Author Topic: Title Insurance Problem  (Read 1962 times)

SwordGuy

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Title Insurance Problem
« on: November 03, 2016, 09:22:20 PM »
I simply can't believe I'm the only person who has ever tried to do this.

But my realtor and the title insurance person I've talked to have had a dickens of a time grasping the concept.

I want to buy a house for $100,000.

I will get title insurance.  It is normally ONLY for the amount paid for the property.  Thus, $100,000.

If someone comes along after I buy the house and shows they really own it instead, the title insurance company will give me $100,000 and that person will keep the house.

HOWEVER, I am going to be putting $100,000 to $150,000 in repairs to this house.

If someone claims title to the house and the title insurance company only pays out $100,000, I could have just lost $150,000!

That would be pretty darn awful, to say the least!

In my experience, Title insurance is dirt cheap.

I want to buy Title Insurance for the cost of the property purchase plus up to $150,000 in repairs and improvements.   I figure it should only cost me a couple hundred at most (given how cheap a regular policy for a $227,500 purchase was).

Is that hard to understand?

Anyone know how to tell them what I want so they don't get confused and tell me stupid stuff, like I could buy a home-owners policy to help me if someone vandalizes it?  Duh.   Like every home buyer in the nation didn't know that already...   And which wouldn't do a damn bit of good if I lost a title claim...


Rezdent

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Re: Title Insurance Problem
« Reply #1 on: November 03, 2016, 09:58:26 PM »

I thought that part of the title insurance was that they looked at everything they could find before issuing?  Or am I misremembering that part?

paddedhat

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Re: Title Insurance Problem
« Reply #2 on: November 04, 2016, 06:48:30 AM »
In reality, you are attempting to insure yourself against potential problems that will never reach a even close to the $100K the title company is insuring for. I have done huge amounts of business with a local good ole' boy lawyer that owns a closing agency, and does a large volume of closings. He reports that the typical title insurance claim is not only extraordinarily rare, but typically a low dollar procedural error that takes a few hours of legal work to resolve. The concept of some hidden relative of a deceased previous owner, showing up to claim your property is about as likely as you getting struck by lightning. I also know a family of developers who developed hundreds of millions of dollars worth of new residential communities from the 1970s to 2000. One of the partners in this group told me that he can only recall one title claim in thirty years. Somebody discovered a previously unfiled timber claim, and it had to be resolved. It took a few weeks and a few hundred bucks to make it go away. This is from a guy who did thousands of deals in that time frame.

Your realtor and title agent understand what you want, but have enough experience to realize that it's not a reasonable way to spend your money, even if they could. I built millions of dollars worth of homes on property that I bought as inexpensive individual lots, typically paying $9-19K for them. Many that had changed hands repeatedly in the past. Some of these lots even came from a fairly shady lawyer with a history of doing pretty questionable deals on distressed properties.  I then resold those lots with a $150-200K new home built on them.  I never lost a moment of sleep over the fact that I had spent very little on title insurance, since the policy value would cover 99.99% of any issues that have historically occurred in my market area. After decades of  buying, flipping, building and selling in my local area, and dealing with dozens of realtors, lawyers and title companies, I have yet to hear the horror story you are worried about. That being somebody strolling out of the woods, with a clear title to your property, and taking possession. Not saying that it isn't a possibility  in some other parts of the world, but here it's a non-issue.

SwordGuy

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Re: Title Insurance Problem
« Reply #3 on: November 04, 2016, 08:58:34 PM »
Thanks for the advice.

I'm well aware it's a situation that's unlikely to occur.

But we don't buy insurance just because something is likely to occur.  We also buy insurance because we either can't or do not want to bear the full cost if it does occur.

A $150,000 loss would be 15% of our stock portfolio.   That's the cost of three $50,000 rentals that would each return close to $5,000 a year - which is what we intend to do with the money after we sell the property we're intending to flip.

So it's a significant loss if it does happen.   I figure it ought to cost no more than $200 given what I've paid for title insurance before.   Cheap insurance against a significant loss to us.



iluvzbeach

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Re: Title Insurance Problem
« Reply #4 on: November 04, 2016, 10:07:46 PM »

Goldielocks

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Re: Title Insurance Problem
« Reply #5 on: November 04, 2016, 11:53:11 PM »
A rule with most insurance offerings is that you are not supposed to be able to profit from an insurance claim -- end up with MORE money than it originally cost you.

So they may not be able to insure you for more BEFORE the renovations are complete.  -- (if a title claim happened two days after your purchase, then you would net $150k, instead of $100k that you paid, making a profit)

You might be able to find someone to increase the title insurance coverage AFTER the renovations are done.... but I imagine the admin costs to administer it are not worth the value of the insurance, due to the low risk incidence the other poster indicated... and so this is not an offered product.

