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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