This column is written by D.C. Realtor and resident Sean Forschler. Licensed in DC, MD & VA, he has been in the business since 2001 and currently works at RLAH Real Estate. He may be contacted at [email protected].
Before answering this question, you need to first understand what “title” is in reference to property.
In the simplest terms, it means ownership. When you take title to something, you take ownership, like when you get the title to a car. When a property is being purchased, the title company (a.k.a. settlement company) researches the public records to verify that the ownership of the subject property has been legally transferred from party to party.
Over the years, mistakes in these records happen. Such a search can also turn up unreleased mortgages and other liens on the property, like a tax lien or mechanics lien.
Title searches revealing such defects are common enough and generally, quite fixable. However, even the most careful and thorough title searches can miss important information and hazards, despite the knowledge and experience of professional title examiners.
Title problems may exist that cannot be disclosed in a search. For example, if 16-year old signed documents transferring the property to another owner, this would be a problem since that person was a minor. Or, say a couple divorces and one of them sells the property as a sole owner and pockets the proceeds. Not legal!
As you can see, there are some pretty serious situations that can arise over the years as a property is bought and sold.
If you were suddenly named in a lawsuit because you were the unfortunate recipient of such disaster, you would have the daunting task and massive expense of hiring attorneys to defend against your ownership. You may or may not end up keeping the home you paid so much for.
When you purchase title insurance, you are protected from the loss of your property by such previously mentioned circumstances, as well as many other scenarios.
Other common hidden risks that are protected by title insurance include false impersonation of the true owner of the property, forged deeds, releases or wills, undisclosed or missing heirs, instruments executed under invalid or expired power-of-attorney, mistakes in recording legal documents, misinterpretation of wills, deed by persons of unsound mind, deeds by minors, deeds by persons supposedly single but in fact married, liens for unpaid estate, inheritance, income or gift taxes and fraud.
Title insurance will pay for defending against any lawsuit attacking the title as insured and will either clear up title problems or pay the insured’s losses.
Lenders require coverage of only the loan amount, not the actual price you paid for the property. Standard and enhanced coverage provides coverage of the full contract price and even more. This is why I always recommend that my buyers pay for the higher level of coverage at closing.
It’s a one-time payment and you are protected as long as you own the property. The cost of title insurance is insignificant in relation to how much the property costs but the cost of not having it could be astronomical!