Every homebuyer should be concerned about acquiring a “clean title,” which basically means that nobody else will have a claim against the property after the sale closes. The universally accepted mechanism to accomplish this is title insurance. In virtually all real estate transactions, the purchase and sale agreement says that the seller will provide standard title insurance for the buyer at the seller’s expense.
The buyer doesn’t get the title insurance policy until after escrow closes. Instead, when the parties open escrow, the escrow officer will order a “preliminary title report” from the title insurance company. The title report (usually called a PT or PTR in the trade) says that the company is prepared to issue a title insurance policy showing exceptions to coverage listed in an attached schedule. The exceptions, otherwise known as encumbrances, will include tax liens, existing mortgages, CC&Rs, easements, and (if all goes well, which happens virtually all the time), every other item in the public record affecting the property. The title report will also identify the current owner, who should be your seller. (Sometimes the owner turns out to be a family trust the seller didn’t remember).
Escrow sends the report to the buyer for review and approval in writing. The punchline here is that the buyer’s approval of the report is uniformly a condition of the buyer’s obligation to buy the property. If the buyer disapproves any of the scheduled exceptions in the report, the seller has the right to request their removal by the buyer. Such an exception might be a recorded mechanic’s lien claim against the property. If the seller cannot or will not remove the exception, the buyer can cancel the contract.
It is critically important that the buyer study the exceptions schedule in the report. To a non-lawyer or an ordinary person not intimately familiar with real estate development, most of the items will not be self-explanatory. Buyers should not rely on their Realtors. The first step is to obtain copies from the title insurance company of all the documents referred to as the basis of each exception, other than existing deeds of trust which will be paid off when escrow closes.
There are three major categories of concern. The first is the location of easements. The second, for properties on private roads, is road maintenance agreements. The third, which is rare but deadly, is improvement covenants in favor of government entities. Such a covenant may impose conditions upon obtaining a building permit for new construction or remodeling. For example, widening the adjacent street and undergrounding utilities may be required, which can be staggeringly expensive. If any of the exceptions in the schedule looks threatening, the buyer should seek legal advice.
A buyer should NEVER return his signed approval of the title report to escrow until the buyer is satisfied that none of the scheduled exceptions in the report is objectionable.
One of the exceptions in the standard policy is recited separately in the corresponding report, not in the report’s schedule. It covers items adversely affecting ownership which are not in the public record, but would be shown by a visual inspection of the property or a survey of the property. (Nobody from the company will visually inspect the property or perform a survey before issuing a title report for a standard policy, or issuing the standard policy itself.)
This can prove to be a very important exception, particularly when you’re buying an older home. Frequently fences and walls intended to be on boundary lines, but installed after initial construction without a survey, are somewhere else (the seller’s neighbor is occupying some of the seller’s property, or the seller is occupying some of his). Later added structures may also have been built in violation of setback lines. Encroaching fences may even be a problem with new construction. They are supposed to be installed with reference to survey stakes or pins, but stakes or pins are often missing or buried by the time fences are installed, and the installers may be careless.
The buyer can remove the inspection or survey exception, at his expense, by upgrading from the standard policy to a more expensive policy. The problem there is the additional cost of a survey, which can be substantial. In older states, particularly along the eastern seaboard, the ‘standard’ policy is an upgraded policy with no inspection or survey exception, with a correspondingly higher premium. When buying a home or lot in a semi-developed or rural area, a buyer should upgrade his policy.