Yesterday on NJ.com the following article appeared and figured it would be wise to add a few points to it.
Sales contracts generally require the seller to convey a marketable title to the purchaser. Moreover a lender will generally require the title to the property securing the loan to be marketable.
Sometimes a sales contract will require the seller to convey title in which a reputable title insurance company will insure. There are several reasons why a seller or a purchaser would want a sales contract to require a specific title company to insure title. There may be a defect of title that the seller knows that the title company he works with will insure over. The seller may have an owner’s policy with that company and knows they would be willing to issue a new policy to the purchaser. Perhaps one of the parties wants to name a party, the title company, in advance to be a neutral 3rd party in deciding whether the title is good or bad. This will provide a quick method to determine whether the title is good if a problem arises. Some individuals who work with title companies and feel confident about their decisions would want the contract to require an insurable title from that title company.
For various reasons a title insurance company may be willing assume a business risk and insure a title which has certain defects because the company thinks the risk of loss is low enough to justify issuing the policy. But the risk would be greater than a court would decide that a reasonable purchaser would except. Presumably, the court does not assume that the purchaser will have title insurance. The company would be operating on a spread the risk theory. If it insures a number of this type risk it may have a loss on one but the loss would be offset by the premiums from the others. A title company may accept a risk it would not otherwise insure if the order is from a good customer from whom it gets a lot of business. The loss would be offset by the volume of business. Some titles are insured based on indemnifications, or funds may be held in escrow for a period of time to cover loses from known defects which are insured over.
Whether you are a realtor, banker or home buyer/seller you have probably heard of stories where a defect has popped up on the chain of title which is not necessarily easy to clear. Hence at times the title company may provide a solution so closing need not be delayed. The solution, escrowing funds to cover the apparent defective title. Examples of such escrows.
1- Sam owns property. Sam passes away. Bill the heir gets the deed through the estate and goes to sell the property to bonafide purchaser Jack months or years later. In accordance to the terms of the real estate purchase agreement the seller (Bill) must provide marketable title and the ability for the purchaser (Jack) to obtain title insurance from a reputable title company. The title company will undoubtedly verify that inheritance tax was paid by Sams estate. If it wasn’t an estate attorney will be needed to file the necessary returns by Sams Estate as well as pay any applicable outstanding inheritance tax. If Sams estate was a larger one there could be more then just the tax owed from property which creates a problem for Bill. Such taxes must be paid and satisfied before Jack can be given title insurance which will essentially hold up the purchase. However, lets say the the title company can verify that the estate was a small one and the property was one of the only true assets. Many times the title company will hold double what should be owed in inheritance tax in escrow. The money will be held by the title company until Bill makes sure that Sam’s estate has met its obligations with the government.
2-A shorter one. Say Bill is selling the property to Jack but Bill was recently sued and there is a judgment against him for $5,000.00. When the title company finds the judgment and questions Bill on it, Bill explains that this judgment was already paid. Unfortunately the title company has not been able to speak to Bill until the day before settlement and Bill is unable to obtain a satisfaction letter showing that the judgment has been paid. In this case many title companies will hold approximately $7,500 in order to escrow for the judgment and be able to insure Jack’s purchase of the property.
3-Or just like in Michael Moore’s case in the article above an old mortgage from a previous owner still sits on record with out a satisfaction piece.
In all of these cases the money is held in escrow until the Seller meets its burden of clearing the necessary title defect.
There are many title companies that will merely throw the money in escrow and wait for the seller to come back to them with clearance, sort of what happened in the article posted above. However, title companies that go above and beyond should assist the parties in getting the item cleared. There are many services available these days to go after satisfaction pieces of defunct banks or lending institutions. It is vital to work hard at clearing these items that the title company escrowed for and stay on top of the title company or else the money will merely sit in escrow for long periods of time. In fact after a while most title insurers require their agent escheat the money to the state. At that point its up to you to petition the court for the escrowed funds. We all know that won’t be a pleasant experience…
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