Title insurance is still a misunderstood subject among investors. I thought I’d give you some tips to help protect you with your real estate closings.
Let me start by saying , it is critical that you always purchase title insurance whenever you purchase a property. Title challenges do not happen often, but when they do, they usually require tens of thousands of dollars to rectify. They are not usually small little issues.
Even if you will only own the property for an hour, you need to be covered.
I know that seems counter-intuitive…if your ownership is very brief, what could possible change in the title after the title was checked.
What most people don’t realize though is that when you sell the house under a General Warranty Deed, you are warranting clear title up to the point of your transfer to your buyer. That means you become responsible for any and all title challenges even before your ownership.
If your buyer is faced with a title challenge, they will turn to you to correct the problem and to pay whatever costs are incurred. As I stated earlier, that is usually tens of thousands of dollars. If you have title insurance, you simply pass the problem on to your insurance carrier.
When purchasing Title Insurance, you’ll have two types: Owners Title and Lenders Title. You don’t need to have a Lenders Policy, but most institutional lenders will require a policy written in their name. The insurance pays off the debt in case of a claim that cannot be settled. Each lender receives their own policy, and it is written in addition to the Owners policy which covers you for any equity in the property above the debt.
So how much insurance do you need? The policies are written for the amount of the purchase and/or the amount of the debt on the properties. As investors, though, we often increase the value of the property after close via renovation. So what happens if you have a claim against title which occurs after your renovation? How do you cover this additional value if the policy can only be written for the purchase amount? In fact, my attorney was just telling me the story of an investor who purchased a property for $30,000, but was putting $100,000 into renovation. What would a $30,000 policy do for him after the renovation? Not much.
To resolve this deficit, be sure to purchase a rider to the policy for the full After Repaired Value of the property. If there is a claim after you have begun renovations, the rider will kick in to cover you up to the current appraised value of the property.
What I have discovered is that there are a few closing agents that have never heard of this and they will argue with passion that you cannot insure the property for more than the purchase price. Stand your ground and ask them to call the insurance company to see about a rider. I have made more than a couple of attorneys do this and each learned something new that day. One of my personal mentoring Clients closed on a house recently where the attorney would not increase the policy value and said that riders did not exist. His answer was that if there was a title claim, then you could get an appraisal and purchase the additional insurance.
Can you believe that? What insurance company would say, sure…you can increase your coverage now that you have a claim. No problem. That would be like sitting here on the coast and calling my home insurance company while a hurricane is ripping off my roof and ask to increase my coverage to cover the loss. It’s not going to happen.
My rule is simple. If the closing agent won’t provide the rider, I find a new closing agent. Remember, in the end, they work for you.
Finally, make sure your title policy has gap coverage. In this case the “gap” is the time between when paperwork is taken to the land records area, and when they appear on the books. I have seen that gap as long as six months in large counties. Without gap coverage, any claims for issues that occurred during the gap would not be covered.
And here’s the crazy part…covering the gap is usually just a check box on the policy and cost nothing extra. Why wouldn’t you want it?
Title insurance often seems like a useless expense, and for the most part it is. But when you need it, you really need it – and there is no way to predict on which property you’ll need it. So always buy a sufficient amount to cover your assets.
Expect abundance,
Lou Castillo
