If you’re planning on buying a home, it’s probably best that you put your book of the month subscription on pause, 'cause with most major life (and financial decisions), the process of purchasing a home involves a lot of reading.
From sellers’ disclosure documents to rent rolls to floor plans to stacks on stacks on stacks of property reports, buyers must sometimes wade through quite a bit of dense documentation before they actually buy a home.
Disclosure packages will often contain reports that provide crucial information regarding various aspects of a property. As a buyer, it’s important to review these reports, as they can help you uncover any major issues with the property that you’ll want to resolve before closing escrow.
One report, in particular, that every buyer should be aware of is the preliminary title report.
So, what exactly is a preliminary title report?
It's essentially a term for documentation that establishes ownership of a property.
A title company compiles it for the purpose of issuing title insurance to the buyer. These title reports can often be found in the disclosure package that a seller provides. You can also contact the county assessor to obtain one or order a title report from a title company for $75-$100 if one is not provided by the seller.
A preliminary title report also:
- Gives a detailed legal description of the property (including a detailed account of the property boundaries, lot size and any established easements or encroachments)
- Discloses any liens or outstanding debts against the property (including unpaid property taxes or even unpaid invoices to contractors who’ve completed work on the property)
- Outlines any restrictions regarding the use of the property (which includes CC&Rs for condos)
Why is this report so important?
Some homeowner associations will have restrictions regarding additions like pools or rules that regulate the maximum height of your hedges.
These restrictions will be documented in the report, so it’s important to review it and be aware of any limitations that exist and what they are before you commit to buying.
Additionally, a clear title (meaning a title free of any defects or judgements), as well as title insurance will be required by your lender if you are financing the purchase.
Before a title company issues the policy, they will investigate county records verify that the seller has the right to sell the property to you and that the title is clear.
If any issues with the title are uncovered during the discovery period, your title company will assist with resolving those issues before you close. In the case of unpaid taxes, for example, you can typically resolve the issue with the seller by requesting they pay the judgement or having the amount deducted from the sales price and settling it yourself.
What does title insurance cover?
Once the title is transferred into your name, its accuracy is insured by the title company who holds the policy.
This places the liability for any damages incurred due to errors in the report (including complete loss of the property) squarely on the shoulders of the title company.
The scope of that coverage will depend on the buyer.
As you’re aware, lenders require borrowers to purchase a lender policy to protect any outstanding balance on the property owed to them should the ownership of a property be successfully challenged. They might not make it a requirement for the buyer to purchase an owner policy as well.
Whether or not they do, it’s smart to do so.
While the cost of a title insurance policy can set you back up to $4,000 (depending on your state), having a policy can save you a lot more money as well as time and stress in the long run. It’s better to be safe than sorry.
What happens if I don’t purchase a title insurance policy for myself?
Ownership claims can come at any time. They can come in the form of a spouse whose name was never removed from the title after a divorce or even an unknown heir. The scary part is that you could lose your down payment as well as any equity you have in the home if an error in the report results in you losing your right to ownership. You’ll be relieved of any obligation to your lender as the lender policy will cover their losses, but you’ll also find yourself relieved of a home. Ain’t nobody got time for that!