A home is for many of us the single largest purchase we will make in our lifetimes. Insuring that we own it without being subject to claims of others seems only common sense. We insure our homes against the risk of fire, accidents, and accident liability, things that could threaten our ability to continue to live in and enjoy our homes. Title insurance provides a similar protection.
When you buy a home, you first enter into an agreement with the sellers that upon payment of the purchase price, they will deliver to you the property in which you intend to live. That occurs at settlement when the sellers give you the keys to the front door and a document called a deed. The sellers sign and deliver the deed, which is your evidence that you own the home, similar to a car title which is your proof that you own your car. With motor vehicles, you can be sure the seller owns the vehicle and can sell it to you because the state controls the issuance of car titles. If the seller does not have the authentic state-issued car title in his or her possession, the seller may not own the vehicle or it may be subject to a bank lien. (Did you ever try to get your car title before you paid off the bank which financed your purchase?)
With real estate, however, the state does not control the issuance of authentic titles, i.e. deeds. Instead, the state controls the process of putting the public on notice of who owns real estate. This is done in Pennsylvania at the office of each county’s Recorder of Deeds. Once a deed is recorded, however, claims against the property can be made with or without the consent and foreknowledge of the property owner. The claims, known as liens or encumbrances, can take the form of mortgages, judgments, easements, licenses, leases, condemnations, and dedications, among other things. When the property is sold, the buyer takes ownership and possession of the property subject to these items, unless some provision is made to have the property released from these claims beforehand. This is done by searching the Court House records before settlement.
Title insurance is then issued upon payment of an insurance premium to cover the cost of searching the property records and to indemnify the buyer against any loss if items in existence when the buyer purchased the property adversely affect the buyer’s ownership and enjoyment of the property thereafter.
Since the sales agreement with the seller of real estate almost always requires the seller to convey “good and marketable title, free of liens and encumbrances,” sometimes the buyer asks: “Why then do I need title insurance? Why can’t I simply make the seller correct any problem?” The answer, of course, is you can take action to make the seller correct the problem or pay damages, but is that really where you want to be? The seller may be in some other part of the country; may be where his or her whereabouts are unknown; may be deceased; or may be bankrupt. Any of these reasons could make it difficult or impossible to make the seller correct the problem or pay you damages. Your title insurance company may be able to collect from the seller, but your search for compensation should be completed when you make your claim to the title insurance company. For this reason title insurance is a wise investment when buying a home.
You would not buy a car without having someone knowledgeable look under the hood or without taking the car for a test drive. Why would you buy a home without having someone knowledgeable check for liens and encumbrances and ensuring you that upon payment of the contract purchase price, you will be the owner of the property?
Questions? Contact our Real Estate Group.