Everyone wants to be on title, but nobody wants to be a guarantor
Mr./Mrs./Miss - no not that kind. The best way to "take title" to a property can be a touchy subject - but that's for another post! However, understanding title is fun - so let's chat about it.
First, let’s talk definitions:
What is title?
In property law, a title is a bundle of rights in a pieceof property in which a party may own either a legal or equitable interest. The rights in the bundle may be separated and held by different parties. It may also refer to a formal document, such as a deed, that serves as evidence of ownership.
Clarifying a property owner’s title is vital to real estate ownership because all owners want to make sure that they own what they buy. And, possibly even more important, the bank is not going to give you a loan unless they know who has title to the property (their loan is secured by the underlying property, so if something goes wrong they need to know that they have the right to it).
A clear title is a title to the property that does not have any liens/encumbrances/etc. from creditors or any other parties that raise questions about who has legal ownership to the property. Clear title therefore allows a prospective buyer to know that they will have the entire bundle of rights in the piece of property if they decide to purchase it.
In contrast, when there is a “Cloud on Title” or a “Cloudy Title,” the entire bundle of rights in the piece of property is not clearly owned by the seller. That would give a reasonable person pause before accepting a conveyance of title (because they might shell over money for a home that they ultimately might not have the legal rights to own).
To clarify this further: imagine running a bakery and having an apple pie that is cut into 6 slices. If you own all 6, and no one has any claims to any of your slices, you can do what you want with the slices (if it were me, I would eat the whole pie). Now, if you borrowed sugar from your neighbor to make the pie in exchange for a slice later on (i.e. this would be equivalent to a mortgage), almost all buyers of pie at your shop are going to require you to satisfy that obligation before forking over any money to buy a slice. Why? Because that neighbor has the right to a slice, and no one wants to be the short straw and have to give up their piece to the neighbor.
The question becomes, “How do you know if the seller has the right to sell the property you are buying?” The answer: through a Title Company. Title Companies play a major part in real estate transactions. Each state differs on how the title process is done, but in California when you are interested in a property, almost always you will get title insurance. Title insurance is a product used to protect an owner's or lender's financial interest in the property against loss due to title defects, liens, or other matters. Before title insurance is issued, the title company will perform a Preliminary Title Report. A preliminary report is an offer to insure, but not a complete history of recorded documents relating to the property (it may not list all liens, defects, and encumbrances affecting title). Instead, it merely reports the current ownership and any claims from creditors or other parties. As the Bay Area market is unique in many regards, many sellers will open escrow and order a preliminary title report along with the inspections and disclosures prior to putting the "For Sale" sign in the front yard. This is typically done even though the buyer has the right to choose the title and escrow company when they submit the Purchase Agreement/Offer Contract.
Despite all of the above, it is important to note that "Cloudy Title" may not be a deal breaker. For example, certain items can be negotiated or properly removed through an action to quiet title, while other items, such as delinquent property taxes, can be satisfied at the close of escrow from the seller's proceeds.
If you ever have any questions at all, please do not hesitate to reach out. At MinnGo, we realize that real estate is not something our clients think about everyday. Lucky for you, that is what we live and breath.
Until next time.