When you’ve decided on a house to buy and entered into escrow, you can expect a preliminary title report. The report will verify ownership and reveal lurking issues that will not be covered under a subsequent title insurance policy.
When you’re buying a home, the preliminary title report gives you the chance to remove or eliminate problems before you close on the property in order to avoid any legal headaches that arise from those issues.
Here’s a look at how to read these documents and what kind of information you can expect to find in them.
Title Insurance 101
First you’ll need to fully understand what title insurance is. A title is the set of legal rights you have to a property once you buy it. A clear title is the goal, meaning you want the property to be free of liens and other ownership claims.
Title insurance protects both buyers and lenders against any problems with a title when ownership of a property transfers from one person to another.
During or after a sale, if there is a title dispute, the insurance company may be responsible for paying certain legal damages. If you don’t have title insurance, you could be responsible for any issues that crop up.
There may be two forms of title insurance involved in a sale. If you are borrowing money to buy a home, you may purchase lender’s title insurance, which protects the lender. Owner’s title insurance, less common, is usually purchased by the seller to protect the buyer.
Reading a Preliminary Title Report
Once you open escrow, an order is placed with the title company to produce your preliminary title report. The company will assemble and review records having to do with the property you want to buy.
When you receive the report, look for the following information:
Owner of Record
The preliminary title report will start with the name of the owner of record. If you’re buying a home, this should be the seller’s name. If it isn’t, that’s a major red flag, and you should let your escrow or title officer know.
Is the seller really selling the property? As absurd as that sounds, during the 2008 housing crisis, people managed to sell properties they didn’t even own.
Statement of Vesting
Next, the report will lay out the extent of the current owner’s interest in the property. The highest type of ownership, and the most common, is known as “fee simple” or “fee.”
There may be other types of ownership that will show up in this section. For example, you might see a leasehold estate, which gives a tenant exclusive rights to use a property owned by someone else for a set period of time.
The legal description details the property location, lot size, boundaries, and any easements or encroachments. For condominiums and planned unit developments, the legal description might include common areas, parking, storage, and easements that convey.
A plat map, which shows how land is divided into plots, may be included as well to show the general location of a property.
Exceptions will be listed numerically and are matters that your title insurance policy will not cover. They may include:
• General tax issues. Are there unpaid taxes? Property taxes will show up as the primary “lien” and as due or paid in full. Property taxes must be paid for the property sale to go through. And tax classifications could affect the new owner. For instance, if land is classified as agricultural, there could be penalties for withdrawing from that classification.
• Assessments. Are there delinquent water or sewer bills owed to the city that need to be paid before closing?
• Encumbrances. These might include liens from creditors or lenders, or liens for the payment of federal taxes or assessments. They might also include liens against a property because of back-due child support of spousal support. Are there loans against the property you weren’t aware of, such as additional mortgages?
• Covenants, conditions and restrictions, or CC&Rs. These are rules that homeowners must follow in a planned community or common interest development. They might determine whether you are allowed to park on the street, what kind of fence you can put up, or what color you can paint your house.
• Easements. An easement is the right another party has to the property you’re interested in buying. For example, neighbors may have a right of way that allows them to access their property through yours. Or a utility company might have the right to install, access, or maintain equipment on the property, such as power lines or cable.
• Other issues. There are other matters that may appear on the preliminary title report, such as bankruptcies or notices of action, which are court proceedings that are underway and involve the property.
The transfer of property is subject to these exceptions unless they are dealt with by the seller before the sale.
If any liens or encumbrances crop on your preliminary title report, you have the chance to clear them before the sale goes through. Together with your real estate agent you can work with the sellers and their agent to clear the title before you take it on.
If you have any questions about your preliminary report, you can contact your real estate agent, an attorney, or your escrow or title officer.
Standard Exceptions and Exclusions
In addition to the list of exceptions that are particular to the home you want to buy, there are standard exceptions and exclusions that a title insurance policy won’t cover.
Building codes and restrictions are exempt from title insurance coverage, as are zoning restrictions or other regulations for how land can be used in certain areas.
Sometimes a building is subject to zoning restrictions. For example, it may be in a historical district that restricts how a buyer can develop the property.
Limitations of the Preliminary Title Report
Be aware that the preliminary title report only shows the matters that the title company will exclude from coverage when and if a title insurance policy is issued.
It is not a complete picture of the condition of the property. And it may not even list all of the liens and other encumbrances that may affect the title of the property.
Think of a preliminary title report like a background check on a home, revealing tax, lien, or ownership poltergeists lurking. Knowing how to read a preliminary title report helps prevent spooky surprises.
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