How's this for a homebuyer's nightmare:
You purchase your dream home, and a few years after closing, a man shows up on the doorstep. He's a long-lost heir of the previous owner and claims he owns the house.
Or this: A few weeks after closing, you've moved into your new home, and a woman pulls into the driveway and says she owns the property. You then discover you've become a victim of real estate fraud, that the person you bought the house from didn't have the right to sell and had forged the deed and other documents.
Now for a sigh of relief. Rarely do such things happen.
But in case they do, it's not your homeowner's policy that covers you, but title insurance issued by companies like Chicago Title Insurance Company or Allied Title.
Title insurance is "not a guarantee, but an indemnity," said Dennis Rodgers, assistant vice president and county/agency manager of Chicago Title in Champaign.
It's not required by the state, but virtually every lender requires a buyer to purchase a lender's policy and a vast majority of real estate contracts include a clause that requires the seller to purchase title insurance for the buyer, said Frank Pellegrini, president of the Illinois Land Title Association and of Prairie Title of Oak Park.
Title companies search public documents, such as deeds and mortgages, and inform buyers and sellers about any issues like unpaid taxes that need to be resolved before the property is sold.
If something comes up (a utility easement or lien) that the title company did not inform the buyer about, the title company will cover the buyer's losses up to the policy amount. The policy amount is typically the property's purchase price.
"It's not casualty insurance. We're not insuring that nothing bad will happen to your property," said Bob Spencer, in-house counsel for Allied Title of Champaign.
"It's not a glamorous industry," Pellegrini said.
Because the business of searching titles and issuing title insurance is a "back office process," homebuyers and sellers "historically were probably not as informed as they could have been or should have been," he said.
But Pellegrini said he believes consumer awareness of title insurance and its value is growing as more people hear about cases where title insurance was not purchased and issues came up, and as more consumers educate themselves about the home-buying process.
Earlier this month, a land dispute between the University of Illinois and Urbana resident Gene Vanderport became public. Both claim ownership of land along the Vermilion River southeast of Danville.
The dispute may underscore the importance of title searches and what can and cannot happen during those searches.
Title insurance explained
What's odd about title insurance, said Richard Joy, a Champaign attorney who has worked on real estate for about 30 years, is that the person who orders or buys the insurance is not necessarily the consumer.
It is the property buyer who will ultimately benefit from having the title insurance policy, not the seller, who typically orders and pays for the new buyer's title insurance, he said.
There are two types of title insurance, one for the property buyer and one for the lender. Typically the seller pays for the buyer's insurance, and the buyer pays for the lender's insurance.
Fees can vary by county, and title companies set their fees differently. Some regional title companies charge a few dollars per thousand dollars of the purchase price. Buyer's title insurance on a $150,000 home can cost about $375.
Spencer said area title companies usually come within $5 or $10 of the total price for buyer's insurance on residential properties.
Title companies have teams of employees who search public records and compare them with their own databases, which are based on public records but indexed differently. A search can take up to several days per property.
"The whole business is data dependent," Spencer said.
The business is also dependent on timely recordings.
"The longer the gap between the recordings (at the county recorder's office) and the closing, the more we are out insuring we don't know what," Spencer said.
Depending on when records were filed and when a judgment or lien was filed, the lien or judgment may not show up on the title search until after the closing.
After they conduct a search, title companies issue what is called a commitment for title, which Joy refers to as "almost a road map for the parties."
In the commitment, the title company lists any issues, such as paying off the mortgage, that the buyer needs to resolve.
"The purpose of the commitment is to let the parties know what needs to be addressed at or before closing," Spencer said.
The title company will then run a second search of records up to the closing date.
The actual policy isn't sent to the buyer until a month or two after the closing.
Title insurance protects buyers from forgery and missing heirs as well as other issues that may pop up.
"If you are the victim of real estate fraud, if you bought from someone who doesn't own the property, the cost of defending your title and damages are covered," Pellegrini said.
But forgery and missing-heir issues are rare and considered "pure risks" the title company takes on when it issues title insurance, Rodgers said.
More often, the title company will have to reimburse the buyer for losses related to issues it failed to inform the buyers about – if the property is in a special taxing district, such as a drainage district, if a sewer line runs through the property or if an owner did not pay income taxes and the federal government attached a lien to the property.
When an error occurs, more often than not it's "where someone didn't search properly," Rodgers said.
"Taxes is the one that cost us the most this last year," Spencer said.
For example, a title company will search the county treasurer's office to find out when property taxes were paid and may interpret the dates incorrectly.
"There was a date in the second column, and we thought that was payment, when in fact that was the date the treasurer sent the documents to the county clerk for sale," Spencer said.
Eventually, the title company had to buy back property taxes.
Sometimes a mistake that occurred decades ago may affect the property transaction today, Rodgers said.
He provided an example when a man purchased property near a railroad line. Recent surveys showed the property included a slice of land near the rail line, but according to older documents, the property did not include land along the rail line. Information from a land survey had been incorrectly transferred to other documents.
Title insurance companies such as Chicago Title are regulated by the Illinois Department of Financial and Professional Regulation's Division of Financial Institutions.
Title insurance underwriters (there are 24 in the state) have to submit financial data to the state in order to issue policies, Pellegrini said.
These underwriters operate through a network of agents, who issue policies on their behalf.
"That way, if the title company office closes tomorrow, the policy still stands with the underwriters. So coverage is always there," Pellegrini said.
You can reach Christine des Garennes at (217) 351-5388 or via e-mail at email@example.com.