THE MOST GALLING moment came when the notice of a sheriff’s sale was nailed to a tree in our front yard. The message to passersby was all too clear: “Deadbeats live here.”
Except they didn’t. Our house was in foreclosure—but the debts weren’t ours. They belonged to the people we had bought the house from. How did we escape what turned out to be a two-year ordeal? Three words: owner’s title insurance. How did we get caught up in such a mess? To answer that requires more than three words.
Let’s begin with my trip to our bank, where I planned to collect a cashier’s check to take to the closing on our first house. Cellphones weren’t yet common, so I learned from the teller that my wife had called to say I should turn around and come home. The closing was off.
The title search had turned up both a second mortgage and an IRS lien for $14,000 for a tax debt. That probably explained the frantic move-out by the seller’s family and the garage door’s opener code, which was “BANKS.”
Our purchase was in limbo. Although we didn’t own the house, it already felt like ours. We had paid a plumber to fix the leaking toilet our home inspector had flagged. I filled dozens of bags with fallen leaves to protect the lawn during our two-month wait for a new closing date. Finally, a week before Christmas, the deal closed, and we owned the house. All the old debts were settled—or so we thought.
Six months later, some legal documents arrived in the mail. They declared that we were defendants in a foreclosure lawsuit to satisfy unpaid debts. We learned that the title search had missed a small mechanic’s lien. That had triggered the foreclosure lawsuit. There also was a much larger promissory note held by the bank that had previously issued the second mortgage to the seller. Both liens involved debts of the seller and related to his solo business. They got missed during the title search—supposedly because they were indexed incorrectly in the county’s property records.
The business that held the mechanic’s lien had won a judgment in court when the seller didn’t show up to defend himself. That business had, in turn, filed for foreclosure on the house—on the same day as our revised closing date. Together, the two debts amounted to some $60,000. They were our problem now, as the new owners of the home.
Our title insurer provided us with a lawyer to defend us in court. When we and the title insurer lost in state trial court, our lawyer assured us there’d be no foreclosure proceedings. He said all the parties involved knew our case would be settled before such a drastic step.
Soon after, I discovered the sheriff’s sale notice in our yard. Outraged, I almost hired a lawyer to keep an eye on “our” lawyer. When your lawyer is paid by a co-defendant whose interests diverge from yours, do you really have legal representation?
After a second loss, this time in state appeals court, the title insurance company settled with the two lien holders. We kept the house, and we incurred no significant direct costs and no harm to our credit records.
We did, however, emerge with battered psyches. At times, my wife would collapse in tears, fearful that we’d lose our house and our 20% down payment. I was bitter that, as innocent bystanders, we had been put through the emotional wringer.
Owner’s title insurance saved us. It’s optional coverage. By contrast, lender’s title insurance, which protects the issuer of the mortgage, typically isn’t optional. Most homebuyers probably don’t notice their title policy, or what type it is, except perhaps to ask about the expense as a line item on the closing statement.
There’s a reason for title insurance’s obscurity. Buyers are highly unlikely to need protection from title problems. They arise from longshot occurrences, such as filing errors, undetected liens, missed easements, property-line disputes and fraud. Paying for title insurance can feel a bit like paying for auto insurance coverage against uninsured drivers. It protects you from someone else’s careless or irresponsible behavior.
Most other forms of insurance protect against obvious risks, such as fire or flood. Buying them can provide peace of mind. What about the peace of mind that comes with title insurance? The risks tied to a property title don’t leap to mind, so the emotional relief is minimal. What if you’re among the unlucky few who must make use of this coverage? If our experience is any guide, I wouldn’t count on peace of mind—until the entire ordeal is over.
Joe Kiefer volunteers regularly at his church in Ohio and at an adjoining food pantry, and he enjoys helping friends with personal-finance issues. After a career spent in newsrooms as a copy editor and reporter, he volunteers as an editor for a nonprofit organization and has been helping edit articles for HumbleDollar. His previous article was Aversion to Income.
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It is possible to negotiate the price of owner’s title insurance.
