Title insurance - sensible closing cost or scam?
January 31, 2012 10:36 AM   Subscribe

Should I purchase owner's title insurance for my new home?

I am in the process of closing on my first home. Beyond the mandatory costs and fees (lender's title insurance, registration fee, certificate fees, underwriting fees, etc.), our attorney that will be managing the closing process has recommended that my wife and I purchase owner's title insurance.

He (the attorney) stated that owner's title insurance protects the buyer should another party make claim on your property and legally win ownership of the title via litigation. The added costs to closing will be about $800. In addition, the attorney stated while this cost is optional, I would be a fool not to purchase it given the total cost of purchasing the house itself. He also admitted that he will get a kickback if I purchase it. Other special snowflake features - house was built in 1956, sold to second couple in 1976, now being sold to us in 2012. Both the original owner's and second couple have passed away. The second couple's children are now selling us the house as the property has been put into their trust.

After doing some investigation on owner's title insurance, it is additional protection if my attorney makes errors when doing his diligence in the initial title search. There also appears to be rampant price fixing and poor coverage should a claim come up. As further anecdotes, none of my parents (mom, step-dad, in-laws) have owner's title insurance. Our loan officer also stated she has not seen one application of owner's title insurance claims in the 25 years she has been servicing mortgages.

If the progression of ownership is clear along with clarity on the mortgages/lot boundaries/lack of leins, should I even bother or is this money down the drain? My ultra-cautious side says to purchase it while my BS detector is going off as this looks like a scam marketed to home buyers by fear, uncertainty, and doubt.

For other home buyers and home owner's, will you or did you purchase owner's title insurance? What was your reasoning behind your decision to purchase it or decline the insurance?
posted by seppyk to Home & Garden (29 answers total) 3 users marked this as a favorite
We did. (Mr. M. is a real estate lawyer.)
posted by Maisie at 10:40 AM on January 31, 2012 [1 favorite]

I am a lawyer, but I am not your lawyer and this is not legal advice.

Yes. It's pretty cheap and it protects you against the unlikely-but-not-unheard-of scenario of somebody coming in and proving that the seller didn't have clear title on the property and therefore could not have conveyed clear title to you.

It is highly likely that your parents, home-owning friends, neighbors, relations, and indeed everyone else has title insurance and doesn't know it. It's a pretty standard closing costs expense, and it's not an ongoing premium like, say, homeowner's insurance.
posted by gauche at 10:45 AM on January 31, 2012 [2 favorites]

If you view life insurance, fire insurance etc as a scam marketed with FUD, then go ahead and skip it. All fall into the category of things you don't need, until you actually do need them.

I believe title insurance also covers things like lot survey errors (property lines, etc), easements that may or may not be recorded yet are actionable, some document problems and possibly others.

Ours was $300. Have I needed it ? No.
posted by k5.user at 10:46 AM on January 31, 2012 [1 favorite]

I did not, because of my perception that a claim was too unlikely to merit the cost. With 56 years of stable ownership spread across only two families, I definitely would take the (very, very small) risk that something would happen regarding the title. If you are risk averse enough, obviously you should get it.

the attorney stated... I would be a fool not to purchase it given the total cost of purchasing the house itself.

What dreck! By that logic, you should insure against tiger attacks, given how expensive your house is.
posted by deadweightloss at 10:46 AM on January 31, 2012 [2 favorites]

I am not a lawyer but, somehow, I am your lawyer. Only kidding; this is not legal advice.

We just bought a house and I thought about this very question for quite a while. In the end, we decided to buy it since, as your attorney points out, it's a relatively small cost compared to the cost of the house. Our attorney recommended it as a hedge and, while I know that she clearly isn't a neutral party, I decided that I trusted that she wasn't telling us this just to make a profit. Our situation is a little more complicated than yours: our house is >100 years older, we don't know for sure about every owner of the house, and the people who sold us the house didn't really conduct the deal with the utmost honesty. I guess what I'm saying is that, while you're probably fine not to but it, I don't think this is one of those things where people are going to stand around and say, "Can you believe what a sucker seppyk is?!"
posted by Betelgeuse at 10:47 AM on January 31, 2012 [1 favorite]

