TITLE INSURANCE
In California, most real estate transactions are closed with the issuance of a title insurance policy in favor of the owner, the Lender or both. Many home buyers erroneously assume that when they purchase a piece of real property, possession of the deed to the property is all they need to prove ownership. Not so, because hidden hazards may attach to real estate. Forgeries, faulty surveys, hidden liens, the false representation of ownership of a married person as being single are just a few examples of factors which may cloud the title to real property ownership. A property owner’s greatest protection is a policy of title insurance.
WHAT IS TITLE INSURANCE?
Title insurance insures property owners that they are acquiring marketable title. Unlike casualty insurance (policies which insure against future events), title insurance is designed to eliminate risk or loss caused by defects in title from past events. Title insurance provides coverage only for title problems. A title insurance policy is a contract of indemnity which insures against loss if the title is not as reported; and if it is not and the owner is damaged, the title policy covers the insured for his/her loss up to the face amount of the policy.
TITLE SEARCH
Issuing a title policy is an extensive and exacting process. Title companies work to eliminate risks by performing a painstaking search of the public records or the title company’s own “plant,” where public records pertaining to the property and the parties to the escrow are maintained, to determine the current recorded ownership, any record liens, encumbrances, or other matters of record which could affect the title to the property. Once a title search is complete, the title company issues a preliminary report detailing the current vesting, description, taxes and exclusions from coverage.
PRELIMINARY REPORT
The preliminary report contains vital information which includes ownership of the subject property, the manner in which the current owners hold title, matters of record which specifically affect the subject property or the owners of the property as well as a legal description of the property and an informational plat map.
WHAT TO LOOK FOR
The Buyer and Realtor® should review the preliminary report as soon as it arrives, with particular attention to certain areas:
• Verify the ownership vesting. Be certain the names on the report are the same as the names on the purchase contract. Sometimes the name of an unexpected owner will appear (e.g. a previous spouse or relative who died), and corrective documents may be required.
• Verify the property address. The plat map and legal description should match the address. An owner could own two properties adjacent to or across the street from each other, causing confusion in identifying the correct property.
• Carefully review the exceptions. Common exceptions include current taxes, bonds, deeds of trust, Mello-Roos assessment district items, CC&Rs and easements. Be sure the CC&Rs or existing easements do not interfere with the Buyer’s future plans. For example, an easement across the backyard could have a profound effect on the Buyer’s ability to add a swimming pool later.
• Always look for surprises. If you cannot locate an easement; if an unexpected deed of trust shows up; if you see an item you weren’t aware of before, immediately call the escrow officer or title company to discuss the matter. The title company should be a problem solver, and top notch escrow officers and title officers go out of their way to resolve quickly the majority of “red flag” areas. However, the responsibility for early detection and resolution of problems falls on the entire escrow team: the Realtors®, the escrow and title companies and the Buyers and Sellers as well.
WHAT IS COVERED?
Here are just a few of the many title risks covered in the California Land Title Association (CLTA) standard coverage policy in the event of a loss including a lack of a right of access to and from the land and a number of recorded defects:
• A forged signature on a deed
• Impersonation of the real owner
• Mistakes in interpretation of wills or other legal documents
• Deeds delivered without the consent of the owner
• Undisclosed or missing heirs
• Deeds and mortgages signed by persons of unsound mind, by minors,
or by persons supposedly single but actually married
• Recording mistakes and missed recorded documents
• Falsification of records
• Errors in copying or indexing
In addition to indemnifying the insured against losses which result from a covered claim, the policy also provides for legal fees and defense cost incurred in handling claims against the property. Extended owner’s and lender’s policies provide broader coverage and are available in the American Land Title Association (ALTA) policy. Coverage is extended to certain matters that are off-record but which are generally discoverable by an inspection or survey of the property, or by questioning the parties in possession, such as:
• Unrecorded liens and encumbrances
• Unrecorded easements
• Unrecorded rights of parties in possession
• Encroachments, discrepancies or conflicts in the boundary lines
ALTA policies are available for lenders or owners, and a “plain language” ALTA residential policy is also available for owner occupied residential property of one-to-four units. Realtors®, Buyers and Sellers should not assume that all title policies and title companies are the same. They’re not, and it is important to ask questions of your title company to determine the type and cost of coverage available.
COMMON WAYS OF HOLDING TITLE
How should I take ownership of the property I am buying? This important question is one California real property purchasers ask their real estate agent, escrow and title professionals every day. Unfortunately, while these professionals may identify the many methods of owning property, they may not recommend a specific form of ownership, as doing so may constitute practicing law.
