As a real estate investor, you may think you can forgo certain services a homebuyer may need when purchasing a property, such as real estate title insurance. In some cases, this may be true, but real estate title insurance can be invaluable, even for investors, and should be something considered every time a purchase is made.
This article will help you gain a better understanding of what a title insurance policy can offer you, when it’s a good idea to purchase an insurance policy, and how much you can expect to see for a title insurance premium.
Title insurance is a form of insurance that covers missed information by the title agent related to the title search of the property being purchased, also known as a title defect. It differs from most insurance policies like car insurance or homeowners insurance in that title insurance covers things that occurred in the past, not the future, and is purchased for a one-time fee from the insurer.
There is both lender’s title insurance and owner’s title insurance, which can be purchased during the closing process for any real estate transaction and is settled with escrow. In most cases, the mortgage lender will require the homeowner to purchase the lender’s title insurance, and it’s typically included in the closing costs of a traditional mortgage loan. It’s important to keep in mind that the lender’s title insurance offers zero coverage to the buyer.
Most times, when a property is purchased, the property undergoes a title search to make sure of no prior encumbrances. This can include issues with undisclosed heirs, unrecorded easements, incorrect legal descriptions, errors in prior recordings, zoning violations, or unpaid taxes. If the title isn’t clear, the current owner of the property, the selling party, will be held responsible for any lien or violation on the property, unless otherwise negotiated. There are times when title searches miss certain defects that place the burden for ratification on the selling party.
By purchasing title insurance, if a legitimate title claim is filed after the closing, you or your mortgage lender won’t be held responsible, and the title insurer will handle any payouts or conflicts on your behalf, depending on your insurance coverage. Although it’s an additional out-of-pocket expense, it’s a one-time fee and covers you for the length of your ownership, whether it’s 6 months or 20 years. A title insurance policy will vary just like any other form of insurance, so make sure to read the title policy closely.
An owner’s title policy will cover financial losses associated with everything from an ownership dispute to fines discovered after closing. Since there’s no other recourse if something comes up, without an owner’s policy, you would be on the hook for any costs associated with the claim.
The title insurance premium is variable by state, but you’ll typically see title insurance rates based on around 0.5% to 1% of the overall value of the house. It can be as little as a few hundred dollars or as much as several thousand. There are calculators online, but the best approach is to ask the going rate for your area from the title insurance company that you’ll be dealing with to be able to accurately estimate the costs.
Although there are states with fixed title insurance rates, most are variable. If you’re familiar with your state’s rates and the general price point you typically invest in, you can average the costs when you’re running numbers initially. Just keep in mind that it may differ come closing time.
Make sure to shop around for the best rates if you do decide to purchase a title insurance policy, because rates may be slightly higher or lower, depending on the title company. You might also be able to combine the owner’s policy and the lender’s policy into one purchase for a discount.
Often, an investor is working with off-market deals, foreclosures, and other high-risk property, so it’s typically a good idea to get the title insurance policy, even if it isn’t mandatory. The upfront, fixed-cost, nonrecurring fee is almost always worth the peace of mind.
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