A question I hear frequently is “why do I need title insurance?”
Well… as they say at the Big Thunder Mountain Railroad in Disneyland.. Hold onto your hats and glasses folks!
Ok, maybe title insurance isn’t as exciting as Disneyland, but it does have significance.
First, if you’ve recently purchased or refinanced a property, you probably had to pay for title insurance. Second, you may also be aware there are two types – a Lender’s Policy and an Owner’s Policy. Third, the type of deed that you take title with matters too.
Let’s start with the first and second points.
A Lender’s Policy is what it sounds like. It protects the lender’s position (or loan) against a property. The Owner’s Policy protects the owner’s position (or equity) in the property. With each of these policies, there is an exhaustive title search through public records to make certain the title to the subject property is clear. After that is complete, the policy will cover against a future loss if a claim is brought against the property that was not discovered during the search.
I was surprised to learn that according to the American Land Title Association, one out of every four title searches reveals a problem. That seems like a pretty big ratio of problems to encounter. Then I started thinking about all the issues I have found and dealt with over the years. This has ranged from tax liens, forged signatures in the chain of title, recording errors, title search errors, undisclosed easements, and title claims by missing heirs and/or ex-spouses, mortgages that were recorded incorrectly or not at all, seller financing contracts that are forgotten about for decades, etc. Most of these items are easy enough to fix prior to closing. Sometimes they aren’t and then you need to decide as a buyer if you want to take on the risk and potential additional cost to cure the cloud later or pay the liens.
Now for the third. The type of deed. I’ll be brief.
In Washington State (at least in my own practice), the most common deeds are a Warranty Deed, Special Warranty Deed, and Quit Claim Deed. There are others, but let’s focus on these.
A Warranty Deed is a “warranty” from the seller to the new buyer that they promise everything on the title is good, dating all the way back to the beginning of time.
Personally, as a seller, I have no idea if the deed is clear since the beginning of time. Should I convey the property with a Warranty Deed or should I use a different type of Deed? Your call. The default method is with a Warranty Deed, unless you tell title to use something else.
Next, is a Special Warranty Deed. This deed can impose certain restrictions. Essentially, now you’re saying something like “I’ll give you title, but only as far as I have owned it” or maybe even “I’ll give you title, but I make NO warranties to whether it’s clear.”
Finally, a Quit Claim Deed is the lowest man on the totem pole. A Quit Claim (not quick claim as so many people say!!!) essentially quits all interest you have in the property and gives it to someone else. A Quit Claim Deed is only as good as the person giving it. I could record a quit claim deed to anyone for a property I don’t own.. but it won’t mean anything, because I have no interest to pass along.
Funny story, there was a guy one time who actually created a quit claim deed to himself and signed it as from God. On title, there was now an instrument recorded that said God gave him the property. Religious discussion aside, that’s pretty funny that this guy actually had a deed recorded that said God gave him a property. Anything goes with a Quit Claim deed, so you need to make sure the person giving you title has the authority to do so.
Now that you’re aware of the different types of deeds and potential clouds on title, title insurance for both the Lender’s and Owner’s policy should make more sense. You are protecting yourself when (not if) something looks funny later or when properties start falling out of the sky.
Have questions about title? I’ll try my best to answer. At the very least, I promise to put you in touch with a resource who can answer your questions in depth and point you in the right direction.
Give me a call at (206) 293-1005 or email: Jen@HudsonCREG.com.