I am buying house, do I really need title insurance?

Prior to the closing of title, the public records are searched to find all document which affect the ownership of title, including among others, mortgages, judgments, and covenants, easements and restrictions. A title search is conducted against the property using an abstract search. The abstract search serves as the basis for the creation of a title commitment. Simply put, a title commitment is a report which discloses the results of the abstract in a standard form. Additional searches are performed at the request of the customer as part of the title commitment, i.e., a lender and a purchaser in New York request a certificate of occupancy search. A title insurance policy is issued based upon the results of the title commitment.

Title insurance is a policy issued by an insurance company guaranteeing that the title to real property is free and clear of all issues and properly in the name of the owner and that the owner has the right to transfer or sell the property to a purchaser. In the event that a title issue rears itself, the insurance company will pay the damages to the new title holder or take actions to correct the issue.

In my opinion, the definition of title insurance is a policy usually purchased by a buyer to protect against human error (i.e., mistakes in examining title) and adverse claims that exist against a property prior to the issuance of a title insurance policy (usually the date of your purchase). Essentially, any claim of right or lien prior to the date of your ownership (the date of your policy) is extinguished with the purchase of a title insurance policy. Without title insurance policy you are defending all rights and claims of others out of pocket. Do I need to tell you how much a lawsuit costs to defend? Imagine that you have a complete failure in title which would require you to forfeit the property. All the money you paid for the property would have been lost. Moreover, if for no other reason, once you sell the home, the title insurance policy serves to extinguish any matters prior to the date which you owned the property. In order to protect your property rights, you absolutely should purchase a title insurance policy.

What can possibly go wrong?
1. Incorrect property descriptions
2. Wild deed chains
3. Wild mortgage chains
4. Claims by those who stand to inherit, including, undisclosed heirs
5. Fraudulent conveyances to defraud creditors
6. Property placed on the wrong property during new construction
7. Open mortgages of record
8. Open liens and judgments of record
9. Forgery
10. Covenants, easements and restrictions

How much does it cost?
Title insurance is a one time charge at the closing of title. In New York and New Jersey, the cost varies based upon your purchase price and your loan amount. The fee is set by statute. The policy lasts so long as you own the property. Any transfer in ownership of the property voids the policy.

Who pays the transfer tax on the sale of a property?

In New York, the seller is required to pay the transfer tax.  The amount depends on the county which the property is located and in some counties, it depends on the type of property, i.e., vacant land, 1 family, or commercial property.

An exception applies to transfer  of new construction residential properties and real estate owned properties (REOs).  In these instances, it is the custom of the industry in new construction conveyances for the builder or the REO lender to pass the transfer tax payment to the purchaser.  That is, the transfer tax payment is built into the terms of the purchase agreement wherein a purchaser agrees to pay the transfer tax.  Some builders are adamant about transfer taxes being paid by the purchasers and are willing to let the purchasers walk away from the deal.  Of course, I would ask if that were to happen what kind of market are we in – a buyer’s market or a seller’s market?  If it is a buyer’s market, the terms may be able to be dictated by the buyer.

In New Jersey, it is typical that the seller pays the transfer tax even on new construction.  In recent years, however, builders have attempted to pass the transfer tax onto the purchaser.  Once again, this is contractual.  REO lenders still pass the transfer tax bill to the purchaser.

Even with a buyer’s market, I have seen builders stick to the contract to the detriment of losing a deal.  I would most certainly ask under that scenario, why not build the transfer tax into the price.  Meaning that you should formulate your offer by incorporating the transfer tax into the purchase price.  For example, “I will offer the purchase price, but the purchase price offer includes the transfer tax.”

Who should pay the real property transfer tax?

In New York, the seller is required to pay the transfer tax. The amount depends on the county which the property is located and in some counties, it depends on the type of property, i.e., vacant land, 1 family, or commercial property.

A special exception applies to transfer of new construction residential properties. It is the custom of the industry in new construction conveyances for the builder to pass the transfer tax payment to the purchaser. This is a contractual agreement that a purchaser agrees to pay the transfer tax (this is not imposed by any governmental authority). Some builders are adamant about transfer taxes being paid by the purchasers and are willing to let the purchasers walk away from the deal. Of course, I would ask if that were to happen what kind of market are we in – a buyer’s market or a seller’s market?

In New Jersey, it is typical that the seller pays the transfer tax even on new construction. In recent years, however, builders have attempted to pass the transfer tax onto the purchaser. Once again, this is contractual.

Even with a buyer’s market, I have seen builders stick to the contract to the detriment of losing a deal. I would most certainly ask under that scenario, why not build the transfer tax into the price.