Getting a title report early on in the home buying process helps ensure both buyers and real estate professionals can verify that a property’s title is free and clear to transfer and that they can proceed with the purchase transaction. A title report can significantly reduce delays at closing and can save time and money in the long run by allowing you to tackle any title problems head on.
A title report is one of the most important records that a buyer will receive during a home purchase. The title company (hired by the buyer) compiles the report from county records to issue title insurance. It documents ownership and details any liens, encroachments, or easements on the home. While the title report might read like legalese, it’s important to understand what it says. There are several aspects of the title report that you should review carefully.
1. Legal description. This part of the report documents your property’s location and all of its boundaries in relation to surrounding streets. If the property you’re buying is a condominium or planned unit development (PUD), the description will include common areas, exclusive or non-exclusive easements, and details on parking or storage that comes with your property. Make sure that the description matches what you expected.
2. Taxes. Before closing, liens must be paid in the order they appear on the title report. A lien in real estate is someone’s legal claim to getting paid when a property sells (like the balance of a loan or an unpaid bill for a service). Property taxes are always the first lien to show up. A property cannot be transferred to a new owner with unpaid property taxes. Property taxes always need to be paid before any other lien holder gets paid.
3. Mortgage liens. Generally all mortgage liens come directly after property taxes on the title report. If there is more than one lender, the largest lien holder takes priority over the others. If the transaction is a short sale, one or more of the lenders will get “shorted” the amount they are owed (since there are not enough proceeds to pay everyone). Lenders must agree to the short payoff in advance of the closing.
4. Restrictions. There are a variety of other elements that can show up on a title report. Commonly among them are condo or PUD Covenants, Conditions, and Restrictions (CC&Rs), which lay out the rules all owners of these communities must follow. (CC&Rs should always be reviewed thoroughly during the offer phase, prior to finalizing a purchase contract.) If the home is in an historic district, there may be restrictions on what work can be done to the exterior of the home.
5. Encroachments. An encroachment is when one owner violates the rights of his neighbor by building a structure on the other’s land or allows something hanging over that land. You can accept the encroachment on your land if it doesn’t bother you, but it could become a problem when you later sell the property. You can ask your neighbor to remove the encroachment or you can request payment for the portion of property affected. If these options don’t work, you can take legal action in court.
6. Easements. An easement is the legal right to use part of another’s property without possessing it (like a shared driveway). An easement is a legal agreement on a property, which remains intact unless both parties agree to remove it.
Items discovered for the purpose of conveying clear title can affect your enjoyment of your property. Review the report carefully before closing and know your rights.