Tips for Title Insurance
February 3, 2014
Guest article by Deborah Farnell:
When evaluating an investment in real property, whether for purchase or to hold a note on, one of the most important aspects in your risk assessment is making sure the property has a clear title. Typically, there are no IRS or custodial/administrator requirements to obtain title insurance on IRA-owned real estate. As the primary fiduciary of your self-directed IRA, the decision to insure the title to the investment property is entirely yours.
If you chose to simply have a title search of the property performed without actually purchasing the title insurance policy, you may gather useful information, but there is no coverage to protect you as the homeowner or lender. Quite often investors will rely on a pencil search or ownership and encumbrance report to inform them of any issues with the property and then forego the actual purchase of a title insurance policy to save money. These title search products provide no protection and are often performed as preliminary searches without the formality of a title search that is required to issue a policy of title insurance. In the current market of abundant foreclosures, short sales, bankruptcies, and fraudulent activity it is more important than ever to protect your investment. Title insurance is a one-time premium that protects your investment for the entire time you own the property.
Here are some helpful hints to consider when obtaining title insurance for your transaction:
- Work with a title company that is familiar with complex transactions and is considered investor friendly. Quite often when you are shopping for title insurance and do not have an established relationship with a title insurance professional, you will get objections and claims that the transaction you are proposing is illegal when all that is needed is a better understanding of the structure of the deal.
- Be proactive in getting the information on the transaction to your IRA administrator and title company as soon as possible. My title company does not charge a cancellation fee for transactions that do not close, and we ask our clients to get us the contract as soon as it is accepted so that we can begin our title work immediately and get any objections or problems solved before deadlines come due. Since there are often a number of parties involved in these transactions that need to review, question, and revise documents as the deal concludes the more proactive you can be to allow the parties time to perform their necessary due diligence, the smoother the transaction will be.
- Review the title commitment carefully. Make sure you understand the requirements and exceptions listed on the commitment and that all items are satisfied as needed. Quite often when purchasing from national banks or servicing agents, a national title company may be used that is not familiar with state or local rules and customs. Perfect examples of this in Florida are the issues with unrecorded utility liens and code violations, which vary by city or county.
- If you are purchasing property to be held in your IRA, you can typically get the seller to pay for the owner’s title insurance policy. If you are lending money and holding the note, you can require your borrower to purchase a lender’s or mortgage title insurance policy that covers your interest in the property.
Deborah has been in the title industry for more than 18 years and is the owner of Southeast Professional Title, LLC, in Maitland Florida. You can reach her at Deb@seprotitle.com or 407-539-0781.