Sorry; to clarify, no one is going to call you a sucker if you choose to buy it.
posted by Betelgeuse at 10:48 AM on January 31, 2012

Yes. Previously. However, you should try to shop around, especially if "he will get a kickback if I purchase it." (Or you could simply ask him to split the kickback.)
posted by Mr.Know-it-some at 10:48 AM on January 31, 2012

Best answer: Having clear title is more than just knowing who owned the house in the past; title insurance can protect against, say, unpaid specials that the estate missed that suddenly gets a lien on the property next year, or a poorly-recorded mortgage on the neighbor's property that doesn't include the easment for your driveway. Even if you're in the right, there may be a cost to defending your property against a bad claim, and title insurance can help with that as well.

In theory, you should be able to comparison-shop for your title insurance, rather than going with the default your banker or title company offers. As you've noted, what the insurance covers may vary quite a bit, so make sure you know what you're buying. So, while there's not a lot of hard evidence over whether or not you need the insurance, you don't necessarily need your attorney's insurance.
posted by AzraelBrown at 10:50 AM on January 31, 2012 [1 favorite]

Titles are weird things. There's a complex web of laws to ensure that only those authorized to sell a title to a property do so and what the title to property entitles you to own and use. Things like liens follow the property, not the person the lien is again... and in that case, the current owner of the property (ie, you) gets stuck with it. It's worth your while to comparison shop, but the truth is that you can't afford the consequences of something going wrong, and that's why insurance is a necessity.
posted by deanc at 10:53 AM on January 31, 2012

Title insurance is not a scam- you probably won't need it, but if you do, you will really, really need it. I did it on the advice of my father, who is an attorney, and don't regret it even through I havent needed it You can shop around if $800 seems high.
posted by charmedimsure at 10:58 AM on January 31, 2012 [2 favorites]

I will quote myself from a thread in 2010:

"I know a couple who skipped it because of the cost.

Seven years later, an attorney showed up, representing some guy who specializes in buying up old easements.

It took them years to work it out, and they spent way more than the original cost of the insurance."

To elaborate: this guy liked to find old easements that had been forgotten about or lost track of somehow, and track down whoever had the rights to the easement. He'd show up out of nowhere, offer them some cash to part with an easement they never knew they had a right to, and then turn around and file against the current homeowners who had passed on title insurance. It was an ugly little racket that is apparently perfectly legal. An unlikely tale, but a true one...
posted by Irontom at 11:44 AM on January 31, 2012 [1 favorite]

Title insurance may not be a scam, but it sure is scamm-Y. Four title companies control most of the industry and jack up premiums. The claim/premium ratio is phenomenally high compared to all other kinds of insurance (e.g., the insurers very rarely have to pay claims). Kickbacks are rampant. Worst of all, lenders require title insurance even in cases where the title has been extensively searched already and nothing has changed (e.g., refis). All that said, as a lawyer, I'll probably break down and get it, but as a matter of principle I'll get a discount and shop around for the best price.
posted by yarly at 11:49 AM on January 31, 2012

Irontom: First, why would the guy care whether the current owners had insurance? Either the current owners would pay, or the insurance company would-- it makes little difference to him. And second, even so, it's not particularly compelling evidence that buying the insurance is a good idea. What do you prefer: paying $400 now, or a 1/100 chance of paying $4000 later? It might be way more, but it's still a good risk if you can afford it, given those odds. It comes down to how likely and how expensive problems are, and from what yarly and others have said, the odds are not in your favor.
posted by alexei at 12:04 PM on January 31, 2012

$800 sounds high, but you need title insurance. The way this manifests will depend on where you are; if you are in (say) Massachusetts, you ABSOLUTELY need title insurance. We almost got ourselves in trouble with a property whose legal status was changed retroactively by a court decision that made an earlier foreclosure (5 years and 2 owners ago) illegal and opened the door for anyone who had been foreclosed on improperly (and it's not a high bar) to sue the bank for their troubles, and the current occupants for title to the house.

