You say you own that black Mustang convertible? Prove it!
Generally you have a bill of sale, or the certificate of title to an item that you own, whether it be a computer or the car. In the case of a car, your ownership is registered in your name with the state in which you live.
Proving that you own a home, however, is a little more difficult.
How do you prove the seller owns the home you want to buy? You conduct a title search.
During a title search, the examiner (who may be an attorney or who might work for a title company), looks at the chain of title of a home, working backwards from owner to owner until it reaches the point where the land was originally granted or sold from the local or federal government to the original owners or developers.
If title has been recorded correctly, you should be able to trace the lineage of a piece of land all the way back to when that area of the country was settled.
(As with many of our real estate laws, we derive our methods of recording title from our English cousins, whose records of property ownership stretch back 1000 years or more in some cases.)
How the title search is carried out varies from county to county and depends on what kinds of records have been kept. In the past 10 years, many of the records used to document ownership, including records of deaths, divorces, court judgments, liens, taxes and wills, have been put online, and that has really sped up searches.
Lawyers, title company or title specialists can look through the chain of title to discover if there are any problems that could prevent title from passing from the seller to the buyer. These problems are called “clouds” in title industry jargon.
The lender wants to know if there have been any liens (a claim made against a property by a person or tax assessor for the payment of a debt), or judgments (by a court of law) or easements (rights of others to use a portion of your land) filed against the property, which might prevent a buyer from receiving good title.
For example, when Susan and Steve bought a house in suburban Detroit, they had the land surveyed. When they actually moved into the house, they discovered that years earlier, a neighbor had built a garage that took about 5 feet off the side lot of their property. The surveyor should have noted that the garage encroached on their property in the survey report.
Because of the encroachment, the title Susan and Steve received wasn’t “clean” title because the encroachment created a defect on their title. In other words, someone was using their land without their permission.
Susan and Steve had bought title insurance for themselves as well as for the lender, which insures the buyer and the lender against a cloud on title. The insurer did some research and eventually reimbursed the owners for the portion of the land that they paid for but to which they didn’t receive good title.
If the insurer catches the problem (in this case, an encroachment), the buyer is notified and then has the responsibility to take up the issue with the seller before closing.
But what happens if the seller really isn’t the seller? If a long-lost relative of the seller’s turns up with irrefutable evidence (say, a recorded deed from the property’s original owner) that she actually owns the home, you might have to turn over your home to that relative.
Since the title search should have turned up this information, but didn’t, title insurance protects the buyer and lender from any losses associated with the cost of any errors made, up to the value of the policy, usually the purchase price.
Lenders will insist that you purchase title insurance that covers the lender up to the amount of the loan. The simple reason is that if it turns out that you don’t really own the home, then the collateral you’ve given the lender in return for your mortgage (your home) isn’t yours and there is no collateral.
In many states, title insurance is regulated by the state government. With no competition, title insurance prices in these states are very high. In states where title insurance is unregulated, competition drives the marketplace and prices are relatively low.
Remember, when you purchase a lender’s policy, it only covers the lender, not you. Even if the cost of title insurance is high in your state, you should purchase an owner’s policy as well. Otherwise, if something goes wrong, you could lose your home and your home equity as well.
Finally, in some states, the buyer pays for title and in other places, it’s the seller’s obligation. Check with your real estate attorney or broker about the local custom in your community.
Also, some online lenders aren’t aware of whose responsibility it is to purchase title. If the good faith estimate you receive from an online lender appears a little high compared to other quotes you’ve received, check the title charges. It could be you’re being charged for title insurance when it is the seller who normally picks up that cost in your area.
May 3, 1999.