Well, if you or your lender insures title with First American Title Insurance Company (FATIC) or Chicago, you can’t. Big news.
When FATIC and Fidelity/Chicago announced new processes for writing title insurance policies on foreclosed properties (more here from Rich Vetstein’s blog), making it extremely difficult to get an Owners or Lender’s Title Policy, we knew it would cause waves. Long story short, about 8 years ago, a guru once told me to ALWAYS get title insurance. I never really questioned it — after all, the “real estate gurus” know everything, right? It was always an added expense on our P&L for every project, but I would always swallow it. Finally, back in 2011, we at the AA Real Estate Group started asking to what exactly is title insurance, why is it needed, and the big one — why do we as the owner need our own policy anyways, especially if we’re already paying for the lender’s policy?
We took our questions to our amazing legal counsel, Meghan L. Grugnale, Esq. of Grugnale & Schlesinger, PC, and asked for her take.
First, a quick definition from investopedia.com: Title insurance is insurance that covers the loss of an interest in real property due to title defects. Anytime you finance a transaction, any lender will require that the closing attorney issue a lender’s title insurance, which is paid for by the borrower but protects only the lender (italics ours). Owner’s title insurance is a separate policy which is considered optional because your lender does NOT require it.
Ok, now — Meghan, take it away!
GRUGNALE: I feel very strongly on this subject and require that every investor client of mine purchase an owner’s title insurance policy —to do otherwise is a foolish place to cut costs. The major reason being that whether you are buying to hold or flipping within the year, you are purchasing as an investment and purchasing without an owner’s policy leaves you without a safety net.
Now listen closely — do NOT think you’re covered if a lender’s title insurance policy was purchased at the closing. Each title insurance policy is unique to the insured listed on it, just like a life insurance policy or homeowners policy or auto insurance policy runs only to the benefit of the insured named on the policy. The lender’s title insurance policy will provide NO protection for the buyer or homeowner if a title issue arises — it only protects the lender. I’ve heard people say that having one policy on the property is enough because then the underwriter has to fix any title issues that come up, but you have to remember, you as the owner will not have any standing to fix anything unless you are insured as an owner.
The lender’s title insurance policy is only effective once the lender forecloses and becomes the owner. In either case, it is of NO benefit to you, the owner.
To illustrate: Let’s say a client buys a property to flip and doesn’t purchase an owner’s title insurance policy (bad idea). The purchase price is $100k and he pours another $50k of rehab into it, using a hard money loan at 13% to fund the project. The rehab is completed, a buyer has placed an offer and the sale is scheduled for next week. That’s when the buyer’s attorney alerts us there is a title problem (This could be something I missed on the purchase, something that became a problem because the laws changed during his ownership, or something that is NOT a problem, but this particular attorney who chases ambulances for a living and is handling this for a friend read in some book is a problem, so now it’s holding up the sale).
With no owner’s title insurance: There is no one to pass the buck to except our seller, who now has to remedy the issue (or non-issue) while carrying the cost of 13% a month on his loan. And he may lose the buyer if it takes more then 30 days to do this, which is the case 90% of the time.
With owner’s title insurance: One call to my guy at CATIC (my preferred title insurance underwriting company) and I get a buck-passing paper known as an indemnification in place and the deal will close. I handle this 99% of the time without my client even knowing a problem ever was raised. Done.
Buy and hold scenario? You buy it cash and choose to skip the owner’s title insurance policy (again, bad idea). When you go to refinance into a long-term loan, the closing attorney finds or raises a title issue. Now your cash is tied up in this property while the issue gets straightened out, and you’re missing out on other opportunities because you have no quick buck-passing piece of paper from CATIC to free you from this legal semantics prison.
In most cases, the cost of the owner’s title insurance policy is somewhere between $200 and $1,500 — less than a single mortgage payment, and certainly less than the cost of losing a sale or missing out on another opportunity. Definitely NOT the place to trim your budget. Protect your investment and your bottom line — always include title insurance on your deals, and budget for it in your analysis. You’ll be glad you did.by