As a note investor, I’m always looking for new ways to increase the likelihood of success. To be a successful note investor, one must understand all aspects of note investing, including due diligence. Today we will help you learn more about the difference between title searches, title reports, and title insurance.
What is a title search?
A title search is a limited report of what the property records contain. The main purpose of a title search is to make sure there are no liens, judgments or other items that would affect your ability to hold and own the note.
A title search is conducted using records that are readily available to the general public; nevertheless, this does not imply it’s simple. The title contains all of the data on a specific parcel of property and its previous owners.
These records are kept in a variety of locations, including the county property appraiser’s office, the county tax assessor’s office, the county court records or the county public records office.
There are several goals in performing a title search and examination:
- To verify the owner of the property.
- To determine what liens encumber the property.
- To see whether the current owner is up to date on all property taxes.
If you purchase a note on a property with a clouded title, you assume the problems that come with that property, including any back taxes owed and the potential the security instrument for the note is not enforceable.
You may do it yourself, but you’ll be better off hiring a title company to perform this as part of its services. A title company has access to a title plant and the knowledge to extract the necessary information from the documents. Reasons, why you will want to include a title company, are:
- They may have access to a higher level of data than that found in public records.
- The data should be certified and backed by the title plant, so you have a guarantee of quality.
- Your time and worth. The effort required to conduct a keyword search is significant. To know what you’re looking at in the record, you’ll need some experience. Hiring a title company takes care of that problem for you.
A title search and evaluation is a procedure that has both steps and phases. The conclusion of the process is a document known as a title report.
A title report is a detailed, comprehensive document that summarizes the findings of a public records title search and helps you decide whether to go through with the transaction. The report includes all the information required to clear a title. In general, title reports include:
- The property owner and the type of deed.
- A legal description of the property.
- Notice of any liens or encumbrances against the title including mortgages and assignment of mortgages.
- Tax information, including whether back taxes are owed.
What the title report does not determine is whether the property is insurable.
Title insurance is a policy that protects you from risks associated with your real estate purchase. It can be used to cover losses due to title defects, such as liens and encumbrances on the property.
There are two types of title insurance. Owner’s insurance and Lender’s insurance. As the names describe, Owner’s insurance protects the Owner and Lender’s insurance protects the lender from title claims. I currently have a note in Louisiana where the mortgage was recorded in the wrong parish. Thankfully, the note had a Lender’s title insurance policy on it and we are now working with the title insurance company on the claim.
This is just one of many reasons why you would want a note that has a title insurance policy. Other reasons include:
- If someone believes they have the same rights as the owner, they might file a complaint. A sibling who feels he or she is owed a portion of the house might do so, for example.
- If you are divorced, you may find yourself facing claims to your home from an ex-spouse who has suddenly resurfaced during increased housing prices.
- Documents recorded out of order. We have had title claims whereas the mortgage was recorded before the deed.
When purchasing a note, make sure to confirm if it has a title insurance policy on the underlying mortgage you are acquiring. If it does not, we recommend having an attorney or title company analyze the title report and advise if the title is insurable.
If you are new to note investing and need information on attorneys or title companies to perform your title searches and obtain a title report, reach out to us.
These were the basics about the difference between title searches, title reports and title insurance. Continue to learn more by visiting our podcast.