No title Insurance?  Really?  Why wouldn’t a buyer get title insurance when using owner financing?  Would you or I tell a cash buyer they don’t need title insurance?  Of course we wouldn’t.  However, it has come to my attention there are real estate brokers telling their buyers and sellers, and other brokers, that it is not necessary to get title insurance when using owner financing.  While it is true that title insurance is not required to close an owner financed transaction when using a real estate contract, it is poor risk management for the buyer, seller, and broker not to get a title insurance policy.  After all, this is a sale.  It is not a rent to own.  This practice could lead to the buyer ending up with an undiscovered lien on the property or a title defect with no insurance company to go to for help.  This could also lead to a very costly lawsuit against the seller and the brokers that were involved.

Apparently some brokers are closing the buyer and seller at their office, or at a location other than a title company, using only a title search instead of a title policy.  Let me give you just one example of how this could backfire; the buyer and seller enter into a purchase agreement not requiring title insurance, only a title search.  On Monday the title company gives the title search to one of the brokers.  Everyone agrees to close on Thursday not using a title company.  On Wednesday, unbeknownst to the parties, the IRS files a federal tax lien against the seller and the property.  Buyer and seller close on Thursday and record the contract.  Several years later the buyer tries to refinance the property to pay off the real estate contract.  They are prohibited from doing this unless they come up with enough additional funds to pay off the IRS lien that slipped in between the title search and closing.  The buyer sues the seller and both brokers.  This all could have been avoided by closing at a title company and getting title insurance.

Standard practice used to be to close at a title company and the seller would wait until the contract was paid off to give the buyer title insurance.  This too proved to be problematic.  An example is that the seller died and the seller’s heirs refused to pay for a title insurance policy on a property that sold 20 years ago because now the policy premium is three times what it would have cost if purchased at closing.  The buyer has zero leverage and has to pay for the cost of the policy themselves.  Standard practice now, as evidenced by paragraph 7 of RANM Form 2401 is that the seller will deliver a title policy to the buyer at the time the sale is closed.  Because this is now standard practice there is some question as to whether or not a broker’s E&O insurance would cover a broker involved in an owner financed sale that only used a title search, rather than a title policy.  (You might want to consult your attorney on that one).

Cutting costs by not closing at a title company and getting title insurance at closing could be very costly in the future.