Why You Pay For Title Insurance

Anyone who has purchased real estate has probably had their eyes glaze over when reviewing the title company’s estimate of closing costs.  You look at the document and see all these charges for things like doc fees, origination fees, title insurance, appraisals, and a bunch of others.  You scan this long list of numbers that begin with dollar signs as you look for the grand total.  At closing, you do the same thing not even thinking about what these charges are for and why is it so much.  You just sign the documents.

I want to talk about one of these costs that can be several hundred or even thousands of dollars that you are paying:  title insurance.  Many, many home buyers see this charge and don’t know what it is, and some think it’s just another way for the title company to separate you from your hard-earned dollars.  But it’s not.

When you are involved in a real estate transaction, whether buyer or seller, you generally think that the title company’s job is to be the middleman handling escrow.  They make sure that all the paperwork, and the is a whole lot of it, is in order, get the money from the buyer and lender, record the documents, distribute money to the seller, appraiser, and anyone else that agreed to get paid from escrow, figure out who owes what taxes, and all that stuff. Well, you’re right, the title company’s job is to do all that stuff.  But one part, and perhaps their most important job, is to make sure that the seller actually owns the property being sold without encumbrance so that as the buyer, you will actually own the property after escrow closes.

That’s what title insurance is for.  The title company takes on the risk if there is a problem with the title that isn’t discovered until after the transfer.  They have to straighten it out or pay the consequences.  How can that happen?  Here’s a simpler example.  Let’s say you buy a used car and six months later there’s a knock on the door.  Your visitor says, “You have my car.”  You say that you bought it and have the paperwork to prove it.  Well, it turns out that the car was stolen, and the registration and title was forged. Therefore, the guy who sold it to you did not legally own the car and couldn’t legally sell it to you, and hence you don’t legally own it.  You are then out whatever you paid for the car.

It’s a similar scenario with real estate deeds.  While property usually isn’t stolen, there can be problems with the deed which could cost you thousands of dollars to fix or in a worst-case scenario, you could find that you don’t own the property you bought and you’re out everything—and are still responsible for the mortgage.  Title insurance is for this purpose.  But what are the odds of something like that happening?  Actually, very slim… in a sense.  The reason that it is so unlikely that you’ll need to ever make a claim against that insurance is because the title company will minimize their risk, which is a major role they play in the transaction.  Before they issue the policy, they audit the title to make sure it is clean.  They review the title to make sure that every transfer was clean with all the T’s crossed and I’s dotted.  They check to be sure that all taxes are paid, there are no liens, and everything is in order so that when you receive the deed, the property is yours.

But what if the title company misses something?  Well, that’s what the insurance is for.  In that case, your title insurance will cover all costs of getting the mess cleaned up. Here’s a couple of examples:

Someone once purchased property and a few months later received a notice that there was a lien against the property for back taxes totaling several thousand dollars due to the previous owner.  The lien, for some reason, didn’t show up on the title search, but the title insurance paid the lien.  A friend was co-owner with a partner of a piece of real estate.  My friend was buying his partner’s share to become sole owner.  While in escrow, the title company discovered that when they purchased the property originally, the previous owner signed over the deed personally, but the property was held in a trust and not owned personally, therefore the deed was never legally transferred.  This was a minute detail and technicality, but it mattered.  The original title company had to handle all the legal wrangling to get it straightened out.

One more anecdote here that is intended to give advice more than as a reason to have title insurance. Several years ago, when applying for a home equity loan, the title search found an unsatisfied mortgage on the property from a mortgage that had been paid off years ago through refinancing, but it still showed as active.  As is common, the original mortgage company had sold the loan to another mortgage company.  Once that loan was paid through the refinance, years later that company was bought out by a large, major, national bank.  I needed to get documentation from that bank that the loan was, in fact, paid off. How hard can that be (I ask with total sarcasm)?  Try calling a major bank, telling them that years ago they bought a small mortgage lender, and I need documentation about one of the loans that was paid off well before you acquired them.  Needless to say, they didn’t even know if they had that documentation, let alone where it might be.  Luckily, I was able to find the letter of reconveyance sent to me when the loan was paid off and that sufficed to get my new loan.

The lesson here is to make sure that you keep all documentation on mortgages and have a solid paper trail from application to payoff.  Had I not had the letter of reconveyance, it could have taken months and hundreds of dollars in legal fees to get it straightened out.

Bottom line, don’t get upset about the cost of title insurance, it’s worth it.

