Are you a first-time real estate investor looking to dive into the world of property ownership? One of the key steps in the process is understanding what a title search is and why it’s so important.
Before you can close any real estate deal, it is essential to conduct a title search. A title company will look up deeds, land records, court judgments, and more to determine if there are any liens on the property – which could be a potential obstacle to completing the transaction.
This article will explain why performing thorough research beforehand is crucial to protect your investments from any unknown issues that could cloud the title down the line.
What Is Included in a Title Search?
A title search examines public and private records to determine the legal ownership of real estate and any associated liens, encumbrances, or other claims. It is an essential step in the home buying process as it provides valuable information about potential risks for buyers, sellers, and lenders.
A comprehensive title search typically includes the following:
- Examining historical documents such as tax records, deeds, mortgage registrations, court judgments, and bankruptcy filings.
- Title insurance company searches to identify existing mortgages, liens, or assessments on the property.
- Confirmation that all municipal bylaws applicable to the property have been satisfied.
- Verification that previous owners paid all taxes due on the property.
- Searching for evidence of any easements, right-of-ways, or other claims against the property.
- Examination of any surveys and plans associated with the property.
How a Property Title Search Works
A title search looks at the property’s public records to determine if the title is clean or ‘clouded.’
A cloud on a title is an encumbrance or claim that can make a property tricky or impossible to transfer. According to Cornell Law School, common title clouds can include mechanics liens and defects in the deed.
Usually, a title company or real estate attorney will use a combination of different legal documents to create a chain of title to confirm that the seller has the legal right to sell. However, the title search process can also be led by a lender or other entity to verify if there are any claims against the property.
Before you can perform the search, you will need to gather information regarding the property. This includes public records, legal documents, liens or other claims, loans on the property, and the property taxes due. Since you need to collect legal documents, you may need access to courthouse records, so hiring a professional is usually recommended over searching yourself.
An attorney or title company will then look up the public records on the ownership of the property before you can close on the transaction. After the search is complete, you will receive a preliminary title report. If any issues should arise with the title, you can advise the seller and decide whether or not you want to follow through with buying the property.
If there are problems with the title, it is a good idea to let your attorney and real estate agent know your findings and thoughts. While some issues in a search can be easily corrected, others can be more complex, which could create a problem with your loan commitment.
Why Should You Search the Title?
Performing a title search protects both the prospective buyer and lender from any hidden surprises dealing with claims, zoning violations, or liens on the property. A title search clears the property from ownership issues and confirms that you will be the sole owner of the property. Searching for yourself is a way to save some money, but you could be setting yourself up for failure if you miss an important legality.
A title search can reveal many potential problems that could keep the house from being sold. Some issues that could arise include:
- Bankruptcy by the current owner can blur the lines of ownership
- Pending/current foreclosure
- Building code violations
- Tax, mechanic’s, or creditor’s lien on the property
Advantages of Searching the Title
Uncovers Existing Claims
Title searches will show if the prospective property has outstanding property tax liens or other current claims. If there are existing claims, it is important to know that you will inherit those issues if you purchase the home, which means the seller’s problem will belong to the new owner.
Reveals Restrictions
Sometimes land is subject to easements, meaning that a third party has the rights to a piece of property. These and any other restrictions, such as zoning laws, homeowner association regulations, covenants, and the existence of environmental hazards, will come up in a title search to make you aware of potential issues that should be addressed before you move forward with a purchase.
Clarifies Ownership
A title search will disclose if the seller is the legitimate owner. This information is extremely important if there is a break in the chain of title due to missing information, such as the original seller not being listed on the deed. Running a title search can help solidify the chain of title and will verify who the legal property owner is.
Example of a Title Search
Say you’re looking to purchase a new home, and you put in an offer. Before you close escrow on the house and take possession, you want to ensure that the home’s title is clear of any liens, violations, and claims to ensure that the home will be rightfully yours. You decide to hire a title company to determine if your future home’s title is clean or flawed.
