Examining Title to Lakeshore Property: Liens, Titles and Bearings - Oh My!
by Carter DeLaittre
As published in the March 8, 2002 issue of Outdoor News

For many buyers of lakeshore property, the examination of title to the property is by far the most puzzling part of the transaction. Seemingly minuscule issues can turn into perplexing problems. Buyers are bombarded with legal jargon and title insurance lingo. Words seldom used in a normal conversation are thrown around like loose change. Quite simply, for many buyers the process is, well, "Greek."

The following questions and answers are intended to clear up some of this confusion. I've included some "warnings" and "tips" for those who manage to stay awake.

What is title examination? Basically, it's an investigation of the different factors that can affect the title to the property you are buying. It serves three main purposes: give the buyer a "snapshot" of the status of the title as of the date of the investigation, point out identifiable title problems and provide solutions to fix the problems so that the seller can convey a "marketable title" to the buyer.

What is marketable title? A marketable title is "one which a reasonably prudent person with full knowledge of all relevant facts would be willing to accept." Purchase agreements usually require the seller to convey a marketable title to the buyer.

WARNING: Even though title to the property may be marketable, it may not be acceptable to you as the buyer. Marketability is an objective standard and does not take into consideration your subjective concerns about the property. For example, easements and covenants, conditions and restrictions (CCRs) recorded against the property may not make title unmarketable per se, but could seriously interfere with your future use of the property. Your choices of possible locations for a new cabin or septic system could be limited by existing easements, and CCRs could prohibit certain activities on the property.

TIP: Carefully read all easements and CCRs. Understand where any easement areas are located. If you cannot review the easements and CCRs until after the purchase agreement is signed, make the agreement contingent on your satisfactory review. Avoid unpleasant surprises.

What factors cause title problems? Numerous factors can cause title problems. Common ones include: 1) the seller's defective title ownership; 2) defects in the property's legal description; 3) outstanding monetary liens (mortgages, state and federal tax liens, mechanic's liens, judgment liens, etc.); 4) lack of access to the property; 5) delinquent real estate taxes; 6) outstanding special assessments; and 7) a bankruptcy regarding the seller or a prior owner.

WARNING: Watch out for "blanket" easements. They are not confined to a specific portion of the property but instead cover, or blanket, the entire property. They are serious problems when purchasing vacant land and planning future improvements. Lenders will refuse to finance the construction of a cabin if there is a risk that the cabin could be required to be torn down because it was built in an area already encumbered by an easement.

Is a survey of the property important? You bet. In addition to the issues discussed in last week's article, a survey will show whether buildings or other structures encroach over the boundary line of the property, will locate easement areas and public rights-of-way, will point out access problems and can show whether the respective legal descriptions for your property and the adjoining properties may overlap (yes, the legal descriptions for two adjoining parcels occasionally include property that is common to both parcels). Your lender may require that you have a survey prepared as a condition to obtaining a loan.

WARNING: Standard form purchase agreements usually do not incorporate a survey into the title examination process. I think this is a mistake. Surveys can, and do, disclose major title problems. If a buyer is not made aware of these problems before closing, the buyer will be saddled with them later.

TIP: Have your purchase agreement drafted so that a survey is reviewed along with the other title evidence as part of your title examination. You should have the right to object to any defects disclosed by the survey.

What's best - an attorney's title opinion or title insurance? Attorneys' title opinions are really a thing of the past. Title insurance is now the norm. Title insurance protects you against certain "hidden" risks that an attorney's title opinion will not touch. Title insurance covers you up to the face amount of the policy (i.e., the purchase price of the property), plus the insurer will defend you and pay your legal fees if a claim is made against your title.

What is excluded from title insurance coverage? Like any other insurance, title insurance policies contain exclusions from coverage (e.g., laws restricting use of the land, certain governmental rights, defects created after the date of the policy, defects created by the insured, etc.). In addition, a title commitment contains "standard exceptions" from coverage. However, the standard exceptions often are waived if the title company is given additional documentation that lessens the company's risk level.

TIP: Title commitments generally list five standard exceptions (parties in possession, facts that would be shown by a survey, unrecorded easements, unrecorded mechanic's lien rights and a change in title occurring after the "effective date" of the commitment and before the policy is issued). An accurate, clean survey of the property, an acceptable affidavit from the seller and a physical closing through one of the title company's offices will usually result in all of the standard exceptions being waived.

What are lender's and owner's policies? If you are borrowing money for your purchase, your lender probably will require that you purchase a "lender's policy" covering its mortgage interest in the property. A lender's policy does not insure your ownership interest. You also must purchase an "owner's policy." The good news is that when you buy them together, you get the "simultaneous issue rate," which can result in substantial savings. Furthermore, if a prior policy was issued for the property, you also may receive a "reissue credit," resulting in additional savings.

TIP: Make sure you ask for the reissue credit. It's not always voluntarily offered. If the title company issuing your owner's policy did not issue the prior policy, you may have to track down the old policy in order to receive the credit.

How much does title insurance really cost? Individually, the cost for a lender's policy is based upon the dollar amount of the mortgage being insured and the cost of an owner's policy is usually based upon the purchase price of the property. However, if the two policies are purchased together, you must factor in the simultaneous issue rate.

For example, if the purchase price of the property is $110 thousand and you are borrowing $88 thousand, the simultaneous issue rate for an owner's policy and a lender's policy is approximately $628. This includes the premium for both policies and a service charge for preparing the title commitment. If an owner's policy for $100 thousand was issued to a prior owner of the property, the reissue credit is approximately $160. Your total cost will be about $468. The rates charged by different title companies are very competitive. Charges for a plat drawing, name search, and special assessment search will add about another $100.

Remember, your payment for an owner's policy is a one time charge. Once it's paid, you're done.

Next week: issues to consider when purchasing lakeshore property with another couple or a group of friends. For more information, please contact Carter DeLaittre at 612.252.2858 or .

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