Is Title Insurance on a House Always Necessary?

[Peony]

My mom is buying a small house for under $200,000 in a residential neighborhood in a small city in upstate New York. The house was built in 1890, as were all the neighbors' homes. The property boundaries have been well established since that time. There is no shared driveway or garage or other possible encroaching edifices. She is paying cash for the property, so there is no bank requirement to have title insurance on the house. I doubt she will stay in the house longer than 5 years or so; she tends to move a lot.

I know her lawyer is going to insist that she spend $1,200 or so for a title insurance policy, and I probably won't try to convince her to do otherwise. However, I'd like to hear mustachian thoughts on title insurance, because $1,200 seems like a lot to spend on something that it seems exceedingly unlikely that she will use. I don't actually know anyone who has ever used their title insurance, except that there is one well-publicized case in our area in which the homeowner is pissed because his insurer is not paying the claim. I don't know the specifics of that case, but it is in a more rural area outside of my mom's new town.

OK, what do you all think -- is title insurance on a house something that can ever be skipped?

[ZiziPB]

I am not a big fan of title insurance myself but it would provide protection in the following cases:

- if there is some undiscovered prior lien on the house (a common example would be a contractor or tradesperson who did work and did not get paid by a previous owner)

- if there is some claim from a prior lender who either did not get paid or (more likely) does not have record of getting paid

- if there was a prior deed signed by someone without proper authority (most often would happen if the house was sold by the estate of a deceased prior owner (title insurance would also provide protection from potential claims by heirs, etc.))

If she decides not to purchase insurance, she should still have a title search done to see what is on the title of the house, but that is for informational purposes only, she would not be able to sue anyone if an adverse claim is discovered later.

[Clover]

We bought a house last year and I declined title insurance because I knew enough of the history of the home and the previous owners that I thought the risk was too low to justify the cost. 

However, if I were in your mom's shoes, buying a house that dates back to 1890 I would probably buy the title insurance.  The cost of the title insurance is lest than 1% of the investment.  With over 100 years of property transfers I would want to be covered in case something wasn't done properly in the past.

[arebelspy]

There are very few cases I wouldn't buy title insurance.  It's a small sum, typically, to ensure against a catastrophic loss (and/or large legal fees in preventing that loss).

I'm not a fan of mundane insurance, just for large catastrophic, and title insurance typically falls under that.

[CommonCents]

Is she getting a mortgage?  If so, the bank may insist on it and she may not have a choice.

[arebelspy]

Is she getting a mortgage?  If so, the bank may insist on it and she may not have a choice.

She is paying cash for the property, so there is no bank requirement to have title insurance on the house.

[CommonCents]

Is she getting a mortgage?  If so, the bank may insist on it and she may not have a choice.

She is paying cash for the property, so there is no bank requirement to have title insurance on the house.

Shouldn't try to provide advice when I'm out sick from work.  :(  Brain not functioning today.

[arebelspy]

Shouldn't try to provide advice when I'm out sick from work.  :(  Brain not functioning today.

That's okay.  :)

It's a good point for anyone else reading and thinking about going without it.

[Thegoblinchief]

I'd agree with ARS here. The insurance is cheap relative to the asset you're trying to protect. Liens can get real messy, real fast.

[Tyler]

I was saved from purchasing a home by the title insurance company a few years ago.  The owner had bought it at a foreclosure option and fixed it up, but it turns out the previous owner never signed the necessary legal documents to release their claim on the house.  The title insurance company is in the business of sorting these things out, and they basically told me the house was a huge legal liability and they wouldn't insure it.  So now the house is dead weight as it is legally possible for a court to eventually kick out any new owner and return it to the original.  AFAIK the current owner didn't bother with title insurance as they paid cash and planned to flip it (which is also why the proper paperwork was incomplete), and now they're hosed. 

After the real estate crisis and the legal mess that created, I personally think title insurance is totally worth the cost especially for an older home with a history.

[seattlecyclone]

Regarding the possibility of a prior owner or their heirs coming in and claiming a prior transfer was done incorrectly, adverse possession laws can minimize the risk of this somewhat. Details on this vary by state. In my state of Washington, for example, land can become yours through this process if you have openly occupied it for ten years without the permission of the rightful owner. So if you bought a house ten years ago and have been living in it ever since, any previous owners or their heirs can no longer claim the property even if the person you bought it from was squatting in the house and had no right to sell it to you in the first place.

If I was buying a house from a close friend or family member who I could trust to not have any unpaid liens against the property, and they had lived in the house long enough for adverse possession to kick in, I would probably skip the title insurance. Otherwise, it seems like a good insurance to buy for the reasons arebelspy stated.

[No Name Guy]

I used to work in Title Insurance (a long, long time ago, in a far away galaxy) as an examiner - establishing the chain of deeds, etc.

The Seller of the property should pay for the Title policy to guarantee your mother - that's the custom here in Washington at least.  YMMV since it's NY. 

Think of it - why should your mother believe the "seller" is in fact the legal owner of the property and holds it free and clear?  As Reagan said of the commies - trust, but verify.  The title policy is the "verify" paid for by the seller to induce your mother to part with her hard earned money in exchange for the deed.

When taking out a mortgage / deed of trust, the borrower typically pays for the policy to insure the bank's security interest - after all, why should the bank believe things?  Again, to the bank, the policy covering their asses is the "verify" paid for by the person benefiting (the borrower, in this case)

Oh - Seattle, your understanding of adverse possession is off.  It has to be open, notorious and known to the rightful owners.  In a bum estate situation, the rightful owners, the screwed heirs, likely don't know, and the clock doesn't start until they do.  Besides...it's up to the seller to pay for it (here in Washington, by custom), not the buyer.

