Buying or selling a home, whether you’re an experienced investor or not, can be a tedious and complicated process. From dealing with brokers, agents, appraisers, inspectors, and lenders there is quite a bit of industry jargon and documentation. Somewhere in this lengthy process, you’ll come across the need for ‘title’, and though it may seem like just another piece of the puzzle, it can represent the most important aspect of your real estate investment.
Educating yourself on how title works in practicality, and how it impacts your property could be instrumental in your success moving forward.
What is Title?
Broadly speaking, title is documentation that proves the legal right to ownership of a piece of property. This can be anything ranging from a house or car, all the way to intellectual property, alternative assets, copyrights, or trademarks. For real estate-specific purposes, we’re going to focus on real property titles or documentation that convey ownership of a tangible, long-standing asset.
It’s important to differentiate ‘title’ from ‘deed’, which is legal documentation denoting the transfer of ownership from buyer to seller. If this is all too confusing, that’s okay. Just know that both are components of a successful real estate transaction.
Title, specifically, demonstrates a historical chain of custody extending through a property’s history. This detailed transactional ledger assures current and future buyers that the property they are purchasing is free from any claims, liens, debts, or other unresolved issues that would be conferred to them on acquisition. This record extends back upwards of 60 years, or the life of the property. A property free from any of these obligations is said to have ‘clear title’.
Title Companies
The act of validating a clear title is performed by a title company, which will have experience researching the history of a property as well as access to extensive documentation from other title companies and government archives. Their verification should be your number one priority before you close on a property. But the initial validation is only a component of what the title company offers. They will also be able to provide ‘title insurance‘ that protects you from title defects.
This insurance is typically paid for by the seller (as is the title work generally) and insures you against mistakes that the company may make. This can happen regardless of the quality or reputation of the title company. Certain properties simply have a complex history that lacks sound documentation. A small error at the registrar 50 years ago could come back to bite you in the present, and as you will see the list of possible title defects is extensive.
The Hard Truths Podcast | Understanding ‘Title’ with Craig Haskins | Episode 16
In this episode of The Hard Truths Podcast we are joined by Craig Haskins of Knight Barry Title. As COO of the company with over 26 years of experience, Craig has seen what it looks like when the title process goes right, and what can happen when it doesn’t. Topics discussed in this episode range from title insurance, chain of title, 1031 exchanges, land contracts, subject to real estate, and more. This conversation is an essential starting point for anyone looking to achieve a better understanding of property transactions and become a more sophisticated real estate investor.
Title Rights
Title also is not a binary decree of ownership. There are different types of rights granted to a property owner that allows certain privileges with regard to the property. This is especially important for investors who may own property as a group or through an LLC with different roles assigned to different members. The primary different title rights are as follows:
Possession: This is the most obvious and basic title right. Those who have a passion right are the legal owners of the property.
Control: Control gives you the right to use the property at your discretion provided that its both legal and falls within all other sets of extraneous regulations such as HOA rules or environmental guidelines.
Exclusion: This gives the right-holder the ability to prevent others from using the property, a fundamental aspect of property ownership. This right can be overridden by other factors such as easements or law enforcement actions, but generally gives you the right of refusal to bar unwanted people from entry to your property.
Enjoyment: A close association of control, but this covers the right-holders to participate in personal activities for their personal enjoyment on the property. So long as it’s legal, no one can tell you what you may or may not personally do.
Disposition: Disposition protects the rights of the holder to transfer ownership of the property. Most often, this right is only fully recognized when a property is owned outright with no partners or mortgage backing. That said, most real estate transactions occur with some level of financing, and these instances are often easily resolved through timing mechanisms of the sales process.
Its important to note that though these rights are granted to you through title, they do not automatically override other relationships to the law, HOAs, legal partnerships, or tenant/landlord relationships. Do not assume your rights in any investment situation without having a complete understanding of the entire situation.
Title Defects
Title defects, also referred to as clouds, can have varying degrees of impact on your property, and they come in all shapes and sizes. Some defects may just require some additional documentation, grant access to the property, or require the repayment of debt. Others still have the potential to stop a sale in its tracks and revert ownership to some third party.
Here are some of the most common title defects that an investor might encounter.
Liens: A lien is a legal right that someone holds against a property. The origin of this lien could be any number of things including tax penalties, child support payments, or civil judgment. Liens give the holder a right to recover some financial compensation from the property.
Encroachments: Encroachments occur when someone else builds or maintains a physical structure on your property. Oftentimes they are simple issues such as a neighbors fence, a shared driveway, or an overhanging tree. Other times they are more substantial such as a portion of a building, waste runoff, or other hazardous externalities.
Easements: Nearly every property has some easement on it, which grant someone else the right to access a part of your property under a strict set of circumstances. A common example of such would be an easement for a utility company to install and maintain power, water, or gas lines on your property. Different kinds of easement pose different challenges, and having a clear understanding of them is essential prior to purchasing a property.
The potential list of other title defects is essentially boundless. They can include items such as errors in the public record, illegal activity, forgeries, delinquencies, missing wills, and more.
Conclusion:
Title is a complex aspect of real estate investment and can lead to headaches in the acquisition of properties, but it is there to protect you and your investment. Use the resources you have at your disposal (Title companies, lawyers, partners, etc.) to comprehensively assess your title situation and ensure that your ownership of the property is beyond reproach. This will protect you in the short and long run and will lead to success in your real estate investing career.
