The word “title” in the context of a residential real estate transaction is referring to the ownership of real property. The title review process is a vitally important component of a real estate transaction. The goal is to ensure that the seller is conveying, and the buyer is receiving, clear and marketable title to the property. Since prior owner liens, security interests, other rights of occupancy or possession, and bankruptcies, judgments, lawsuits or other legal actions can remain on title when the new buyer assumes ownership of the property, obtaining a title insurance policy should be of paramount importance to every property owner. Below is a general outline of the steps taken in a residential real estate transaction by the attorneys for all parties involved.
Seller’s Attorney Orders and Provides Title Documents Required Under the Contract
In a residential transaction, the seller’s attorney (on behalf of their client) is required to provide a standard set of documents which, when taken together, demonstrate that the Seller has, and is properly conveying, clear and marketable title to the buyer.
- Abstract of Title → A compilation of the documents on record with the county clerk’s office for the subject property, which together provide the legal history of the property. The Abstract is ordered from a title company, who examines the public records, and either updates an existing abstract or creates a new abstract dating back at least 60 years from the date the Contract was signed. This is typically one of the longest lead time items in a residential real estate transaction. If an existing abstract can be located, redating that abstract can take anywhere from 1-4 weeks, depending on the length of time since the abstract was last updated and the number of title-affecting events that have taken place since the abstract was last updated. To create a new abstract from scratch can take anywhere from 3-8 weeks, depending on the complexity of the search and the availability (and ease of searching) of public records in the county the property sits in.
- Survey → A physical depiction of the property in map form. The Survey map shows the boundaries of the property, the location of any improvements located on the property or on adjacent properties but near the boundary lines, and the location of any easements or rights of way that might pass through the property. In order to properly depict the boundaries of the property and the location of and easements or rights of way, the surveyor must examine the Abstract of Title. Because of this, the survey map generally requires the longest lead time in a transaction because the Abstract is required to be reviewed in conjunction with preparing the map, and some additional work to prepare new legal descriptions may be required thereafter.
- Proposed Deed → Drafts of the transfer documents, including a proposed deed, which is the instrument that will ultimately convey title from the seller to the buyer, must be prepared by seller’s attorney. Oftentimes, these documents are delivered after the buyer has secured their financing, if any, so as to ensure that the buyer’s name will match any loan documents prepared by the bank.
Hiring an attorney experienced in real estate to guide you through the process is crucial. An experienced real estate attorney will also be able to leverage their relationships with local title companies and surveyors to expedite the title review process and get the transaction to the closing table in a timely manner. In the current market where both title companies and surveyors are flooded with work, and likely to experience delayed turnaround times, choosing an attorney who has these relationships and is persistent in following up on these items can mean a difference of weeks in terms of the closing date.
Buyer’s Attorney Reviews Title Documents and Orders Title Insurance Commitment
Once the seller’s attorney has provided the title documents required in the contract, the buyer’s attorney can get to work reviewing those items to determine whether the seller is conveying good, marketable title to the property. Part of this process is ordering and reviewing a commitment for title insurance, which protects the buyer up to the purchase price they pay for the property in the event of damage resulting from a title defect not explicitly excepted from the policy. Below are the most common items buyer’s attorney and the title company are looking for when reviewing the documents provided by the seller:
- Liens on the Property → Any valid liens that are discovered (open mortgages, judgments, bankruptcies, tax liens, mechanic’s liens, HOA liens, etc.) must be fully paid and discharged prior to closing so that the buyer takes the property free of these encumbrances
- Survey Issues → The survey is reviewed to determine if all improvements are located within the boundary lines, and to make sure that improvements are no located in problematic easement areas. The survey will also show if any setback restrictions in prior deeds that carry on to future owners of the property are being violated.
- Authority Issues → For a seller who is an LLC, Corporation, Estate, or Trust, the Authority Documents are reviewed to make sure that the person signing on the seller’s behalf is authorized to do so, and that the seller is permitted to sell the property in the first place.
- Compliance with Laws and Restrictions → The abstract is reviewed to confirm compliance with any restrictions set out in any prior conveyance documents. The HOA Documents are likewise reviewed for compliance with any restrictions set forth in those documents.
- Ownership Issues → All prior conveyance documents are reviewed to ensure that (1) the Seller is the rightful owner of the property, (2) the Seller has a full 100% ownership interest in the property (or at least an ownership interest equal to that which they are trying to sell), and (3) that there are no options to purchase the property that have not been exercised. Such options could be found in prior conveyances or in leases affecting the property.
A review of these main issues is conducted on every transaction, along with more careful review of ancillary items depending on the findings during the above review or the unique nature of each transaction. It generally takes 1-2 weeks for a title insurance commitment to be generated by the title company, after which time buyer’s attorney will complete their own title review of the title report and will advise the seller’s attorney on documents required for conveying clear and marketable title to the property.
Lender’s Attorney Reviews the Title Insurance Commitment and Seller Documents
Lenders need to assure that buyers who are applying for a mortgage received clear and marketable title to the property. Once a title commitment is generated, it is reviewed by the lender’s attorney to confirm the lender will have a first priority lien and the lender’s title insurance policy coverage they require. This process takes 3-5 business days.
Why Do I Need Title Insurance?
The process above culminates with the closing of the transaction, and ultimately, with the delivery of final insurance title policies for both the property owner and mortgage lender from the title insurance company who provided the initial title commitment. Title insurance protects the owner of property and the mortgage lender against future claims for any unknown defects in the title to the property at the time of sale. Title insurance rates are set flat by New York State, so regardless of which title insurance company you use, the cost to you is the same. For a one-time fee paid at closing, you, as the property owner, are protected up to the full original sales price of the property. Claims can arise as a result of fraud, forgery, unpaid real property taxes, judgments, liens, or other encumbrances that were not discovered during a search of the property’s title history conducted before the sale and oftentimes these issues remain unknown until a subsequent sale. Even if you have an attorney who is experienced in real estate to guide you through the process, it is important to purchase an owner’s title insurance policy that will protect you for as long as you own the property.
This article is intended for general informational purposes only and should not be considered legal advice or counsel, nor does it create an attorney-client relationship.
Sam Hauser is an attorney whose practice is focused on Residential and Commercial Real Estate, Financing, and Corporate matters. He advises his clients through all stages of a real estate transaction, from contract drafting through closing, including issues related to entity formation, title matters, and financing. Sam can be reached at email@example.com or (585)-672-5500.