Because real property has become increasingly more valuable, the question of how parties take ownership of their property has gained greater importance. The form of ownership taken – the vesting of title – will determine who may sign various documents involving the property and future rights of the parties to the transaction. These rights involve such matters as: real property taxes, income taxes, inheritance and gift taxes, transferability of title and exposure to creditors’ claims. Also, how title is vested can have significant probate implications in the event of death. The California Land Title Association (CLTA) advises those purchasing real property to give careful consideration to the manner in which title will be held. Buyers may wish to consult legal counsel to determine the most advantageous form of ownership for their particular situation, especially in cases of multiple owners of a single property. The CLTA has provided the following definitions of common vestings as an informational overview only. Consumers should not rely on these as legal definitions. The Association urges real property purchasers to carefully consider their titling decision prior to closing, and to seek counsel should they be unfamiliar with the most suitable ownership choice for their particular situation.
Sole Ownership
Sole ownership may be described as ownership by an individual or other entity capable of acquiring title. Examples of common vesting cases of sole ownership are:
1. A Single Man or Woman: A man or woman who is not legally married or in a registered domestic partnership. For example: Bruce Buyer, a single man.
2. A Married Man or Woman As His or Her Sole & Separate Property: A married man or woman who wishes to acquire title in his or her name alone. The title company insuring title will require the spouse of the married man or woman acquiring title to specifically disclaim or relinquish his or her right, title and interest to the property. This establishes that both spouses want title to the property to be granted to one spouse as that spouse’s sole and separate property. For example: Bruce Buyer, a married man, as his sole and separate property.
3. A Registered Domestic Partner As His Or Her Sole & Separate Property: A registered domestic partner who wishes to acquire title in his or her name alone. The title company insuring title will require the domestic partner of the person acquiring title to specifically disclaim or relinquish his or her right, title and interest to the property. This establishes that both registered domestic partners want title to the property to be granted to one partner as that persons sole and separate property. For example: Bruce Buyer, a registered domestic partner, as his sole and separate property.
Co-Ownership
Title to property owned by two or more persons may be
vested in the following forms:
1. Community Property:
A form of vesting title to property owned together by husband and wife or by registered domestic partners. Community property is distinguished from separate property, which is property acquired before marriage or before a registered domestic partnership, by separate gift or bequest, after legal separation, or which is agreed in writing to be owned by one spouse or registered domestic partner.
In California, real property conveyed to a married person, or to a registered domestic partner, is presumed to be community property, unless otherwise stated. Since all such property is owned equally, both parties must sign all agreements and documents transferring the property or using it as security for a loan. Each owner has the right to dispose of his/her one half of the community property, by will. For example: Bruce Buyer and Barbara Buyer, husband and wife, as community property.
2. Community Property With Right Of Survivorship:
A form of vesting title to property owned together by husband and wife or by registered domestic partners. This form of holding title shares many of the characteristics of community property but adds the benefit of the right of survivorship similar to title held in joint tenancy. There may be tax benefits for holding title in this manner. On the death of an owner, the decedents interest ends and the survivor owns the property. For example: Bruce Buyer and Barbara Buyer, husband and wife, as community property with right of survivorship.
3. Joint Tenancy:
A form of vesting title to property owned by two or more persons, who may or may not be married or registered domestic partners, in equal interests, subject to the right of survivorship in the surviving joint tenant(s). Title must have been acquired at the same time, by the same conveyance, and the document must expressly declare the intention to create a joint tenancy estate. When a joint tenant dies, title to the property is automatically conveyed by operation of law to the surviving joint tenant(s). Therefore, joint tenancy property is not subject to disposition by will. For example: Bruce Buyer, George Buyer, as joint tenants.
4. Tenancy in Common: A form of vesting title to property owned by any two or more individuals in undivided fractional interests. These fractional interests may be unequal in quantity or duration and may arise at different times. Each tenant in common owns a share of the property, is entitled to a comparable portion of the income from the property and must bear an equivalent share of expenses. Each co-tenant may sell, lease or will to his/her heir that share of the property belonging to him/her. For example: Bruce Buyer, a single man, as to an undivided 3/4 interest and Penny Purchaser, a single woman, as to an undivided 1/4 interest, as tenants in common.
Other ways of vesting title include as:
1. A Corporation*:
A corporation is a legal entity, created under state law, consisting of one or more shareholders but regarded under law as having an existence and personality separate from such shareholders.
2. A Partnership*:
A partnership is an association of two or more persons who can carry on business for profit as co-owners, as governed by the Uniform Partnership Act. A partnership may hold title to real property in the name of
the partnership.
3. Trustees of a Trust*:
A trust is an arrangement whereby legal title to property is transferred by the grantor to a person
called a trustee, to be held and managed by that person for the benefit of the people specified in the trust agreement, called the beneficiaries.
4. Limited Liability Companies (LLC): This form of ownership is a legal entity and is similar to both the corporation and the partnership. The operating agreement will determine how the LLC functions and is taxed. Like the corporation, its existence is separate from its owners.
* In cases of corporate, partnership, LLC or trust ownership, required documents may include corporate articles and
bylaws, partnership agreements, LLC operating agreements and trust agreements and/or certificates.