There are many critical parts to a residential real estate transaction that must fall into place in order for the closing to take place smoothly and on time. The first time home purchaser or novice residential real estate investor may not understand what goes on behind the curtain. While angst is understandable, it can be forestalled with a little preparation and knowledge about the process. The purpose of this article is to alleviate some of the mystery behind residential real estate transactions. In this article we will address specifically what you need to know about selecting a title insurance agent, and some common pitfalls to avoid.
What is title insurance?
Title insurance is considered non-casualty insurance. The title agent’s responsibility is to examine the history of title with the emphasis on eliminating risk. Title issues which are discovered during examination should be removed or “cured”, thereby reducing the potential for a future title claim. Title insurance is not a guarantee of title. The purpose of title insurance is to indemnify the insured against loss or damage resulting from an issue that may not have been identified during the examination process, prior to the time of the closing. The misconception that many purchasers of real property have is that if they posses a title policy, they are covered against all title-related losses that may arise during their ownership. This is not exactly true. Title policies contain exclusions and exceptions from coverage. If the insured encounters a title issue during his or her ownership of the property or while attempting to sell the property, the title issue may fall within an exclusion or exception from the policy and therefore will not be covered.
Exclusions from coverage
Exclusions from coverage are contained in the cover or “jacket” of the title insurance policy. An example of an exclusion would be an open permit. Open permits fall under Exclusion 1(a) of the title insurance policy which states in part that any law, ordinance, permit, or governmental regulation, including those relating to building and zoning, are expressly excluded from coverage. Open permits are not recorded in the public records as a general rule. They are, however discoverable prior to closing if the closing agent performs a search for open or expired permits, known as a “permit search”. Permit searches should be a mandatory part of all closings in order to safeguard the purchaser against a future permit problem.
Exceptions from coverage
Exceptions from coverage are listed in the title commitment under Schedule BII. They should be reviewed by the title agent and, if possible, deleted prior to closing. Certain Schedule BII title exceptions cannot be deleted, such as exceptions for the plat of record or the homeowner or condominium association declarations. Other Schedule BII exceptions are deleted automatically if the title agent is provided with the necessary documentation. For instance, Schedule BII 2 (b) is an exception for “[r]ights or claims of parties in possession”. This exception is deleted by the title agent when the owner of the property executes an affidavit stating that there are no others in possession of the property, such as a tenant. In some cases, where the property is owned by a bank via a foreclosure action, (also known as REO), it is possible that the bank will not execute the requisite affidavit. If the title agent cannot delete this exception, the purchaser will not have title coverage in the event that a tenant occupies or claims a leasehold interest in the property.
Another example of a title commitment exception which should be deleted at closing is Schedule BII 2(c) and (d), also known as the “General Survey Exception”. The General Survey Exception, if not deleted, would leave the insured uninsured for encroachments, encumbrances, violations, variations or adverse circumstances that would be disclosed by survey. If a survey is not obtained by, or provided to, the title agent, the General Survey Exception cannot be deleted. If a survey is obtained by, or provided to the title agent, the General Survey Exception should be deleted however the title agent should take exception for the specific issues revealed by the survey. If the title agent is not versed in reading surveys to identify potential property boundary line or encroachment issues, the items contained in the survey will be listed as exceptions to the title policy and coverage will not be provided to the purchaser. A survey should be a mandatory part of all closings so long as the property is capable of being surveyed. The purchaser should always be provided a copy of the survey and notified of any issues revealed in that survey as well as their potential impact on the property. Upon discovery of a survey issue (or title issue for that matter), a title objection should be raised to the seller or seller’s counsel. In some cases, the survey or title objection can be resolved with minimal effort. The important point is that survey and title issues are discovered and disclosed to the parties in a timely fashion, and objections raised prior to the deadlines allotted in the contract.
Who can issue title insurance?
Pursuant to Florida Statute 626.841, a title insurance agent is a person appointed by a title insurer to issue commitments or policies of title insurance on its behalf. In order to become a title insurance agent, the applicant must meet the age and citizenship requirements under the Statute, complete a 40-hour classroom course in title insurance and then pass the State examination. Attorneys are exempt from the provisions of Florida Statute 626.841 so long as they are in good standing with the Florida Bar.
A real estate agent or mortgage lender may have an established relationship with a particular title company or attorney and refer the prospective purchaser to that agent. On the other hand, a purchaser does have the option to choose their own title agent. Two things should be considered when making this choice: (1) title insurance premiums in Florida are fixed by statute, so choosing a title agent based on price is a misnomer, and (2) the term “title agent” is rather broad. The industry has lumped together those who issue title insurance as “title or closing agents”. However, all title or closing agents are not created equal. Choosing the right title agent is by far one of the most important aspects of the real estate transaction. Competency and experience should be deciding factors. The underlying responsibility of the title agent is to examine the title history, title exceptions, survey of the property and lien, permit and estoppel results. If there is a potential problem or issue that arises during this examination or which will be excluded or excepted from the title insurance coverage, the purchaser should be informed in a timely fashion so an objection may be raised and the purchaser’s rights preserved. The title agent charged with these responsibilities may have varying degrees of skill or diligence. An attorney who specializes in real estate transactions should always be consulted prior to a person contracting to purchase or sell real estate.