The steps for performing a title search depend on which state you live in. For example, California keeps online records, making it easy to search. Below is an example of how to complete a title search, along with important steps you should take:
Find the Parcel Number
Each property has a parcel number or a sequence of numbers that serve as a legal description to identify the home for tax purposes. You can find this number on your yearly property-tax bill for a property you own. Search online or visit the county tax assessor’s office to locate a parcel number on someone else’s home.
Examine the Chain of Title
The chain of title provides the property’s ownership history, allowing you to see the current and past owners all the way up to the property’s original owner. You can find this information by looking at public records online or visiting your local recorder’s office.
Do a Property Search
Once you have found your county’s website, you must input the property’s information before starting the search. While the information you enter depends on your county, most counties ask for the street address, parcel number, or the planning application number.
Check Property Taxes
Property taxes must also be examined to ensure they have all been paid. If there are any outstanding or overdue balances, there could be a pending lien placed on the property. Once a lien remains unpaid for a certain amount of time, the government can conduct a tax sale, so it is important to ensure that the taxes are up to date.
Review Property Records
After locating the property records, you must review the property’s liens, sales records, and other important information. Advising your real estate agent and attorney of your findings can be valuable as they can offer advice and help you decide your next step.
Average Cost of a Title Search
The typical cost of a title search runs between $75-$200, depending on the state in which you’re buying property. Once the search has been completed, you will receive a report advising of any potential issues you could face. You can reduce the title search cost by performing it yourself, though it is riskier than having a professional do it.
If you decide to conduct a title search yourself, you will need to ensure you have the correct information, such as the street/legal address of the property. Once you have the information, you can go to the county clerk’s or tax assessor’s office to verify if there are any outstanding liens on the property. Searching for yourself is a lengthy and time-consuming process that requires a sharp eye and knowledge of what you are looking for.
Who Pays for a Title Search?
The property buyer usually pays for the title search as part of the closing costs, but in some cases, it could be the seller. For example, if the housing market isn’t doing too well, you might be able to talk the seller into paying for the search. While older properties with a long history can take more time for the title search to be completed, the average usually takes about 10 to 14 days.
What Happens if There Is an Issue With the Search?
Some common issues that a title search can uncover include open security deeds, potential missing interests, a break in the chain of title, and unpaid property taxes. If the title search turns up red flags, the homebuyer has three options depending on what is permitted in their purchase contract:
- Ask the seller to reimburse the buyer for the amount it costs to resolve the issue.
- Require the seller to fix the issue before the closing.
- Walk away from the deal entirely and receive a refund for the deposit.
Title Insurance
While traditional insurance offers protection from future events, title insurance protects against claims from past incidents. Purchasing title insurance will protect you and your mortgage lender from any financial loss during or after the sale if there are any title-related issues.
According to Realtor.com, the cost of title insurance averages about $1,000 per policy, although the price can vary significantly depending on the property purchase price and where the home is located. A typical title insurance policy usually covers the following:Â
- Flawed records or record-keeping
- Ownership by a different party
- Incorrect signatures (including forgery or fraud with title documents)
- Outstanding lawsuits or liens
The Bottom Line
A title search is an essential step in any real estate transaction. As a real estate investor, you need to conduct a thorough title search to ensure that the property you’re interested in has a clear title and that there are no outstanding liens or other issues that could affect your ownership rights. By understanding what a title search involves and being aware of common issues that can arise during the process, you can protect yourself from potential legal and financial risks.
Looking for the perfect real estate investment can be challenging, especially if you’re trying to navigate the market solo. With so many opportunities available, weighing the risks and benefits of each option is important. Fortunately, Arrived offers a solution that can help streamline the process and minimize uncertainty.
By investing through Arrived, you can take advantage of their expertise in finding and managing properties, allowing you to focus on maximizing your returns. Check out their selection of investment homes today and discover how your initial investment could grow over time.
