Anyone who is considering purchasing a tract of land in California will ultimately come across what may seem to be a peculiar creature of the law: title insurance. Most people outside of the real estate industry have never heard of title insurance, and they may have trouble understanding how it functions in a commercial or residential real estate transaction. This post seeks to describe the basic use and functioning of title insurance policy in California real estate transactions.
The basics
Because land cannot be moved or otherwise visibly possessed by its owner, states have set up elaborate methods for recording ownership and transfers of ownership of real property. Reviewing land records to verify the ownership of real property and to determine whether any liens have been filed against the property can be a cumbersome and time consuming task. Therefore, most firms that loan money for real estate transactions require the borrower/purchaser to purchase a title insurance policy that insures the lender and the purchaser against defects in what is called the chain of title, that is, the sequence of transactions regarding ownership of a parcel of real estate.
Who checks the chain of title?
An employee of the company issuing the title insurance policy usually views the land records of the parcel to be sold. This person must answer two questions:
- Is the seller of the property its legal owner?
- Does any third party, such as a bank, have a lien on the property?
The most common type of lien is a mortgage, but other parties may have liens resulting from the owner’s (or a previous owner’s) failure to pay an obligation. For example, the current or a previous owner may have failed to pay state or federal taxes, and the taxing authority may have file a tax lien against the property.
Who is insured?
Title insurance policies can be purchased to protect the new owner’s interests or the interest of any party who is making a loan that will be secured by a mortgage on the property. Most lenders require the purchaser to buy a mortgagee’s policy, but the purchase of an owner’s policy is optional.
The premium for the title insurance policy is pegged to the sale price (or amount of the loan). Many home buyers opt to forego an owner’s policy and rely instead on the conclusions stated in the mortgagee’s policy. While this choice may seem prudent, a title insurance policy, like all other insurance policies, does not insure anyone who is not a named insured on the policy. Anyone with questions about the mechanics or costs of tittle insurance may wish to consult an experienced real estate lawyer for advice on the coverage provided by a policy and any exceptions to title that may be noted in the policy.