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.
- 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. - 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?
- 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.
- 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?
- It isn’t disclosed that the title company selling you this insurance is making a 80% commission on selling you this policy.
- 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:
- 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?”
- 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?
- 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…
- 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.)
- 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:
- Out of your last 1,000 deals, how many times did an owner’s policy get engaged.
- Take the last 5, what would have happened to them if they didn’t have a policy?
- 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
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!
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.
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.
Thanks you. Your website is very informative in general and this article is probably going to save me atleast a thousand bucks. I was trying to find the same data (premium % vs actual loss probablity) and there is nothing out there. This industry does need more transparency.
I just saw this “case” for buying owners title insurance:
http://federaltitle.com/blog/seller-fraud
What are your thoughts on this?
My owner’s title insurance saved me…. When I purchased my home, it had been a complete down to the studs gut rehab…. So essentially like new construction, all new plumbing and electrical, everything…. I was happy with my “new” home…. a year later, the town informs me that all the work by the previous owner had been done without proper permits (the only permit pulled was for replacement windows)… Now the town can actually require ME as the current owner, to pull out drywall so that they can do proper inspections, and make me correct anything that wasn’t done to code. My “Premium” owner’s policy provided coverage for the non-permitted work of the previous owner… so they took care of everything to get my home legal and up to code.
Hey John, You sound like a mortgage underwriter or something. What do you do for a living? We want to make sure comments are impartial. Also what exactly did the owner’s policy do? Did it pay for an hire lawyers? If so, how much did that cost? Sounds like you didn’t rip up your house to start over, so what exactly did it do?
I am wondering if anyone can help me understand something. After I declined owners title insurance the company came back and said I would have to pay a higher premium fee for the lenders title fee. It went from $350 to what the owners title fee was $1,900. Is this right? Legal?
Can you imagine buying a stock from a investment firm at $50 a share and paying $2,000 because the firm took a $1950 commission. The firm would be shut down and the executives would go to jail. Why is this title insurance program allowed to take advantage of consumers? The coverage makes sense and would be useful as so many adherents profess, if the premium was $100.
Good Job man! I am clear now and will get the standard title insurance! Appreciate your time and clarity!
Thanks for the article and enlightening some of the buyers out there. I’m a former owner of a title insurance company and can tell you that the issues that come up are usually minimal requiring only 2-3 months at most and 1k to 2k in attorney fees.. Sure there are those rare cases where someone loses their house but it’s like selling insurance against being struck by lightning. I received 90% commission on the owner’s policies that we sold and everyone bought them. Now when I buy a house for myself I DO NOT get an owner’s policy unless the house is REALLY OLD and has had 10+ transfers in it’s life or there was a foreclosure/quiet title suit in the chain of title. Yea you are taking a gamble not buying it but it’s about 20 times better odds that you get in Vegas.
Wow! Thank you for the info! I am now confident about my decision (getting standard one over the enhanced title insurance)!
Why title insurance? Is it to protect the buyer or the title company that did the title search? Is there some reason I should buy insurance to protect me and the title company? It appears to me that if the title company missed something during their search, they should be liable not the buyer. Why can’t the title company be sued for neglect? Most businesses carry their own liablity insurance why doesn’t the title companies? Where are the law makers when you need them? This is a bad case of double dipping that no one knows how to fight. The title companies and the title insurance companies must be partners.
Very interesting comment. You don’t get title insurance for yourself, but you sell it to others. Thanks for being honest.
Seems odd. Every state is different. Doesn’t seem right.
I am curious. I am about to close on a house it is a new construction (not a construction loan) in a very well developed golf course neighborhood. Its also a VA loan. I have been wondering what is the real risk if any in not getting owners title insurance on my property. My mortgage company was very upfront with me in telling me that the OTI was optional and suggested (highly) that I do research before making a decision. what do you think?
“Why title insurance? Is it to protect the buyer or the title company that did the title search? Is there some reason I should buy insurance to protect me and the title company? It appears to me that if the title company missed something during their search, they should be liable not the buyer. Why can’t the title company be sued for neglect?”
This doesn’t make sense. If the title company misses something and you have an owner’s policy, they WILL be liable. You don’t need to sue them for neglect, they should just simply pay the claim. But if you don’t have an owner’s policy, you have no claim against them even if there is a lender’s policy. Why? Because their contract was with the lender, they never made any sort of promise to you. And if you are buying a house with cash and there is no owner’s policy and no lender’s policy, then nobody (other you than you, hopefully) will be doing any sort of search at all, so there will be nobody to sue. A search is not something that just happens automatically, it’s something you pay for.
This hits on an interesting point. A large part of what you are paying for when you buy a title insurance policy is for someone to go the legwork of trying to determine whether there are issues with the title BEFORE they issue you the policy. Yes, if you know how to do that yourself, you can save a substantial amount of money, so that is why the title agents you spoke to didn’t get their own insurance — they did the research themselves. (Note that there is still some risk you can’t research away, so even if you do the research there is still risk, albeit less.)
With respect to the lenders vs. the owners policy, at least in my state the rates change depending on what you buy. Roughly speaking, if an owner’s policy is $2,000 and a lender’s policy is $1,500, when you get them both you don’t pay $3,500 but more like $2,200. So if you forego the owner’s policy you will save some money (in this example, $700), but not as much as you think.
Finally, to answer an earlier poster’s comment, if you only put 5% down on your house, you are right that your owner’s policy will only really be insuring a small amount amount (because the title company will first pay your lender, then only pay you the difference between your policy and the lender’s policy (aka. your equity)), but if you pay down the loan over time the amount your insurance covers will go up. So if you spend 20 years paying down the mortgage, at least theoretically you will then have more total title coverage.
For what it’s worth, I work as a commercial real estate attorney (but I do not write title). All my clients get owner’s policies. When I bought my house, I got an owner’s policy. Probably a waste of money as there were only three long-time owners, and the most recent owner held on the house for 20 years, and it’s just a nice little house in a suburban cul-de-sac with no unusual features, but I figured if the big boys in the real estate industry have decided they will always get policies as a matter of course, then I might as well. (My clients actually always get enhanced coverage policies, I cheaped out and got basic.) For me it was worth paying the $700 so that I didn’t have to do the research myself, so I could insure against unknowable risks, and so I could know my house was my own and sleep at night.
I’ve got no problem with people (particularly investors in distressed properties who have lots of experience, for example) foregoing title insurance, but they need to know what they are doing in order to make that determination. People who don’t probably are just better off ordering the policy like their realtor told them to.