Backers and risk

I recently watched for the umpteenth time one of my favorite movies:  Fargo.  There is a classic story line where Jerry Lundegaard has a business deal which he wants his wealthy father-in-law, Wade, to finance.  After reviewing the deal, Wade decides that the deal looks pretty sweet and is ready to pony up the cash.

Jerry is thrilled until Wade asks Jerry about his finder’s fee.  Devastated, Jerry walks away while Wade invests and stands to make a fortune.  Of course, Jerry just wanted Wade to lend the money for Jerry to invest so that he could reap the profits.

I see this scenario all the time.  Somebody finds a “great moneymaking idea” but does not have the resources to invest.  They look for deep pockets to supply the cash for a small piece of the action and the person finding the deal would get the lion’s share.

It’s funny, watching the Fargo story line unfold you feel for Jerry and think that Wade is taking advantage of him, but when you describe it as I just did, it sounds different.  That’s because finding a deal has no risk, and that’s what this is all about, risk.

In Fargo, Jerry’s idea was for Wade to shoulder the risk and for Jerry to enjoy the benefits.  Does that seem fair? Of course not.  That’s the way prudent investors and savvy business people work.  If somebody finds a great investment for you, they should get paid for it, and a reasonable finder’s fee is appropriate.  The fee will be smaller if it gets paid regardless of the success of the investment, larger if it is based upon a percentage of the return on investment.   That gives the finder additional benefit for taking higher risk, the risk being not getting paid at all if the deal tanks.

It may seem sad that Jerry can’t reap the big profits from the deal, but that’s the reality.  If you can’t afford it, you can’t buy it.  That is just as true for investment opportunities as it is for an expensive car or palatial house.  “It takes money to make money” the old saying goes.  If you don’t have the money, you can’t invest it.

You’ll notice that when people have a great deal that they want someone else to back, they don’t consider borrowing the money against their house or taking out a loan.  That would give them all the benefit, as well as the risk.  But they are not willing to take on the risk.

Think about that when you are looking for backers or investors for a business.  The one supplying the cash will be the one to reap the bulk of the benefits.

Thank you very much

There is a disturbing trend over the last few years that only seems to be getting worse. A simple courtesy and socially proper practice is fast going by the wayside… that courtesy is the thank-you note.

The first time I realized that we didn’t receive a thank-you note was for a nice Bar Mitzvah gift we gave. I passed that off as a lapse in manners by a 13 year-old even though I know that his parents would be appalled if they knew the lapse occurred (no, we didn’t snitch). Although we have received some thank-you notes from some others, the regularity by which gifts go unacknowledged is not a good thing.

Don’t get me wrong, there are times when a verbal “thank you” at the time of presentation is fine, other times a phone call will suffice, and even an email expressing appreciation is enough in certain circumstances. However, there are certain occasions where a handwritten note has no acceptable substitute. Those occasions are—and this is not necessarily an exclusive list: weddings, Bar and Bat Mitzvahs, and bridal and baby showers, and baby gifts.

I can equivocally state that I have, in the last two years, given gifts for all of these occasions, many times without receiving any thank you, written or otherwise. I know that no etiquette expert will ever state that this is acceptable. I believe that anytime that the question is asked, “Do I need to send a thank-you note?” is asked, while “no” may be an acceptable answer in certain occasions, “yes” is never a wrong answer. In my mind, if someone asks that question, it is highly likely that “yes” is the right answer.

My point to this is, don’t make yourself look like an ill-mannered cad with a sense of entitlement. Help bring back the simple courtesies of society and dash off the note. It’s amazing how much it means to a person.

For one thing, it lets the senders know not only that you appreciate the gift, but in the case where you sent the gift, they actually received it.   It also acknowledges that you are willing to spend a few minutes recognizing that the giver spent time and thought in selecting the gift.

I could regale you with stories of people that I thought were cultured and understood proper etiquette that never sent notes for wedding gifts. However in all fairness, I can also tell of a few—too few—cases of very young children sending absolutely lovely notes when we didn’t expect them. Those were unbelievably welcome surprises.

The worst, and perhaps worse than no note at all, was one time where we did receive a note. It was printed on a “thank you” note card, however it was completely computer generated, without our names, and a generic “thank you for the lovely gift” written in Times New Roman font. The envelope was obviously addressed by computer from the guest list using address labels. After receiving it, I almost looked to see if there was another document stating “I have received the enclosed thank-you note and acknowledge that the gift recipient has satisfied the requirements of appreciatory sentiment as specified under the laws of proper etiquette. Please return this form by certified mail, signed and notarized, within 72 hours.”

All I can say is: how does anybody not know that this trend is just simply wrong?