When I first got started in Real Estate I had no idea what “Title” was in a transaction. At first I didn’t ask many questions about it, I just knew it was something that had to be done when you purchased a house.
When I finally got my first property under contract I had to order a “prelim” for the property so I could get “Title” taken care of. I did not get any of this language or what any of it meant, as I am sure you are currently also trying to understand so I am going to go back a couple steps to clarify it.
Also it is important to state this is based off title policies in the state of California. Although many items are the same from state to state, it is important to look up the guidelines and regulations for your governing state.
And now back to some terms to understand before going into this;
- Title- This refers to the Title Insurance on a property
- Prelim- This refers to the Preliminary Report that the title company provides you and escrow upon opening escrow
- Lien: Right of possession or debt placed on a property that is owed to another person and or entity
- Easement- The right to cross or otherwise use someone else’s land.
- Encroachment- Intrusion on a person’s territory, and or rights
- Recorded- Document recorded with a County Clerk and Recorder
- Unrecorded- Document that has not been recorded with the County Clerk and Recorder
- Binder- An agreement to offer title upon the sell of a property to another person. Generally valid for 2 years and provides a discount on resale.
Now that we have some basics out of the way lets explain the use and necessity of title insurance in your deals. Title provides to escrow the ability to payoff all outstanding debts on the property through the purchase transaction. It also allows the buyer to know what they are buying and what conditions could possibly be on the land. Many times property will have easements on it, or access rights that you can not see with the naked eye, but can effect the future build out of the property. Example, if you have an easement for access on your property and you wish to build an addition on your property, you cannot build over or impede this access. The ability to change that easement is the right of the property owner who access is given, not the property that grants access. This is incredibly important to understand as deals with forced appreciation can be stopped by this, if you are unaware of applicable easements.
So you have a Prelim now for a property you are buying how do you read it?
Reading a prelim can be daunting if you don’t understand what you are looking at, so here are the basics for you. It will be broken in to 2 sections; Schedule A and Schedule B
- Schedule A: This will describe the property and where it is located. It will have an exhibit that shows this information within this section. It will also show how it is owned and who owns the property.
- Schedule B: Schedule B is important because it will show any liens, easements, judgements or covenants on the property.
Building a relationship with a great title officer is key to your success early on. Understanding title up front will not be easy, but it is doable with support of a good title officer. If you need help finding a title officer get a FREE COPY of my book and learn how to meet good real estate professionals.
So I have heard there are 2 types of policies in California a CLTA and ALTA what is the difference?
So here it is in a nutshell, CLTA is more basic and ALTA is more comprehensive… Is that good enough? Probably not so here is a breakdown of what they are;
CLTA- California Land Title Association
- Someone else owns an interest in your title to the property
- A document is not properly signed
- Restrictive covenants
- Forgery, Fraud, Duress
- Defective recording of any document
- Lack of right of access to and from the land
- There is a lien on your title because there is:
a deed of trust
a judgment, tax, or special assessment
a charge by the homeowners association
- Title is unmarketable
ALTA- American Land Title Association
- Includes everything in a CLTA Policy
- Forced removal of a structure because it:
extends onto other land or onto an easement
violates a restriction in Schedule B
violates an existing zoning law
- Mechanic’s lien protection
- Can’t use land for SFD due to zoning or restrictions
- Unrecorded lien by the homeowner’s association
- Unrecorded easements
- Others have rights arising out of leases, contracts or options
- Pays rent for substitute land or facilities
- Inflation protection
- You do not have legal right of access
- Building permit violations – forced removal*
- Subdivision Map Act violations*
- Zoning violations – forced encroachment*
- Boundary wall or fence encroachment*
- Restrictive covenant violations
- Post-policy prescriptive easement
- Street address is correct
- Post-policy defect in title
- Post-policy contract or lease rights
- Enhanced access – vehicular and pedestrian
- Post-policy forgery
- Post-policy easement
- Post-policy limitation on use of land
- Post-policy damage from minerals or water extraction
- Post-policy living trust coverage
- Post-policy encroachment by neighbor other than wall or fence
- Damage to structure from use of easement
- Post-policy correction of existing violation of covenant
- Post-policy limitation of use
- Violations of building setbacks
- Discriminatory covenants
- Insurance coverage forever
- Map not consistent with legal description
- Coverage for spouse acquiring through divorce
*Please note you should check with your title company to ensure you have these coverages
Now, after reviewing this you can see that an ALTA policy is far more in depth, and therefore far more expensive. Now I can’t tell you when to use each policy but I would recommend using an ALTA policy in situations where you are doing complex development deals or working with land that may have possible issues with over time.
That said you can never know 100% so always do your due diligence to understand a property and its title, and follow my rule of thumb of “Where there is smoke, there is fire.” What this means is if you think there could be issues go to the extent required to protect you and your investors from them.
For more information on title please check out my FREE BOOK HERE, or send myself and my team an email at firstname.lastname@example.org. We look forward to your seeing what questions you have and how we can help you further your knowledge.
Andrew T Greer
CEO Better Tomorrow Group
Andrew is an active investor, speaker, Realtor, serial entrepreneur, and educator in all that is Residential Real Estate. If you would like a FREE copy of his book follow this LINK. If you would like to follow him on Social media you can find him on Instagram @beastmoderealestate and @bettertomorrowgroup on Twitter/Periscope @TheBTGRoup and Facebook at Better Tomorrow Group.