Title Insurance Can Be Significant

I’m all for saving a nickel.  Problem is, sometimes there’s a good reason for spending a nickel.  So sometimes trying to save a nickel can, well, backfire – especially when it comes to legal matters.

Sometimes property can be purchased at a very favorable price at a foreclosure sale.  But there are risks in buying such properties.  Purchasers usually don’t have the opportunity to inspect the interior of a property before buying it at a foreclosure sale.  There usually are no disclosures made in a foreclosure sale, so there can be unknown, hidden defects lurking in a property that don’t come to light until after the sale is complete.  When unknown problems exist, foreclosure purchasers may have no recourse but may have to suffer any loss that comes with unknown problems or defects.

There can also be title issues with foreclosed properties.  Sometimes a property will have several liens that affect it.  When buying property at a foreclosure sale, it’s really, really important to know which liens are senior and which ones are junior.  When a junior lienholder sells a property at a foreclosure sale, then the property usually remains subject to any senior liens.  Foreclosure buyers who don’t know about senior liens can find themselves in big trouble if they think a property title is clear of senior liens but it isn’t.

Here’s a case in point.  A real estate investor decided he’d get involved in buying properties at foreclosure sales.  He needed to know the condition of title before he made bids on properties at these foreclosure sales.  He knew somebody at a title company who was willing to give him title information on a very, very informal basis.  When a property would come up for sale, this investor would email his contact person at the title company, and ask if title would be clear after the foreclosure sale.  His contact person would send a reply email that either said “yes” or “no.”

This investor identified an expensive property that was scheduled for foreclosure sale.  The investor emailed his contact person and asked if the title would be clear of liens following the foreclosure sale.  His contact person responded with a “yes.”  However, this information was incorrect.  There was actually a lien for 1.6 million dollars that would still be on the property after the foreclosure sale.

At the foreclosure sale, the investor entered a bid for $1,000,000.01 and got the property.  Unfortunately, he only found out after the sale about the lien for 1.6 million dollars.  As a result of this unknown lien, he lost one million dollars.

The investor sued the title company, and claimed that he lost his million dollars because the title company had given him bad information that he relied on.  But the Court ruled that the title company had no liability to the investor because it hadn’t issued a title policy or a title abstract.  The Court found that title policies or title abstracts are specifically intended to be relied on, but the Court found in this case that the title company had no liability for this informal information give to the investor.  In other words, the investor saved a little bit of money by not buying a policy of title insurance.  But this small saving eventually turned into a million dollar loss. The case is reported at Soifer v. Chicago Title Company (2010) 187 Cal. App. 4th 365.

In this case, the title company wasn’t liable. But that might not be the situation in every case. Title insurance can be complex.  Persons without specialized training or expertise shouldn’t make their own determination about whether or not they need title insurance in a given situation, or what kind or amount of insurance they need, but should instead work with an experienced, trained professional.

  1. Parties to real estate transaction often try to save a nickel in transaction costs.  Sometimes these cost savings can be useful.  But they sometimes involve risks that can be significant.

Copyright 2017 ROBERT B. JACOBS