Buying a Home → Before You Buy
What is Title?
“Title” is a word that encompasses many facets of a real estate transaction:
- It is a collection of recorded documents pertaining to property.
- It’s the type of company that reviews these documents for errors or clouds that prevent a clear title transfer.
- It’s the type of insurance that both buyer and seller may have to purchase to guarantee the title remains clear after closing.
The process of clearing title can also be unnoticeably easy, or incredibly complicated.
Title itself is a collection of documents pertaining to your rights to own, use, and part ways with a property. These documents may include recording of legal owners, covenants, conditions, restrictions, easements, liens, legal descriptions, local regulations, and so on. In order to sell a property, the seller must guarantee a clear title, which means that all of the aforementioned items must be thoroughly checked for “clouds” (aka defects) that may restrict the legitimacy of the seller’s ownership. Examples of clouds may include outstanding taxes, contractor liens, outstanding child support, or deceased past owners.
It is the title company’s duty to perform a thorough investigation of the property’s title and discern how any clouds can be cleared. Most liens can be cleared upon closing by their deduction from the seller’s net proceeds. Other clouds can only be removed after evidence is provided to show that they’ve been satisfied. An example could be a previously cleared contractor lien that was never recorded by the contracting company. Once the title company receives documentation from the contractor that the debt was previously paid, then the cloud can be removed. The title company will work hard to discover all clouds and provide solutions not only because it’s their duty, but because they’ll want to insure the title upon closing. The harder they work to discover any unnoticed liens or clouds, the less likely their insurance company will be to pay out a settlement or compensation to remove the cloud. (And we all know the most profitable insurance is that which never has to be used!)
This leads us to our last step: title insurance. Title insurance is purchased by both the seller and the buyer. The seller purchases it for the buyer to protect from any unforeseen claims of property ownership that were not discovered during title review. This is the seller’s way of guaranteeing they’re delivering a clear title. If the buyer is financing their purchase, they will be required to buy title insurance for their lender. Lenders have a stake in ownership of the property as well, and the buyer provides protection on that ownership as part of their contract for the loan.