It's a long shot, but so is a house fire, and I don't see a lot of people advocating against homeowners' insurance.
posted by Mayor West at 12:14 PM on January 31, 2012

Best answer: Hold your nose and buy the title insurance. If we were talking about the way the real property system used to work 20 years ago, you could make a case that it might be sensible to skip it. Not now. I would argue that, if there was a mortgage on the property at any time during the past ~20 years, you shouldn't even think about not having title insurance. The banks have been playing all sorts of sloppy, shady games with what used to be a very transparent and reliable system for recording titles and mortgages, by securitizing mortgages, dispensing with the need to record mortgage transfers in County offices, losing or destroying original documents. It is now quite within the realm of possibility that a homeowner could one day get a letter from the successor to some bank they never heard of, claiming that some mortgage from a decade ago wasn't properly discharged. Even if you'd probably win the case, you don't ever want the headache (and expense) of having to fight it, or even think about it.
posted by Corvid at 12:17 PM on January 31, 2012 [1 favorite]

I used to work for a title company. The details are fuzzy now, as it's been several years, but a story (urban legend?) circulated about an entire subdividing that had been poorly surveyed causing everyone's legal property lines to be 10 feet off. Big to-do ensued, title swooped in and saved the day. Whatever, the moral was that everyone "needs" title insurance. I'm skeptical, but would probably do it.

That being said, what is far more likely, as someone has mentioned, are old liens showing up against the property after your purchase. Mechanics liens, in particular, have a way of taking a long time to appear (mostly because those "mechanics" owed money are slow to file, maybe?). One of the things that title insurance covers is that the title to the property is"free and clear" at the moment it transfers to you backwards into perpetuity (you, of course, can do whatever you like moving forward).

Also, In my state, it's pretty customary for the seller to pay for the title insurance policy. It makes sense because it is, in part, protecting you from their liens and such.
posted by LyndsayMW at 12:19 PM on January 31, 2012

My understanding of title insurance is that it differs strongly from many other kinds, being past-focused rather than future-focused, and that this is part of the reason why premiums and claims are so imbalanced. Regular insurance is focused on the future -- in the next month, you might die, or be in a car wreck, or contract an illness, so the premiums reflect the expected claims. Title insurance is (mostly) against things that have already happened but are unknown -- in the past, was the land or home sold incorrectly? Is there a lien on the property? This means that most of the premium doesn't reflect the likelihood of future problems but rather the cost of investigating the title history.

This also means that while the lender's title insurance isn't formally protecting you, there is a real sense in which it is -- the searches performed to protect the lender's interest also point to a lack of any known problems that would plague you. So there is a limited sense in which you can free-ride on most of the lender's-policy premium.

The kickback to the lawyer is slimy slimy slimy. The amount of that kickback is money you're spending, but that's not providing you with any protection or indeed any service or benefit at all. Instead, you are simply indirectly paying your attorney... but you've already agreed on what his fee will be, and the attorney's job here is to zealously guard your interests in place of his own in exchange for the fee you offered. If the kickback is more than a lunch worth of money, I would feel comfortable simply demanding the entire sum rather than splitting it. Or some move that's equivalent, like reducing his fee by that amount.
posted by ROU_Xenophobe at 12:41 PM on January 31, 2012

It depends how old the house is. A brand new house would have clear cut (more or less, depending on foreclosures) title. A house that is 150 year old could have passed through many hands through purchase or inheritance: there could be be problems hidden away in the title ownership.

I have purchased 3 houses so far in my life, and I always thought that title insurance was a small additional payment for peace of mind.
posted by francesca too at 1:07 PM on January 31, 2012

You may have a harder time getting a mortgage if you don't get title insurance. Why is anyone going to lend you money when you may not own the house you're putting up as collateral?
posted by one more dead town's last parade at 1:47 PM on January 31, 2012

You may have a harder time getting a mortgage if you don't get title insurance.

