Last week, the Globe’s Binyamin Appelbaum, who reports on real estate for the paper, wrote a story about his search for a new home.
He made a comment that has created a lot of controversy (by “a lot”, I mean, a little).
Title insurance is a curious thing. Before a home is sold, a lawyer checks to make sure no one besides the current owner has a claim to the property – no boundary disputes, no unpaid contractors, no unresolved battles about which grandson gets to keep the home. Then the mortgage company charges you several hundred dollars for an insurance policy in case the lawyer made a mistake.
That’s called lender’s title insurance. It protects the lender’s investment. I had heard of that.
As I would learn during the following frantic hour, owner’s title insurance is a second policy that covers you in case the lawyer made a mistake and the lender’s insurance company doesn’t care. In other words, it’s a third safety net.
Apparently, a lot of people didn’t like what he was saying, and responded.
He wrote about it in the Globe’s real estate blog:
Many of the writers, maybe most, are mad at me. They’re mad because I didn’t buy homeowner’s title insurance and, they say, because other people may not buy a policy as a result. One writer said he was “furious.” Another characterized the choice as “a grave mistake.”
The thing is, the writers are mostly lawyers. And lawyers make money selling title insurance.
Well, here’s what I think.
1) Your attorney doesn’t do the title search, the Globe’s real estate reporter has this quite wrong. Your attorney hires a title company to do the search. Makes sense, especially if you are buying in a country where there are over 200 years of private land ownership to research. (Of course, the average property in Boston has turned over so many times that there is probably no way you could buy a condo that hasn’t been researched to death … plus, if you buy new construction, the developer probably did a pretty intensive / extensive search before it broke ground, in the first place.)
2) The owner’s title insurance policy does not cover you “in case the lawyer made a mistake and the lender’s insurance company doesn’t care”. It covers your investment. It covers you if there should be a challenge to the title.
He makes an egregious error in his article (yet it has not been corrected).
The lender’s title insurance policy, on the other hand, protects the lender – for the above, but also in case there is a claim by another lender (say you “double-dipped” and took out two loans on the property, or something – the lender’s policy would allow it to get its money back).
Here’s one scenario (I’ve never had any clients have a claim against them, so this is my best understanding of what would happen):
You buy a condo (well, it’s easier to talk about if we use a single-family as an example, but that’s irrelevant to most people who read this …). It costs you $500,000. You put down $100,000 of your own money (‘cuz you’re rich) and the bank loans you $400,000.
Say the title company never found any liens against the property. Well, you close, then all of a sudden it turns out part of the land belongs to someone else.
After all the attorneys get involved, there may be a need for payment to the other side. Or maybe you have to sell or something.
The lender’s title insurance policy would kick in. Up to the lender’s loan amount. $400,000.
You can see the problem!
If you have $100,000 of your own money invested, you’re in serious trouble.
That’s why you get an owner’s title insurance policy.
The lender’s title insurance policy protects the lender, the owner’s insurance policy protects you, the buyer, up to the total purchase price.
But, that wasn’t the reporter’s main issue.
… the attorney is paid 70% of the fee as commission. So they always recommend it partly because they have a large interest. The lawyer would have made an additional $584.50 on your transaction. He also gets paid the same on the lender’s policy.
I totally agree.
It’s a rip-off (this of course, from someone who makes 3% off any real estate deal, I know …)
If you look on your HUD-1 settlement statement, you’ll see the title insurance policy listed – it might be $800 bucks or something. For each policy. So, $1,600 (oh, you pay for the lender’s insurance policy, did I mention that?).
Of that, say $1,120 goes to your attorney.
The policies cost something like $480.
You can see why people get annoyed (at least those who know about it).
One of the problems is, most buyers only find out about the cost at the closing table. And, very (VERY) few buyers are going to raise objections when they are at the closing table.
So most buyers end up paying.
And then forgetting about it.
The point of this post (this long, rambling post) is that you should buy an owner’s title insurance policy.
You do not want to take a chance that something comes up days, months, or years after you close.
You have the option of using any title insurance company you want.
Here’s what you should do – when you hire an attorney to handle the purchase & sale contract and closing, tell the attorney you will be buying your own title insurance policy (tell your attorney this AFTER you negotiate the price of his/her services). Tell your lender this, as well. (I don’t know, but maybe your lender will have a short list of approved title insurance companies … find this out, early in the process.)
Buy the policies on your own. Save some cash, but still be covered.
More: Why title insurance is a sometimes-costly evil – By Robert J. Bruss, Real Estate Center
Also: Coverage And Types Of Title Insurance Policies – By Sandy Gadow, EscrowHelp.com