TITLE SEARCH vs. ATTORNEY TITLE OPINION vs. OWNER TITLE INSURANCE.....WHAT'S THE DIFFERENCE??
The difference is level of risk. The purchase of real estate is typically a family's largest investment. If you are in a position to choose whether or not to buy an owners title insurance policy, you need to understand the difference between the products.
TITLE SEARCH: I'm not sure about other states, but in Pennsylvania, there are no standards for a title search. Searchers or abstractors are not licensed or certified and even if they were, there are no standards; there are no minimum requirements. So what are you getting when you buy a title search? I have no idea. You might get a lot of information, or not. You'll likely get raw data from the courthouse records. If the searcher/abstractor gives you an opinion, they have no legal authority to do so, so how will you hold them responsible if there is a problem later? Maybe if you're lucky you can get a refund on the cost of the search. Basically you are alone and totally at risk.
ATTORNEY TITLE OPINION: This is kind of an old fashioned practice and I'm surprised how many folks still rely on this method. Even in situations where a mortgage lender is requiring a loan title insurance policy to protect the interest of the mortgage lender, we see homebuyers opting to take an attorney title opinion in lieu of an owner title insurance policy. I have reviewed many attorney title opinion letters and am surprised at what they do not guarantee. Many items that would be covered by an owner title insurance policy are not covered or guaranteed in an attorney title opinion. This is definitely a situation in which the consumer must obtain the opinion and carefully read it before closing. I would strongly suggest that you ask the attorney to compare in writing the differences between accepting the opinion vs. buying the owner policy. Often there is no difference in cost or very little but the difference in risk to the homeowner is material. The bottom line for homebuyers who choose to accept an opinion instead of insurance is that the opinion is only as good as the person who issues it and the guarantee that comes with it is only as good as that attorney's willingness and financial ability to perform if you get into trouble later.
OWNER TITLE INSURANCE: The title insurance industry is regulated at the state level. The industry has adopted national standards through the American Land Title Association (ALTA) and more narrowly defines those standards in each state. Because the title insurance underwriter is affirmatively covering risk, they have clear and detailed standards for search and examination of title. There is a defined due diligence method that must be executed prior to closing and insuring the title. Roughly 80% of the premium collected for title insurance goes to pay for search, examination, and clearance of potential claims - preventative actions - prior to issuing a title insurance policy. The title search and examination performed prior to the issuance of an owner title insurance policy is akin to the physical examination many people go through before they can purchase some types of health or life insurance. The title examiner is looking for pre-existing conditions and then resolving them prior to closing. Title examiners and underwriters do not want to pay claims so they are picky. Pickiness is good for the homebuyer. Buying an owner title insurance policy is buying protection.
OK, now if the examination is so thorough, why are there still claims? Well, the beauty of title insurance is the extra stuff it covers. The big two sources of claims are fraud and human error. Let's talk about error first. I'm sure you consider yourself a very careful person. Do you ever make a mistake? Of course you do. Everybody does. Setting aside possible mistakes by the title searcher/abstractor or the title examiner, what about the courthouse? Nowadays the Recorder's office is computerized. What if the data entry clerk misspells a name and a mortgage gets lost in the system or how about typo in a deed? Errors like this may not be found for years and can cause serious damage to the integrity of a title. What if the local taxing authority gives the wrong information to the title agent and the property goes up for tax sale the year after you bought it? These are common situations caused by human error that are covered by owner title insurance.
Finally let's talk about fraud. Identity theft is real. Sometimes the thief is a perfect stranger and sometimes the thief is someone close to the seller. Here's an example. A married couple separates. Let's say the husband moves out of town or goes on vacation - he's just out of touch with the property for a while. The wife decides to sell the house, take the money, and leave town to start a new life. She gets an accomplice to pose as her husband. He signs the deed. He might not even attend closing. He might get a willing notary who isn't that careful to acknowledge his signature. She takes the money and leaves town. You move into the house - make it your home, and then someday the husband comes and knocks on the door. What happens if the thief gets past the checkpoints? The most catastrophic title claim occurs - a total failure of title. If that happens to you, you'll be thankful you decided to buy owner title insurance.
Buying an owner title insurance policy is buying real protection. It's money well spent.