The most important parts of a real estate transaction are the title search and title insurance policy. If the seller does not have clear title showing that he is free to sell the property, the sale cannot close. A successful title process is vital to ensure that the transaction goes forward.
Obstacles to closing
Although the owner’s name is on the deed, other people and entities may have claims to the property that inhibit the owner’s legal right to sell it. These impediments to a sale are known as encumbrances, or “clouds on title.” Here are some examples.
- The most common is the lien of the current owner’s mortgage company. This lien is resolved when the buyer provides the seller funds to pay off the latter’s mortgage, whether in cash or with a mortgage.
- Governments can impose liens on property for unpaid property or income taxes.
- If the owner is a defendant in a lawsuit or involved in a divorce, his opponent may have filed a lien against the owner’s property.
- An unpaid contractor or subcontractor may have filed a mechanic’s lien against the property.
- A previous owner may have willed the property to an heir, then sold it to someone else without removing the clause from the will. This most likely would not have shown up in a public record search while that previous owner was alive. Once he dies and the will is probated, however, the forgotten clause in the will conveys the property to the heir.
- A property inspection and survey reveal the owner’s assumed property line is in error, or that a structure on his property encroaches on a neighbor’s property. In each of these cases, the property can be sold, but only after the encumbrance is resolved.
The title search is conducted by agents at the title company who do a thorough search of public records before closing to ferret out encumbrances. If none are found, or if the agent finds encumbrances but they are resolved in conjunction with the seller, the title company issues a title insurance policy. The insurance assures the buyer and his mortgage company that the seller can convey a clean title. If for some reason the title turns out to have an encumbrance that the title company agent didn’t find, the title company pays the cost of removing that encumbrance.
The title search process takes ten days to two weeks. It costs between $500 and $3,500.
Educate your buyers
Your buyers, especially inexperienced ones, may not understand the value and peace of mind that a title policy provides. Explain that their mortgage company requires it for their own protection and that they should not waive the policy that protects them. If vexing and legally expensive surprises arise later, your buyers will be glad they spent the money for the policy.