Friday, July 16, 2010

Owner's Title Insurance: Why Your Buyer Needs It

Real estate agents are often asked "Do I need an owner's title insurance policy?" by their buyers. With all of the costs associated with purchasing a home, an agent may be tempted to either answer "No" or even more innocently not have a clear answer as to why title insurance is needed. Title companies and underwriters have material (disclosure: TRGC is an affiliated title insurance company) to help with this - and you should always ask - but here is a story I recently heard which should be enough to convey the importance of owner's title insurance to your buyer. This took place in a different region, and the names are hypothetical, but the story is real.

Tiger Title Company settles a purchase from Sam Seller to Bob Buyer earlier this year. As part of the transaction, Tiger Title endeavors to pay off the loan that Sam Seller had with Lion Lender. Except, they didn't. Tiger Title was owed money from other lenders on other transactions, and did not have enough in the account to cover the payoff amount.

Scared yet?

Lion Lender never got their money. They are now looking to Sam Seller to pay off the loan. Bob Buyer (who now technically owns a property with 2 mortgages on it) is going to be asked to move out. Bob's lender, who thought they were in first position, is now in second.

What's title insurance got to do with it?

It seems clear here that Tiger Title is at fault. They had a duty to pay off the mortgage, and they didn't. They're likely a small shop, don't reconcile their escrow account monthly, and just don't have the money to pay off the mortgage. Bob and Sam could sue them, and maybe they are covered by a surety bond, but that requires lawyering up and waiting months or years before things are settled.

Fortunately, Bob Buyer purchased an owner's title insurance policy. With a phone call, Bob can file a claim and the title insurance company will step into his shoes. In all likelihood, the title insurance company will pay off the mortgage. After all, Bob has a policy for clear title that doesn't take exception to the mortgage. The title insurance company will likely be visiting Tiger Title's home office in short order, but that's their business. Paying off the mortgage immediately means that (A) Bob Buyer stays in his home with only one lien on the property and (B) Sam Seller owes nothing.

Most title companies do not operate like Tiger Title. Most reconcile their file accounts to the penny and reconcile master escrow accounts monthly. Most would step up if there was a shortage and pay it from operating funds.

But do you want to be the agent who either advises against an owner's policy or is unable to explain the importance?

Flickr photo by borman818