Saturday, August 21, 2010

Insurance - Why is it Important?

This could be a hypothetical situation. You have the opportunity to become the annuitant of the best real estate purchase since they discovered gold in Nevada and California. For months you have been looking for your first land investment and heard about a 40 acre alfalfa farm in the county north of a major city that fronts on a paved two-lane access road. You inspect the property and love it. Then you call the phone number on the sign. The ostensible owner tells you it's a $33,000 all cash deal and since he is leaving town day after tomorrow, he needs one-half good faith cash down immediately and a quick 48 hour close.

You give the seller a $16,500 cashier's check, begin proceedings at a local escrow and title insurance company and are informed the title work will take at least 10 working days. The seller says that's fine with him and he'll notify escrow where to send the paperwork after he leaves town. Have you figured out what happens next? If you're an astute investor cognizant of escrow and title paperwork and proceedings you already know the game. The seller disappears with the deposit money and the prospective buyer becomes the victim of a scam. Once the title report is completed and made public to the buyer it showed a Federal tax lien and a local mechanics lien, both unpaid. It also showed a local county utility lawsuit for a power easement on the back of the property that was never granted. All of these problems occurred because the buyer did not wait to see what was in the title insurance paperwork.

For the uninformed the broad definition of title insurance is a contract between a buyer of real property and a local title company that basically guarantees and indemnifies against financial loss or damage or problems resulting from defects and other problems concerning the legal ownership of real property. It is a complete history of any property from day one to the present. This report not only shows legal ownership but all liens, judgments, and property easements placed on said property and whether they are still in effect or have been released. Insurance fees are not all the same. They vary from state-to-state. Actually, some local title companies set their own fees. In other states fees are regulated by state law and a minimum rate is set but not always adhered to by the insurance company. These title fees are paid at closing and are usually paid by the buyer. However, in some cases deals are made whereby the seller, in order to close the deal, will pay all buyers closing costs. Depending on the title work involved, the state where the closing was opened and the sales price of the property, fees can range from $800 and up.

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