[Peony]

Why should your mother believe the "seller" is in fact the legal owner of the property and holds it free and clear?  As Reagan said of the commies - trust, but verify.  The title policy is the "verify" paid for by the seller to induce your mother to part with her hard earned money in exchange for the deed.

Isn't that what the title *search* is for? I would never question the necessity for a title search. It is only the insurance that I have doubts about, especially if the title search has come up clean. (If the title search did not come up clean, I would not buy the property.)

In any case, I am sure my mother will heed her attorney's advice and get the insurance. But if it were me and I knew I were not going to be hanging onto the property for very long, I would honestly be tempted to skip it.

[Spork]

Imagine that some previous owner (and maybe not the current seller but some seller up the chain) got a divorce and forged their wife's signature on the sale of the property.  Title insurance *should* cover.  I bring this up because it happened to a friend of mine... and her insurance didn't cover.   That's not to say that the "title insurance in general is worthless" but that her particular policy was worthless. 

I personally think it's worth the money.

[Cassie]

We paid cash for our house & still got title insurance.  The seller did not pay for it. I think it is worth every penny in the rare case you might need it. It is too big an investment to take a chance.

[Rural]

This is one of the good insurances -- low cost to cover something you can't. If I could, I'd pay out of pocket to get it on an inherited house, even. No way I'd buy without it.

[No Name Guy]

Isn't that what the title *search* is for? I would never question the necessity for a title search. It is only the insurance that I have doubts about, especially if the title search has come up clean. (If the title search did not come up clean, I would not buy the property.)

In any case, I am sure my mother will heed her attorney's advice and get the insurance. But if it were me and I knew I were not going to be hanging onto the property for very long, I would honestly be tempted to skip it.

Because even the best search / abstract can have errors in it.  A good forgery on a deed for example, might be missed - heck, I spotted and flagged one or two quit claim deeds that "just didn't look right" in my years in the business, but they were pretty blatant (and if the very vague memory serves, the company declined to insure in at least one case).  A classic case is where a squatter / ID theif takes over the home of an Ex Pat type and "sells" it after a little while and does a good forgery on the deed.  Ex Pat comes home after being overseas for years and finds a strange family in their home - pissing contest ensues and new family is told tough cookies, you were scammed....but they're paid off in full by the title company.  That's why you actually buy the policy. 

So what's the custom in NY?  Again, here in Washington, the seller pays for the new owners title policy as an inducement / proof to the buyer that the title is clean, so were the transaction happening here, it wouldn't cost your mom a dime.

Oh, another reason to get the policy by the way:  Even if you're not holding onto the property for long, the typical instrument used to transfer property (again, here in Washington, NY and other states may vary) is a "Statutory Warranty Deed".  That's where the seller warrants the title to the property to the purchaser.  Even if you hold the property for only a day, then sell it off, you're warranting that title, and everything that came before it.  Now, if there was a problem in the title before you owned the property for said day, the new owner (the one you sold to, or the one they sold to, or the one they sold to, etc) is going to sue everyone they can find in the chain of title.  With the policy, it's up to the Title Company to defend your position, not you.

[BFGirl]

Isn't that what the title *search* is for? I would never question the necessity for a title search. It is only the insurance that I have doubts about, especially if the title search has come up clean. (If the title search did not come up clean, I would not buy the property.)

In any case, I am sure my mother will heed her attorney's advice and get the insurance. But if it were me and I knew I were not going to be hanging onto the property for very long, I would honestly be tempted to skip it.

Because even the best search / abstract can have errors in it.  A good forgery on a deed for example, might be missed - heck, I spotted and flagged one or two quit claim deeds that "just didn't look right" in my years in the business, but they were pretty blatant (and if the very vague memory serves, the company declined to insure in at least one case).  A classic case is where a squatter / ID theif takes over the home of an Ex Pat type and "sells" it after a little while and does a good forgery on the deed.  Ex Pat comes home after being overseas for years and finds a strange family in their home - pissing contest ensues and new family is told tough cookies, you were scammed....but they're paid off in full by the title company.  That's why you actually buy the policy. 

So what's the custom in NY?  Again, here in Washington, the seller pays for the new owners title policy as an inducement / proof to the buyer that the title is clean, so were the transaction happening here, it wouldn't cost your mom a dime.

Oh, another reason to get the policy by the way:  Even if you're not holding onto the property for long, the typical instrument used to transfer property (again, here in Washington, NY and other states may vary) is a "Statutory Warranty Deed".  That's where the seller warrants the title to the property to the purchaser.  Even if you hold the property for only a day, then sell it off, you're warranting that title, and everything that came before it.  Now, if there was a problem in the title before you owned the property for said day, the new owner (the one you sold to, or the one they sold to, or the one they sold to, etc) is going to sue everyone they can find in the chain of title.  With the policy, it's up to the Title Company to defend your position, not you.

+1

[MrsPete]

I'm with the majority here:  It's a one-time fee to KNOW once and for all that no one will ever pop up with a lien against your house.  Money well spent. 

Having said that, I didn't get it on my current house, but our situation was unique:  We bought this house from a relative whom we trust, and that relative had title insurance done when she purchased the house some 20 years before.  Since she knew she hadn't borrowed against the house, failed to pay any contractors, etc., we felt comfortable -- but that's an unusual situation.

[CommonCents]

So what's the custom in NY?  Again, here in Washington, the seller pays for the new owners title policy as an inducement / proof to the buyer that the title is clean, so were the transaction happening here, it wouldn't cost your mom a dime.

Here in MA, the buyer pays.  They are the one wanting the protection, not the seller.  (Sure, the seller can request money towards closing fees.)