Title insurance is an essential component of every real estate transaction because title insurance protects each stakeholder with a guarantee of clear, lien-free ownership. So why do real estate developers sometimes defy conventional wisdom and enter into a short-term loan transaction without a title insurance policy?
Typically, because they are squeezed for financing and are so desperate for loan proceeds that they overlook the very instrument that could protect them at a later stage of a project as well as at sale time.
The purpose of title insuranceis to mitigate the significant risks faced by both the lending and borrowing parties in a real estate transaction.
The risk to a lender of not requiring a title insurance policy is that a lien or other event could create a dispute to ownership and require extensive legal maneuvering to correct and clear the path to a property sale.
For a borrower or developer, the risk is even more profound because any outside claim to title could kill a project’s prospect for future financing and cause a total loss of cash equity in a deal—not to mention the risk of litigation by lenders, investors and even tax agencies that have a claim against a former property owner.
Title insurance is NOT a do-it-yourself undertaking. Always seek the assistance of a professional and reputable insurer to research a property and issue a policy. Seeking publicly available recorded information on a property is easy but might not be accurate because many city or county recorders have backlogs in publishing to public websites and do not guarantee accuracy of data published.
The cost of a title insurance policy is a small price to pay for every participant in a deal and is typically a cost of the seller or developer, payable at the close of funding or an escrow. Liens, restrictions, unpaid taxes and easements are discovered all the time through title searches and if not removed prior to acquisition can quickly create catastrophic consequences for even the most promising of projects. Title insurance protects you from all of these risks.