Congratulations on finding that perfect house! After months of effort, you’re excited about finally opening escrow and getting the keys to your new abode. But is that perfect house that perfect? Before proceeding, you should look into getting “title insurance.”
Title insurance provides you (and your lender) protection against losses you may incur from issues with the title of the real property you’re about to purchase. A common example of such a loss is a legal fee resulting from ownership claims made by an unknown heir. The company that provides this insurance is known as a “title company.”
However, getting title insurance isn’t as simple as paying a premium. Your title company will first need to create a “preliminary title report.” While it may seem like another unnecessary formality in an already wearying task, getting a preliminary title report will help protect every party involved in the real estate transaction.
What is the purpose of a preliminary title report?
A preliminary title report is a document that provides details regarding the title and the background of a property. It helps ensure that the home you’re about to purchase legally belongs to the seller and not an unknown heir who may try to claim the property. The report also lists any encumbrances — such as tax liens, mortgage liens, and easements — on the real estate. If left unresolved, these encumbrances and potential conflicts regarding ownership of the property could affect you after you’ve bought the house.
Your title company is responsible for creating the report before issuing the title insurance policy. They do this by checking public records and official documents. Any issues that are discovered and reported in the report — known as “exceptions” — are excluded from title insurance coverage. The buyer, lender, and seller are then liable for any losses arising from these exclusions.
Who is responsible for requesting the preliminary title report?
Lenders ask for preliminary title reports and title insurance coverage as one of their requirements. In a typical real estate transaction, it’s customary for the seller to initiate the process with a title company after escrow is opened. The seller then presents the preliminary title report as a part of their disclosure packet, which consists of important documents the buyer and the lender are interested in.
The seller also usually pays for the prospective owner’s policy once all the details have been ironed out. This may vary based on the customs of the real estate market in your region. However, the buyer is always responsible for bearing the cost of the lender’s title insurance.
What to look for in a preliminary title report
The first thing you want to look at is the extent and nature of the ownership of the seller. First, it will help confirm the identity of the real owner. Second, it will tell you what adequate rights they have over the property and how that could affect your future ownership of the house.
There are different types of property ownership in the U.S. The most common one is “fee simple,” which gives the owner the complete right to sell the property. However, there might be certain conditions set by a former owner that the current and all future owners must adhere to. For instance, the owner may state that the property may not be turned into a hotel or an inn. Work with your real estate agent and attorney to understand the type of ownership stated in the report.
Also, look for liens resulting from owed mortgage amounts, property taxes, or construction/repair payments. All of these debts, along with any limitations and interests of a third party, will be listed in your preliminary title report as numbered items. Review them carefully before you purchase the property to avoid any surprises later. In the sample preliminary title report below, the property has a lien on its solar equipment.
A preliminary title report could also list any standard exceptions that aren’t specific to the property- but relate to the general laws of a region or municipality. Examples of these exceptions include any laws surrounding construction work and the use of the property. For instance, you might not be allowed to extend the garage in certain geographical regions. The title insurance policy would not cover any costs resulting from the violation of such rules.
Why do you need a Preliminary Title Report as a buyer?
A preliminary title report raises any red flags regarding title ownership and any outstanding debts and liens before you purchase a property. It’s essentially a get-out-of-jail-free card that gives you a chance to address those issues before it’s too late or backs out of the deal. Here’s why it matters.
Reassurance there’s no other current owner of the property
First and foremost, a preliminary title report will help confirm who owns the property and whether they have the right to even sell it.
A preliminary title report will also reveal any other existing owners or heirs. A third party with interest in the property may try to sue you and claim it as their own. With the report revealing everything, there’s no way for the seller to conceal the identities of any co-owners or heirs.
Find out about any liens on the property
The preliminary title report will tell you if any creditor has placed a lien on your dream house. A lien is a legal notice sent by a creditor to ensure they get their money back from the borrower. They can result from unpaid taxes, mortgages, and repairing/renovation costs, among other things. Liens can even lead to foreclosure, in which a creditor will forcefully sell the property to collect their debt.
Naturally, you’d want to know if the property you’re about to purchase has a preexisting lien on it or not. If there is one, you should either have the seller agree to pay it off or demand a lower price to offset the cost of paying back owed debts.
Discover restrictions and easements
Chances are that you’ve imagined how you’d like to remodel and use your future home. Maybe you want taller fences. Or a completely different garden. Or perhaps you wish to bring a certain number of pets with you.
You might not be completely free to modify or use your new house however you want. It’s dictated by the covenants, conditions, and restrictions (CC&R) set by the Homeowner’s Association and the zoning laws of the local government. The preliminary title report will help reveal such restrictions and rules (if any) that apply to the property. Keep in mind that CC&Rs and zoning laws are non-negotiable. Hence, the report will give you the choice to either compromise on how you intend to use your house or reconsider the deal.
Furthermore, the preliminary title report will reveal if there is an easement on the property, which would give a previous owner the right to access it anytime they want for a specific purpose. For instance, a power company could have an easement to fix or maintain an electric pole installed on a piece of land that falls within private property. This would be a deal-breaker, so make sure to factor that in when evaluating your real estate deal.
Benefits of a Preliminary Title Report for sellers
A preliminary title report will also help you if you’re planning on or are currently selling your existing house to buy a new one. As a seller, the report can help you:
Gain the confidence of your prospective buyer
Sharing a preliminary title report with your disclosure packet will show the prospective buyer you don’t have anything to hide. That way, you’ll earn their trust. And the faster that happens, the sooner the deal is likely to close. From there, it’s only a matter of negotiating and working with the buyer to address any potential issues with the property’s titles and encumbrances.
Without preliminary title reports, buyers and lenders can take ages to run background checks on properties. They provide an instant way to check for title defects, which helps sellers close deals quickly.
Avoid potential lawsuits
A preliminary title report will also help you reveal any existing encumbrances on your listed property to the buyer. That way, the buyer can’t sue you for failing to disclose a lien or a restriction that would have initially been a deal-breaker.