ABSTRACT
Throughout this book, we have examined the nature of property and have used the bundle of rights metaphor to describe the scope of an owner’s private property rights. One of the primary objectives of the due diligence process is to uncover any adverse claims, liens, or encumbrances that remove “sticks” from the owner’s property rights bundle and thereby reduce the market value of the real estate. Another objective of the due diligence process is to reduce information asymmetries between the real estate seller and the investor. A title search begins with a review of the public records for a particular piece of property. In Chapter 6, we discussed the importance of searching the public records for outstanding mortgages, liens, and judgments that have been filed against a property under consideration. Title companies go further by tracing the history of transfers and conveyances in the historic chain of title for the property to establish who currently owns the property. Sometimes, title defects emerge due to a missing or unsigned deed, for example. A title search also looks for current easements, mortgages, liens, leases, or other encumbrances that “cloud” title to the real estate or otherwise make it unmarketable. Title insurance provides property owners and lenders with indemnity against financial losses resulting from title defects, liens, and other encumbrances of record against a property as of the date of closing. The insurance provides real estate purchasers with an assurance of property ownership and clear title. For lenders, title insurance provides additional assurance as to the validity and priority of the mortgage as of the date the policy was issued. This chapter describes the title search process and the nature of title insurance. While title insurance covers a variety of title insurance risks, it is a complex product. Standard title insurance policies routinely exclude and except many title risks. Fortunately, extended coverage and endorsements are available to investors who are savvy enough to fully appreciate the risks. This chapter presents best practices for reviewing title commitments and obtaining title insurance to transfer and mitigate the risks posed by an investment property.