Typically, the lender gets its own title insurance up to the value of the loan. The OP asked about an additional ad-on policy for the owner. So the owner is only really getting insurance for that portion of the house he actually owns (which could be pretty small).
posted by yarly at 1:52 PM on January 31, 2012

Here's a N on "yes, sometimes the title insurance is req'd." My parents used theirs, as they were 'sold' a tiny sliver of land that the previous owner didn't actually own. It wouldn't have been a big deal, except that the sliver held the fourth leg of their pier. Their house had been sold several times 'incorrectly' without anyone noticing, but it was my parents' new neighbors who decided that they wanted their sliver back out from under the dock. (Ok they really probably didn't care about the sliver, but it suddenly had a high market value)
posted by Tandem Affinity at 1:53 PM on January 31, 2012

when you go to sell, the buyer might want it, and it helps that you had it.
posted by thilmony at 2:23 PM on January 31, 2012

A brand new house would have clear cut (more or less, depending on foreclosures) title

How do you figure? The land under the house has still been churning through the legal system for a couple hundred years, and an easement is an easement, even if you built a house on top of it.
posted by zvs at 4:47 PM on January 31, 2012 [1 favorite]

If the progression of ownership is clear along with clarity on the mortgages/lot boundaries/lack of leins, should I even bother or is this money down the drain?

Most banks will not underwrite a mortgage unless there's title insurance. It's one of the reason people can charge so much for it.
posted by valkyryn at 4:50 PM on January 31, 2012

I am a real estate lawyer, but I am not your lawyer. This is not legal advice.

Title insurance is not a scam. Lenders require it (a lender's policy in that case) for all types of property, residential, apartments, commercial, even farmland! That's because although the risk may be small, the result if there is a problem can be financially devastating for the property. The cost for owner's is based on the value of the property and for lenders is based on the dollar amount of the loan.

I would be surprised if it is in fact true that your relatives do not have an owners title policy - it is very standard and is included in the closing costs. As mentioned above, the cost is typically paid by the seller (although this varies by state) so your relatives may never had the question put to them of whether they wanted to buy title insurance.

If you plan on getting a mortgage, you will need to have an owner's title policy in addition to paying for a lender's policy (since the borrower pays all the lender's costs).

you don't necessarily need your attorney's insurance

Yes, it is generally good to shop around, but if you are close to closing and the title search has already been performed then it is unlikely to save money at this point. The new provider of title insurance will need to do their own title search (they can't rely on the one that has been done) and you may have to pay the first title company a small fee for the search they have already completed. Also, in many states the title fees are strictly regulated so there may not be a significant difference between companies. For what it's worth, I didn't bother shopping around for title insurance when I bought my home.

I checked in on this thread to make sure people were covering it, and was very very surprised at the ambivalence. In case you are concerned that I have a bias here in my response, I only work on commercial real estate transactions and do not sell title insurance or benefit from anyone purchasing title insurance.
posted by lvanshima at 7:51 PM on January 31, 2012 [1 favorite]

Yeah, I'm surprised it's optional. Maybe it's a state by state thing? Because I think it's required where I live.

Not a scam. (Provided you buy from a reputable company.)
posted by gjc at 8:08 PM on January 31, 2012

My college roommate and her husband recently ran into some trouble when refinancing with an unresolved lien against the former owners that didn't get caught when they purchased their house. She was happy she had the owner's title insurance as the cost of it was a lot less than what they would have had to pay to resolve the lien.
posted by bluesapphires at 5:26 PM on February 1, 2012

Ok, title insurance may not be a "scam" per se -- but there are NUMEROUS studies and reports and suits indicating serious problems in the industry.

GAO report

Class action pending before Supreme Court

Congressional testimony
posted by yarly at 7:40 AM on February 2, 2012

Response by poster: For posterity, I ended up purchasing the title insurance for the following reasons:

* The title search went with the owner's title insurance policy. It was too late in the process to re-start the process and shop on my own. This would have delayed my closing which was an even bigger risk I wasn't willing to swallow.
* There was an noted exclusion on the specific property.
* My attorney found a problem in the title, but corrected it.
* The amount of the investment was high enough where losing the property would be worth spending the amount of money to protect my interests and equity should something bad happen in terms of litigation or the clearness of title.

If I were to do it over again, I would have definitely shopped around for owner's title insurance prior to and immediately following my accepted offer. The rates may or may not have been different, but given the investment, it would have been better to be educated and informed.

We closed this past week and have started the moving process! Again, thanks to all who posted their stories and advice.
posted by seppyk at 9:40 AM on March 1, 2012

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