Does the seller really own the property? Are there any liens? Is there legal access? Does anyone else have a claim or right to use? Does the buyer have outstanding judgments that might attach when they purchase the property? These are just a few of the questions you will want answered with a title report when considering owner financing.
When you buy a car you expect the seller to provide the original certificate of title registered with the Department of Motor Vehicles. If there is a car loan then it is paid off and the bank releases the title. If the seller can’t provide the title you would start to expect the car to be stolen or to have title defects. When it comes to real estate, title insurance is your proof or guarantee that the seller owns what they are selling free from outside claims.
Title Commitment and Search
The title company will first search the ownership history of a property. Referred to as the chain of title, they are looking to see that there was a valid Deed recorded at the county from each owner to the next. If there are any breaks in the chain of title they show as exceptions. The search also looks at any loans, easements, right of ways, or other claims to the property. The results are issued in a commitment for title insurance along with requirements for insuring the new transfer.
Owner’s Title Policy
The Owner’s Title Policy is in the amount of the property sales price and insures the new owner is vested in fee simple title to the property through a Warranty Deed or other valid deed. If any prior owner, lender, or other party makes claim to the property and it was not reflected on the title policy then the title insurance company must pay a claim to the insured owner up to the amount of the policy. A one-time premium is paid based on the amount of insurance or sales price.
Mortgagee’s or Lender’s Title Policy
This policy insures the lien position of a note holder as evidenced by a Mortgage or Deed of Trust. This could be the bank or the seller in the case of owner financing. The policy is issued for the amount of the note. The cost is nominal, generally between $25-100 if the policy is issued simultaneously with the Owner’s Policy. If issued at a later date than the full premium will likely apply.
When a seller decides to sell their note, an investor will first look to see if title insurance exists from the property sale. If there is an existing Mortgagee’s Title Policy insuring the note holder they will simply order an update.
If title insurance was not obtained at closing then a new commitment and policy will be required. This additional cost is often passed on to the seller so it makes sense for the seller to just obtain upfront when they are selling the property and financing for the buyer. It not only provides the seller protection while they own the note it also saves time and money should they ever decide to sell the note.