What Is Title Insurance and Do I Need It?

In recent articles we have focused on the subject of “caveat emptor,” buyer beware when purchasing a home. This article focuses on another “caveat emptor” issue: title insurance. What is it, who pays for it, and why do I need it?

In New York State, Title Insurance is regulated by the Department of Financial Services.

When the purchase of real property is financed by a lender, title insurance protects the homeowner, the mortgagor, and the lender, the mortgagee against future claims for any unknown defects in the title to the property at the time of sale that may arise as a result of fraud, forgery, unpaid real property taxes, judgments, liens, or other encumbrances not discovered during the title search conducted before the sale.

The common practice is the attorney for the buyer orders a search of the property from a title company that issues a title report. The title company searches the public records to determine if there are any outstanding liens, judgments, surveys, easements, etc. that could affect the owner’s rights to enjoy their property.

There are two types of title insurance policies. The first is a fee policy paid for once by the property’s purchaser. The premium is based on the purchase price of the property.

I asked Lisa Carrabis with New York Title Abstract Services, Inc. located in Bridgehampton, who the fee policy covers?

“The owner’s policy of title insurance [fee policy] names the insured to include successors to the title of the insured by operation of law as distinguished from purchase, including heirs, devisees, survivors, personal representatives, or next of kin.”

According to Steven Bodziner, New  State attorney and manager of Bridge Abstract located in Bridgehampton:

“There is no law that requires a property owner to purchase title insurance for themselves for either residential or commercial property.” He added, “With a residential property, it must be disclosed to the buyer that a ‘market value policy rider is the highest level of coverage an insured is able to obtain. Considering the protection these riders provide, I think it’s a good thing to have.”

The second policy is a policy purchased by the property owner to insure the mortgage lender. The premium is paid once and is based on the amount of the mortgage.

According to Bodziner: “The property owner purchases the lender’s policy at a 20% discount. If the property is refinanced within ten years, the owner  will receive a discount on the lender’s policy.”

With respect to condominiums, the owner of a condominium is the owner of real property and the issues of title insurance are the same as single-home ownership. Residential co-ops, however, are ownership of personal property, shares in a corporation, but the purchase of the shares may be financed with a loan structured by lenders for co-op purchases.

I asked Bodziner to address this issue:

“For the financing of the purchase of shares, I recommend to my clients that they purchase leasehold insurance for the lender. It avoids having to furnish the lender with the original proprietary lease, the original stock certificates, and a UCC-Filing, all of which can delay a transfer of the stocks when the shareholder wants to sell the co-op unit.”

Next, Bodziner spoke about the popularity of purchasing homes in the name of an LLC.

“It gives the owner anonymity, which a lot of high-profile buyers want, as well as tax benefits, and protection from personal liability.” He stressed the complexities of financing the purchase when bought in the name of an LLC.

“Some lenders aren’t willing to take a mortgage on a property owned by an LLC. In the Hamptons, it’s common for the buyer to pay cash with the intention of financing after closing. This is something the buyers should discuss with their lawyer before going to contract.”

Christopher D. Kelley, Senior Partner with the law firm Twomey, Latham,Shea, Kelley, Dubin & Quartararo, LLP offered the following:

“I find that banks are traditionally reluctant to loan money when an owner and mortgagee are to be LLCs, probably because the LLC purchasing residential property is usually newly created, has no assets other than the property being acquired and no credit history.”

Author’s Note:  A Reason for creating an LLC is that it affords its members protection from personal liability for its debts unless the corporate veil has been pierced. In New York, Walkovszky v. Carlton, decided by the Court of Appeals on November 29, 1966, is the leading case on piercing the corporate veil. Rocket Mortgage, formerly Quicken Loans, which claims to be the largest mortgage company in America, doesn’t loan to LLCs.