Owner's Title Insurance.95% Buy It, 10% Know Why!


(This is a Virginia specific posting, disregard for other states)

Update: An Atlanta Realtor did research and found that the number of cases of Total Loss in Georgia was less likely than getting struck by lightening! I’m looking into Virginia’s frequency of Title Insurance claims. You can’t comfortably buy something if you don’t know the statistics behind it, but you also can’t opt out, so what do you do?

Owner’s Title Insurance is OPTIONAL! That doesn’t mean “don’t get it”, it means, “know what you are buying before/if you buy it.”

    There are two types of Title Insurance when buying a house in Virginia.

  1. Lender’s Title Insurance. REQUIRED
    This is a fixed price by the state and is required by your lender, so stop thinking about it. It is paid once at closing, it is NOT monthly.
    For a $400k loan, this comes to about $1,000.
    This is to protect the bank’s investments (loan to you) from a problem with the title.

  2. Owner’s Title Insurance. OPTIONAL
    This covers what the Lender’s policy does not cover. Also a one time payment.
    You have 3 options:
    a) No coverage (rarely do people know this is an option!!)
    b) “Standard” policy. $700 (reissue rates are less, more below about that)
    c) “Premium” or “Alta” Policy. $1,000 ($500k house, $400k loan)


The OWNER’S TITLE policy will be the focus of this blog. This policy is 100% OPTIONAL.

90% to 95% of buyers buy the Owner’s policy. I have no problem with this, however I would guess that 80% of people buying this have no idea what it is or that they even have an option. That I have a problem with.

    Why do people buy Owner’s coverage?

  1. It is snuck into the the closing documents (HUD1) by default with NO mention of it being Optional. Sometimes the “premium” policy is put in by default. That really bugs me.
  2. It is sold as being a blanket coverage that protects you from everything and the fear of losing your house, and going bankrupt. I have yet to get any stats on how often this happens. 1 out of 100? 1 out of 10,000? Once in the USA every year? Or does the insurance cover the costs to cover the $500-$5,000 in legal fees to clear up the issue?
  3. It isn’t disclosed that the title company selling you this insurance is making a 80% commission on selling you this policy.
  4. Realtors do not get a bonus for pushing this (thank God), but if a Realtor doesn’t say “you must get it” they will be exposed to potential future liability. For example, if they sell 100 homes and they tell their client NOT to get it, and 1 has an issue, guess who they will sue? So it is easier for Realtors just to say “buy it.” It doesn’t cost them a dime. We like to say “Learn about it, and then decide.”

I don’t mind Title companies making money. What I don’t like is the lack of disclosure. It is not clear to the buyer that this is optional and that most of the profits of the closing come from this. Not the token $200 “fee” they charge. They make their money from Title insurance.

    Again, I am not saying NOT to buy Owner’s Title Insurance. I’m just saying:
  • Know what it is.
  • Who makes money if you buy it?
  • Are you getting the basic or premium?
  • Ask your Realtor or Title company for some statistics on how often these policies are engaged. (I’ve yet to get an answer for this one)

    Examples to ponder:
  1. The closing company pitches Owner’s insurance as a nearly 100% coverage if something goes wrong with your title. However I spoke to a woman that had to sue her title company to get them to perform on her insurance. She put it this way… “I paid $1,000 for a policy, $800 goes to the closing company as a commission, $200 goes to the policy writer. For $200, how likely are you going to be protected from a $500,000 loss?”

  2. I was once at a closing in Falls Church. The buyer was a President of the Closing company. THE PRESIDENT OF A CLOSING COMPANY DID NOT BUY TITLE INSURANCE FOR HIS HOME. Keep in mind that he would effectively get a 80% discount and he STILL didn’t find it necessary for his personal home. I asked him why he wasn’t buying it and he said “I do the title search personally and I double checked and made sure there was nothing wrong with the Title history.” Then he had the nerve to say “But you should bring your buyer clients here and make sure they do buy the Owner’s policy.” This made no sense to me. Was he not going to double check my client’s Title history as well as his own personal search?
  3. Remember that you are buying the Lender’s policy too. If something was hugely wrong with the title, wouldn’t the Lender’s policy kick in to clean things up (as in legal fees)? This part isn’t clear to me. If the house is $500k and you put down $25k 5%), are you really paying to insure against $500k, or is it more of an insurance to protect the $25k you have put down?

    On the other hand…
  1. I have spoken to a Realtor that has been in business for 20 years and she says you would be nuts to not get the policy. She has seen first hand one person that would have had major trouble if they didn’t buy the policy. Now does major trouble mean the loss of the house? All $500k or does it mean they would have had to pay $1,000 or $2,000 in legal fees. I would never pay $500 to insure against a 1 in XYZ chance of having to pay out $1,000. But I might pay $500 to cover $500,000 (if it really even covers you.)

  2. One of my favorite closing companies in Alexandria says that they use the Owner’s title insurance all the time to clear up title problems that come up. So A buyer buys a house in 2002, and buys a policy. IN 2007 they sell th house but something pops up on the title. This company says that since the seller bought the policy, they were able to close. If they hadn’t bought it… (it isn’t clear if the alternative was a) losing the home (probably not), cover legal fees to clear it up c) ability to close immediately vs delaying closing weeks or maybe months (most likely)

Basic vs Premium
The Premium main feature is that it is supposed to protect you beyond your purchase price. So if your $500k house appreciates to $600k, the basic policy will protect your $500k while the premium protects $600k.

My wish list:
1) That Owner’s Title Insurance would be renamed to “Owner’s Title Insurance (Optional)”, so that consumers would know they have a choice.