A year ago I sold a house for $375,000. The proposed policy was quoted at $2,170. I did a web search and found a title insurance company that charged $825. I changed the buyer specified company to the one I found. The attorney wanted to use the title company he was used to. I told him that if they matched the price I didn’t care which company was used. They did match the $825 price! Surprisingly, I was ok with saving $1,345. 😉
Owner’s title can be expensive, but I think it’s definitely worth the money. Imagine having to deal with that whole mess without having the title insurance company and their lawyers on your side. Glad everything worked out for you!
Thanks for sharing your title ordeal. I have never encountered title problems after my home purchases, but have paid for owner’s title insurance policies to help me out if such situations should ever occur.
It would be interesting to know how having owner’s title insurance would have helped resolve the situation you had.
It’s been a while since I looked at my owner’s title policy documents, but as I remember, even those policies have exclusions.
Oops. Re-reading your post I see you had owner’s title insurance but still underwent the hassle, but not additional out-of-pocket costs.
There are a couple of kinds of title insurance. I have always purchased the enhanced option, which only cost me a little more (maybe $250). It covers a lot more things, including some that are particularly sticky. About 20 years ago, I was in the same predicament as the writer when I got a letter from a Federal loan agency seeking about $200,000 because the redeveloper who rebuilt our home failed to pay back his loan, and our home secured it. The title search either missed the encumbrance or it didn’t need to be filed. However, once I told the lawyer for the government that I had the enhanced policy and contacted the title company, I never heard from either of them again, and we sold the home without any problem ten years later. I never lost a minute of sleep. So I highly recommend the enhanced title policy, which paid for itself many times over.
It is my understanding that a title agent or settlement company keeps anywhere from 70 percent to 85 percent of the premium as a commission with the balance paid over to the underwriter. Maybe the attorney readers of Humble Dollar can offer some insight.
You pay a “title search fee” and then you pay for something called “title insurance” but this is actually “title search insurance”. You are buying a warranty that the title search was correct and complete.
Title insurance is not insurance in the commonly understood sense. If you have homeowners insurance and your house burns down you expect a check from the insurance company. If you have automobile insurance and your vehicle is totaled or stolen you expect a check from the insurance company. If you have title insurance and find out that someone has a prior claim on ownership of the property, do not expect a check from the insurance company. What you can expect is that you have a right to sue the insurance company. Or more commonly the title insurance company will provide legal assistance, but mostly to protect themselves.
I am not sure title insurance is optional in all states. We have never been given the choice to opt out at any closing we have had, or negotiate the price. Yes, it is a racket.
I have also read that it is a good idea to periodically check the county property records to see if any liens or other claims have been added to any property you own, and of course to make sure that you are still the named owner.
My understanding has always been that you are required to pay for lender’s title insurance if you get a mortgage but owner’s title insurance is optional.
You typically only get owner’s title when you buy the home. It’s rarely purchased when refinancing.
Great article. How much was the house worth and how much did the insurance cost? Did you pay or the seller?
A great lesson. With title insurance being relatively inexpensive, I’m always surprised more people don’t have it. Yes, the chances of a problem are extremely low – but the consequences can be very large.
I’m glad it turned out alright for your family.
David Sayler, everything I’ve ever read and personal experience ($2,565 for title ins for a $410,000 house) indicate title insurance is incredibly expensive, bordering on what my father would have called “a racket”.
I agree that it’s a bit of a racket. Title companies make a good amount of money. In the old days, a title company rep would have to go down to the county and search the property records in person before issuing a policy. Today, that process is electronic, automated, and fast, yet the title companies still charge a lot in my opinion. Lots of money for relatively little work. Kind of a racket, but it’s still worth it to buy an owner’s policy when you buy a home.
mjflack, Your experience that owner’s title insurance was 0.6% of house price is similar to mine (0.5% of purchase price about 20 years ago).
Is there any insurance that can’t be considered “a racket”?
I heard a saying, supposedly by Will Rogers: “You bet you’re going to die. The insurance company bets you will live. To see who’s right, look at the size of insurance company buildings.”
I agree with David Sayler. To me, 0.5% is well worth handling potential consequences of a low-probability event.
(But even owner’s title insurance policies have exclusions that can leave the policy owner at risk.)
Yikes! I’m glad all is well now – thanks for the warning. I am surprised how often details are overlooked when houses are transferred. Twice now over the years I have been notified that I was legally a part owner of two different homes in Massachusetts (a huge surprise) because of errors made in property transfers. I quickly signed over my rights to the intended owner.