After an offer has been accepted and executed, and about two weeks before the closing date, a property title search should be performed to make certain that the seller actually has total unencumbered rights to be selling the property in the first place.
You might think this search would take place and the title would be completely clear before a property ever went on the market. And when a responsible seller/listing agent team works together, it is. However, there are a multitude of reasons a seller may not have a clear title -- some completely innocent, some caused in bad faith, and some that are like a soap opera plot line.
A title search prior to closing is not necessarily required by law. However, since it's a buyer's nightmare that a stranger will pop up three years after the transaction and lay claim to the property, running a title search and curing the title of any defects is an important step -- even when a title issue it uncovers turns out to be a deal breaker.
What is the property title search in a residential real estate transaction?
A property title search begins at the county assessor's office or website. At the simplest level, a title search simply checks for liens and encumbrances that may give a third party financial claim to the property. This is generally what buyers or sellers may try to find out for themselves. But a full title search is much more involved. It combs through related court records, county land records, city records, and more.
Why is the title search important?
It's important because it's the best way to ensure that no third party has any claim to the property -- financial or otherwise. Financial claim is usually what people worry about regarding a title -- including contractor liens and judgments. But other claims, such as an easement that allows the government to take over part of the property because it's in the path of a newly proposed freeway, are equally significant if not more so. Basically, anything that might throw a buyer's permanent claim to a property into uncertainty is a big deal, and a title search is meant to uncover it all.
Common defects that a title search might uncover
First of all, "title defect" is a term for problems with the title, or specifically, encumbrances and claims that third parties may have. Title defects commonly include the following problems:
The property owner/seller owes a debt, such as unpaid taxes, and the creditor has asked that the property be used as collateral. A tax lien, mechanic's lien, or judgment lien from a lawsuit would fall in this category.
These occur when the neighbor has a different version of where their property begins and the property owner's ends.
Seller or previous owners misrepresenting their own rights/status
There are a number of title issues that fall into this category. They include illegal deeds -- that is, the person who signed the document transferring the title actually did not have the right to do so -- undiscovered wills and heirs, impersonations, and forgery.
This isn't something that people worry about as much as liens, but they should. Although an open permit may not result in someone else's creditor trying to collect money, it may lead to the city inspectors paying a visit to the property to let you know part of its renovations are not up to code.
When does the title search happen?
A title search usually happens after an offer is accepted and at least two weeks prior to the closing date, since if a title is clear, it takes about two or three weeks to process. However, if you as a seller, or as a cautious buyer, want to get a jump on the process so no one goes too far along in the transaction till the title comes back clear, you can pull some of the information at any time. It's all public record.
Who performs the search?
People do try to DIY this step, thinking it's merely a matter of going to the courthouse and/or running a search on the county assessor's website. However, since the records needed by a title insurance company are much more extensive, most people use a title company or an attorney.
What are the associated costs?
The cost of doing a title search through a title company is typically between $75 and $100 up to $200. The cost of title insurance in a residential transaction is somewhere between $1,000 and $2,000 -- or 0.5% to 1% of a home's purchase price. Experts recommend shopping around for a low rate, since premiums for title insurance are typically not in line with the (relatively very low) number of claims filed each year.
Can you skip the title search?
In many states, yes -- but why would you want to? The cost is nominal. Even if it uncovers something time-consuming and frustrating, such as a disputed property boundary or a clerical error from two owners prior, at least you'll know.
What information does a property title contain?
It contains the address, type of property (fee simple or other), names of owners, legal description of the property, and information on the chain of ownership.
What about title insurance?
Many people assume that a thorough title search isn't necessary because title insurance will protect them from anything that comes up. That is not the case, because title insurance companies won't issue an insurance policy if they do due diligence and discover potential risk. They are as concerned as any party in the transaction that the title be clean and clear.
Also, the type of title insurance policy that's required to close on a property protects the lender and their investment. For example, if a missing heir or unreported spouse appears in the picture and lays claim to a property, and the current owner loses the property as a result, the basic title insurance policy would cover the lender's investment but not the owner's equity. That requires an additional owner's policy.
Title insurance and the fees for title search are typically included in closing costs, and while it is advised to shop around for a lower title insurance premium, the cost of title search is so minimal in comparison to other fees that it's truly worth every penny -- to the buyer and the mortgage lender alike.
Property title searches bring peace of mind
While it's true that it can uncover some very problematic things, the title search is ultimately a protective measure for the buyer and the lender and everyone involved in the transaction -- even the seller, if they've got good intentions. For an inexpensive search, it accomplishes a lot of due diligence, which buyers really can't do too much of before making a major financial commitment to a piece of real estate.