SwordGuy

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Re: Title Insurance Problem
« Reply #6 on: November 05, 2016, 09:20:36 AM »
My thinking was that they would cover purchase price plus the repair cost that's documented with receipts and photos.  There's no intent to profit from this situation.

I guess it's just not a product I'm going to be able to buy.  :(

paddedhat

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Re: Title Insurance Problem
« Reply #7 on: November 05, 2016, 10:54:14 AM »
Thanks for the advice.

I'm well aware it's a situation that's unlikely to occur.

But we don't buy insurance just because something is likely to occur.  We also buy insurance because we either can't or do not want to bear the full cost if it does occur.

A $150,000 loss would be 15% of our stock portfolio.   That's the cost of three $50,000 rentals that would each return close to $5,000 a year - which is what we intend to do with the money after we sell the property we're intending to flip.

So it's a significant loss if it does happen.   I figure it ought to cost no more than $200 given what I've paid for title insurance before.   Cheap insurance against a significant loss to us.

Well by your logic, you had better find a policy to cover yourself from being struck by a meteor and being gang raped by Grizzly Bears. At some point, you have to assume that there is little logic attempting to insure yourself from your imaginary fears. Why not ask your local title company exactly how many times in your lifetime that a local homeowner lost their property since somebody magically appeared with a completely unrecorded, and totally legitimate claim, to title that trumps the totally legitimate, recorded, lawful one that sits in your local courthouse?  BTW, since you claim to be so aware of how this is a nearly non-existent risk, I would assume that you are also well aware that a lot of the industry works on ridiculous profit margins? In many states, the seller of the insurance  nets 80% of the retail value of the policy. My local, go to guy, actually does settlements, handled by a lawyer on his staff at "no charge" since they make a huge profit by selling title policies at the state mandated price. They can do this, since the title insurance company knows that chance of spending even a tiny fraction of the $100k that you are insured for, is a statistically insignificant cost of their business model. Title insurance is about insuring that due diligence is done before the sale, to insure that there is a clean record of an unencumbered property being transferred, it is NOT about preventing imaginary trolls from appearing out of the woodwork to steal your property.

I buy property from an speculative investor who has cycled through huge volumes of properties. He buys from every source imaginable, short sales, REOs, courthouse steps, etc.... and NEVER spends a dime on title insurance. He does exactly what any diligent title insurer does, he searched the records and determines that there are no issues. In a sense, he self-insures, since the risk is extremely low, the cost of insurance grossly inflated, and it all is dependent on the quality of the investigative work done at the courthouse. In other words, if you know how to determine that the title is clean, at the time you are taking possession, you have eliminated 99.999% of any potential future issues.

In a forum about making wise financial choices, you have gotten several solid responses, yet want to argue about why you can't waste money insuring for statistically insignificant risks......................strange.

SwordGuy

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Re: Title Insurance Problem
« Reply #8 on: November 05, 2016, 03:07:36 PM »
So, why buy title insurance at all?

paddedhat

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Re: Title Insurance Problem
« Reply #9 on: November 05, 2016, 03:57:38 PM »
So, why buy title insurance at all?

The biggest reason is that most property transactions have a bank involved and they are not willing to close a deal without it. Secondly, the average joe doesn't have the skill set to do a through title search at their local courthouse to see if there are any clouds on the title of the property that are in the process of purchasing. I recall reading, many years ago, that one midwestern state had actually stopped the whole high profit overpriced title insurance game and started providing state backed coverage. As a result the cost to the consumer is about 15% of national average.

In my case, I bought it religiously since I ended up with a lot of properties that had questionable histories and often had previously unpaid taxes and/or HOA fees that were in excess of half the value of the deal. In theory, if somebody dropped the ball and I found a taxing authority (school, county, township) that "forgot" to resolve an outstanding issue, of if the HOA suddenly claimed that there was an unrecorded balance, I could happily let the title co. fight it out. In reality, on two occasions, some sort of questionable activity on the sellers part caused the title co. to raise a flag after the sale, and the sellers (a lawyer who sold title insurance and a  land speculator , both somewhat shady characters) had to come see me in person, and politely ask me to sign something to make a "problem" go away.

slugsworth

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Re: Title Insurance Problem
« Reply #10 on: November 06, 2016, 01:47:05 PM »
Fwiw, as part of my day job I prefer title policies for new construction and renovations of larger properties. We regularly get policies for the final after rehab (or construction) value.

Typically the final value is backed up by a construction loan and is required by our investors/lenders.

These are larger policies but we have no problem ordering them.