You know the process: your buyer’s offer has been accepted, and it’s time for escrow to order a preliminary report for the issuance of title insurance. Before you move on to your next deal, stop and think: does the “routine” coverage fit every buyer?
Here are some basics to consider:
A title insurance policy indemnifies — reimburses so to hold harmless — the owner against a loss of money caused by an encumbrance on title unlisted when the owner bought the property. [Calif. Insurance Code §12340.1]
Title insurance covers against the risk of:
- any encumbrances not listed in the policy as exceptions to coverage; and
- encumbrances the owner was unaware of when the policy was issued to them as the buyer.
Most California real estate transactions involve title insurance coverage for the buyers. There are two main types of title insurance policies: the California Land Title Association (CLTA) policy and the American Land Title Association (ALTA) policy.
What’s the difference? The CLTA policy will list “standard” exceptions to coverage, while the ALTA policy sets out no standard exceptions. Instead, with ALTA policies, the title insurer lists the encumbrances specifically excepted from coverage regarding the property described in the policy.
The CLTA policy is the most common form of owner’s title insurance. It insures only the title as shown by public records held by the local county recorder’s office. The coverage includes money losses due to fraud or forgery for as long as the policy holder — the buyer — retains title to the property. Furthermore, a CLTA policy assures title is vested in the buyer named on the policy.
ALTA policies cover everything CLTA policies do, but also insure against additional risks not shown by the public record. Since ALTA coverage is so broad, title companies will usually write exceptions into ALTA policies before issuance.
ALTA policies are issued in one of several varieties, including:
- the ALTA residential (ALTA-R) policy;
- the ALTA loan policy; and
- the ALTA owner’s policy.
The ALTA-R policy covers risks of loss including:
- unrecorded mechanic’s liens;
- conflicts of boundary lines;
- water rights;
- mining claims;
- patent reservations;
- covenants, conditions and restrictions (CC&Rs) compliance;
- shortages in area access to and from the land; and
- other visible issues.
In addition to the owner’s title insurance policy, institutional lenders require an ALTA loan policy. It insures the position of their security interest — trust deed — in title to the property. This policy insures the lender against loss of their security interest for the duration of the mortgage trust deed if it becomes invalid or unenforceable.
The ALTA owner’s (extended coverage) policy, not to be confused with the ALTA-R policy, is the broadest form of title insurance in California. This policy requires a survey of the property to be provided to the title company, which can cost upwards of $3,000. The survey usually includes a field inspection and utilities check to make sure unrecorded easements do not exist, and a copy of all leases and/or a list of all tenants. It does not cover matters known, created or assumed by the property owner.
A title insurance binder is also an important component of real estate transactions in which the buyer will be the owner for a short period of time. When your buyer purchases a property intending to resell — flip — it within two years, request a binder. The binder will cost your buyer approximately 10% of the cost of the CLTA or ALTA policy they otherwise receive. In return, they will only pay a title insurance fee equal to the difference in cost between their current policy and the new policy when the property is resold within two years. This saves your buyer hundreds of dollars.
There’s a lot an agent needs to cover! The takeaway is this: your buyer’s title insurance coverage is important. Don’t short change them of other considerations by defaulting to the cheapest available coverage. To best protect your buyer, get advice from the title rep you’re familiar with, and understand the different policies available to buyers.
This article was previously posted in 2013, and has been updated.