Whether you are buying or selling a home, you will surely encounter title insurance and its seemingly exorbitant cost. Local custom usually determines whether the buyer or seller pays the title insurance premium, or if the fee is split 50-50. But sooner or later, you will pay for title insurance so it pays to understand this unique insurance.
However, no matter what the custom is in your town, everything is negotiable.
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For example, some time ago I bought a San Francisco apartment building where local custom is that the buyer pays for title insurance. But I was short of cash. So I wrote in my purchase offer, “Seller to pay for mortgage lender’s and buyer’s title insurance.” To my pleasant surprise, the seller readily agreed, thus saving me several thousand dollars.
WHY TITLE INSURANCE IS UNUSUAL. Most people understand the need for homeowners insurance. Such policies pay the injured party if the insured was negligent.
Of course, there are many other homeowners insurance policy coverages, such as wind damage, fire loss, theft, accidents and others. As long as the insured pays the premiums, the homeowner’s insurer promises to pay valid claims.
However, title insurance is far different. For a one-time premium paid at the time a property is purchased or when a mortgage lender originates a loan, the title insurer promises to pay title losses that may occur while the owner and heirs own the property.
The list of insured title risks includes forged signatures in the chain of title (the major cause of title losses), encroachments, surveys (if specifically included), recorded documents affecting a property, such as easements, income-tax liens, and mechanics’ liens, title search errors, and many other title risks.
In addition, mortgage lender’s title policies include zoning, water rights, and conditions obvious from a property inspection, such as an unrecorded power line easement.
Another unusual title insurance feature, in addition to the one-time premium, is it only pays for actual losses, not threatened losses. For this reason, title insurance is a policy of indemnity, just like your automobile and homeowner’s insurance.
To illustrate, suppose your neighbor threatens to sue you because your patio encroaches on his lot. Until he actually files a lawsuit, your title insurer usually won’t have to pay unless an actual loss results.
WHY TITLE INSURERS RARELY PAY CLAIMS. I’ve been involved buying and selling real estate over 40 years. Fortunately, I’ve never had a claim on any owner’s title insurance policy. The reason is title insurers spend most of their premiums collected to research titles before insuring them.
Title insurers readily admit paying out for title claims less than 10 percent of premiums earned. For comparison, auto insurers pay out for insured losses about 60 percent of premiums received.
WHY MORTGAGE LENDERS INSIST ON TITLE INSURANCE. As home buyers know, their mortgage lender will insist on receiving a lender’s title policy. The lender wants to be certain the title is “marketable,” meaning there are no undisclosed encumbrances against the property’s title.
Some homeowners erroneously think, “If my mortgage lender has title insurance, why do I also need an owner’s title policy.” But a mortgage lender’s title policy protects only the lender, not the borrower.
For example, if the title insurer made a huge mistake and the seller didn’t convey valid title to the buyer-borrower, the title insurer would pay the lender’s title loss due to the defective title. But the home buyer would lose his entire equity if he didn’t have an owner’s title policy.
In most situations, when an owner’s title policy is bought at the same time of property purchase when the mortgage lender’s title policy is issued, the extra cost for the owner is very modest. However, if an owner decides to purchase an owner’s title policy at a later date, the owner’s policy cost can be substantial because a new title search is required.
HOW TO SAVE MONEY ON TITLE INSURANCE. Depending on the situation, there may be opportunities to save on your title insurance premiums. However, in a few states, title insurance rates are state regulated so all insurers charge the same rates and there are virtually no discounts.
But in most states, title insurers offer discounts, if you ask. Here are some examples:
1. DEVELOPER’S DISCOUNT. When a new subdivision is developed, some title insurers offer discounts when they are the lead title insurer for the developer. If you insist on obtaining title insurance elsewhere from another title insurer, you will probably pay more.
2. RECENT SALE OR REFINANCE DISCOUNT. If the property was sold or refinanced within the last two or three years, the title insurer may offer a “bring-down rate.” That means the title insurer need search the title back only two or three years as far as the date the title was last insured by a reputable title insurer.
3. BINDER TITLE RATE WHEN YOU PLAN TO “FLIP” THE PROPERTY. If you expect to sell the property within two or three years after purchase, ask the title insurer about the highly discounted binder title rate at the time of purchase.
For example, where I live most title insurers offer binder title rates, which are 110 percent of the normal title insurance rate. However, if I sell the property within two or three years, and if I come back to the same title insurer, I will receive a 100 percent premium refund, with the insurer keeping only the extra 10 percent binder premium.
4. SHOP AROUND FOR TITLE INSURANCE. Unless the property is located in a state with regulated rates, most title insurers are free to file their own insurance rates.
On less expensive properties, most title insurance premiums are very similar. However, when the sales price or mortgage amount exceeds $500,000, some title insurers offer discounted rates. A few phone calls to competitive local title insurers will determine if you can save on title insurance premiums.
SUMMARY: Two types of title insurance policies, the lender’s policy and the owner’s policy, protect insured policyholders against unexpected title risks such as forged signatures, encroachments, survey errors, and undisclosed but recorded documents affecting a property title such as tax liens, mortgages and easements.
Title insurance is unusual because there is only a one-time, upfront premium for coverage that lasts as long as the owner and the heirs own the property. Because title insurance is a policy of indemnity, until an actual loss occurs the title insurer has no duty to pay a claim for a possible future title loss.
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