2) That I could find actual data on how often these policies are engaged. Are we talking 10% of the time? Once in 100,000? And of those what did it actually protect against. Consumers deserve to have this data.

    Dear Closing Companies, can somebody post a comment answering these few questions:
  1. Out of your last 1,000 deals, how many times did an owner’s policy get engaged.
  2. Take the last 5, what would have happened to them if they didn’t have a policy?
  3. What actual real life “worst case” (because that is how policies are sold) examples do you have of somebody NOT having the policy and being adversely affected by this? What did they lose? $500 in legal bills or a $500k house?

Again, I’m not saying to get the Owner’s coverage or no
t. I don’t care if you do. If it makes you sleep better at night, great, I won’t be disappointed. I will be disappointed if you buy it blindly without understanding it.

Other little known tips:

1) Try and get a Reissue rate. If the former owner bought the property within the last 10 years, they probably have a policy. Track that down and save 20-30% on the Owner’s portion of the Title insurance. If lost, the former closing company can send a fax for $25 to prove the insurance was purchased. Take that $300 in savings and use $10 and donate it to StBernardProject.org.

Conclusion
I am in NO WAY saying not to buy Owner’s Title Insurance. I am not even implying it. I am just saying to make sure you know what you are getting. I prefer to give information instead of giving recommendations, but I can say that if you are at all uncomfortable waiving Owner’s Title insurance, then you SHOULD get it so you can sleep well at night. This is not one of those, “when in doubt, don’t get it” issues.

Here is a link comparing the standard policy versus the premium policy. I still don’t think this is enough information to make an informed decision. Click for link to Owner’s Title Policy Comparison chart. This sales sheet is obviously designed to make the premium policy look like it covers 5 times that of a standard policy.

75% of my clients end up getting the standard. Maybe a couple have bought the premium. I don’t personally buy any Owner’s title insurance, but that is just me, and NOT a recommendation.

Comments? Anybody use one of these policies?

- Written by Frank Borges LL0SA- Broker/Owner FranklyRealty.com
703-827-4006

Videos at YouTube.FranklyRealty.com
Housing bubble? Arlington, Alexandria, mls, homes, Real 22201, 22314, Fairfax Va, DC Realty, Realtor

  • 3
  • January
  • 2007

103 Responses to “Owner's Title Insurance.95% Buy It, 10% Know Why!”

  1. Diane says:

    I work for a title company in Northern Virginia and can tell all of you about title defects and what Owner’s title insurance can do to protect you. I also make sure when I am conducting a closing that I do mention the “option” of purchasing Owner’s title. I give them the facts about the different policies such as “Standard” and “enhanced” and what the difference in price and coverage is. Most important is that option feature.. I mention that Lenders is not an option that it is mandatory to purchase.. but we cannot force them to purchase owner’s insurance. I also give them examples of situations where having owner’s insurance has bailed people out of sticky situations and when not having it has resulted in nightmares for the sellers. I will give you one big nasty example when a seller kicked themselves for not having it. One of our sellers had an unreleased Deed of Trust show up on the title search and it was from a loan they took out in the late 80′s .. The seller tossed all of their paperwork thinking that it was an old deal and there was no need for this NOTE and Paid in full letter anymore. Come to find out.. the lender had gone out of business on top of it! so now we have no way to get information about this Trust.. because she threw it away. and the Deed of Trust was not quite at expiration age (20 yrs after maturity date) We had no proof this loan had ever been paid off. The seller had to hire a lawyer to help her with obtaining a release for the lien. They ended up going to Court to get a “Judicial Release” and it cost her somewhere around $3000 and 2 months worth of research before they could get it cleared. If she would have purchased Owners title insurance when she purchased the house, then we could have gotten an indemnity from her title ins. company and moved on with the closing. You never know when something NOT a matter of public record could show up when you try to sell a house! Such as forgeries. Divorces can make for some nasty title issues on the new purchaser’s title. I also found out in the process of reviewing title one time that a builder had conveyed pretty much 1/2 a subdivision with the wrong subdivision name!!! the county even added remarks in their property cards warning of the mistake and none of the attorney’s or title companies since had the presence of mind to fix the legal … it was conveyed several times referring to the incorrect legal.. including a foreclosure attorney ..!!! so imagine that you found out your house isn’t really in the right subdivision? we corrected it when we recorded.. but it wasn’t an easy task. So seeing these examples first hand..I would NEVER purchase a home without buying title insurance!

  2. Drew McFadden says:

    I searched for an article regarding this topic. I am about to close on a $420,000 home. When preparing to sell my current home my realtor did a title search. This search revealed that I did not have clear title on a part of my property (I bought the home next to mine and tore it down). The title was not clear going back to 1964! there were five different transfers that were not caught when I bought and refinanced. There was also an IRS lien on my property. I have a friend that is a real estate attorney who looked at it and said “I have never seen a bigger mess in my entire career”. I called the bank..it was like talking to Pontius Pilate (they washed their hands of it. My attorney contacted the title company and was told to basicly screw off. I ended up clearing the primary issue from the transfer from the person I bought it from and I cleared up the IRS lien. The other issues were cleared up by haveing a 92 year old widow sign a quit claim deed and providing a death certificate on his deceased wife. So in my view Title insurance was a complete waste of money. When I read the 80% commission that got me even more mad at the title company.

  3. Srini says:

    The Owners Title Insurance policy may be useful in some cases where the property is old. I have purchased several condos in the past, some new and some where there was just one owner. My feeling is that this is a scam and not worth it. There is a clear title chain for newer properties and it is not worth the money. If you are a cash investor then this is something you should think whether it’s worth spending an extra thousand or it would be better served upgrading your home.

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