False Alarm? Title Insurance - Posted by Jerry

Posted by Jerry on February 23, 2001 at 12:25:54:

Thanks for taking the time…I thought we’d lost you. Your reply does a good job of explaining the risks. I don’t know when you’ll have time to reply, but I have a few questions and observations.

Here’s the meat of your reply, as it pertains to me:

“I?m exposed to a blemish that the title company running the report may have missed from the time the current owners took title to the property; nothing prior. I?m also exposed to anything attaching between the time I have the report run and the property is actually deeded into trust.”

In general, the longer the sellers have owned (without a land trust), the higher the risk that title is affected by something since their title policy was issued. A policy issued 20 years ago (in the extreme) leaves 20 years of unknowns. It’s this fear of the unknown that leans me toward buying title insurance. Here’s what’s covered on my ALTA policy:

  1. Someone else owns an interest in your title.

An unrecorded agreement wouldn’t show up on my preliminary title check, but would still be covered if I buy insurance.

  1. A document is not properly signed, sealed, acknowledged, or delivered.

This, also, would not show up on a prelim title report.

  1. Forgery, fraud, duress, incompetency, incapacity or impersonation.

Wouldn’t show up on the prelim.

  1. Defective recording of any document.

Wouldn’t show up on the prelim.

  1. You do not have any right of access to and from the land.

Would prelim always catch this? Maybe not always.

  1. There are restrictive covenants limiting your use of the land.

Don’t know if prelim would always catch this.

  1. There is a lien on your title because of:

-a mortgage or deed of trust
-a judgement, tax, or special assessment
-a charge by a homeowner’s or condominium association

A prelim would miss any of these not recorded correctly, or, not recorded at all.

  1. There are liens on your title, arising now or later, for labor and material furnished before the Policy Date - unless you agree to pay for the labor and material.

You agreed that this is a risk.

  1. Others have rights arising out of leases, contracts, or options.

Oh, I forgot to tell you that another investor has a valid option on our house? I’m sorry!

  1. Someone else has an easement on your land.


  1. Your title is unmarketable, which allows another person to refuse to perform a contract to purchase, to lease or to make a mortgage loan.

Nice to have this, in case any of the above slipped through!

  1. You are forced to remove your existing structure - other than a boundary wall or fence - because:

-it extends on to adjoining land or on to any easement
-it violates a restriction shown in Schedule B (I’m not going to type all of schedule B, but it’s not important to this discussion)
-it violates an existing zoning law

Chances are good enough one of these could get missed in a prelim.

  1. You cannot use the land because use as a single family residence violates a restriction shown in schedule B or an existing zoning law.

Don’t know about this.

  1. Other defects, liens, encumbrances.

OK, I guess my point is, I don’t care how good I think I am at analyzing a preliminary title report, or any title report for that matter. The $150 bucks I spend to insure my title interest in these subject-to deals sounds like the bargain of a lifetime.

Now, I hope I understood your points. If I missed something, please reply when you can. I appreciate your information!

False Alarm? Title Insurance - Posted by Jerry

Posted by Jerry on February 21, 2001 at 11:44:28:

Hello again-

Sorry if this is redundant, but this is really gnawing at me. There was an interesting conversation started regarding buying title insurance for subject-to/land trust deals. A poster (JGoodsen) who seemed very knowledgeable about the subject, suggested that buying title ins. for these purchases was pretty much a waste of money. Here’s the thread.


He said he’d post some information to support his claims, but either has gotten too busy, or decided not to post. This is unfortunate, because I imagine this is of interest to many of us doing subject-to deals. The majority opinion on this newsgroup, for the 3 to four years I’ve been reading it, has been to buy title insurance. But, I just hate to throw away money (doesn’t everyone?)!

I feel nothing got resolved, and the question is still just hanging out there. Any thoughts? Were JGoodsen’s posts just a false alarm? I’d sure appreciate some opinions from seasoned investors, and I’ll bet it will help many more besides just me.

Deep breath, Jerry - Posted by JGoodsen

Posted by JGoodsen on February 23, 2001 at 02:27:34:

Let?s make a couple of things perfectly clear. First, we are talking solely about the land trust takeover, or buying subject to the existing loans and encumbrances by transferring the beneficial interest from the seller to you. If you are transferring title ?subject to? none of this applies and you are playing roulette if you don?t buy title insurance. Even in a land trust takeover you still need to do your due diligence.

Next, I am not attorney, accountant, or title officer?but you?ll be hard pressed to find any one of these that can actually answer your question in your area no matter how hard you look. Nevertheless, I provide no warranty or guaranty that the following is true or correct and you should consult your professional in these areas (How?s that for CYA?)

Lastly, title companies are private businesses. Even if your position is right, just, legal, logical, moral, ethical, correct, proper and in keeping with best business practices they are not required to write a title insurance policy covering the transfer to your ultimate buyer. If they don?t understand it I?ll remind you ?a confused mind says No!? You may have to find a title company that is more ?enlightened?.

On to the examples Rob FL requested:

  1. John Smith decides after getting counsel from some yokel over the fence talking about asset protection that he ought to put his house in a living trust so he could avoid probate if he died. He transfers the legal title of his property to the John Smith Family Trust. Does he have to get new title insurance to underwrite this transfer? No. The original title policy still covers this policy against defects in title prior to his taking over the property. When he sells the property his trustee (Probably John Smith since this is a family trust) will sell the property, and his new buyer will likely need title insurance to protect their title interest in the property they just bought.

Are you still with me?

  1. John Smith goes to a $5 asset protection specialist. After consulting this specialist John realizes if he puts his property into a land trust instead of a family trust he can get not only protection from probate in case of his demise, but he can also get some asset protection by hiding his property using the land trust to get it out of his name. Now here is a key point. To put his property into the land trust he transfers legal and equitable title to the trustee thus divesting himself of ownership of the property. Does he need title insurance to protect his title interest in this transfer? No. The original title policy will continue through the transfer of title from an owner to his land trust. Eventually John Smith decides to sell the property. John?s trustee conducts the sale since the trustee is now the titled owner acting only at John?s discretion. John doesn?t own the property. The new buyer once again will purchase new title insurance to protect the title interest they have now acquired.

I know. More complicated, and some of you are probably lost. We?ll summarize the salient points later. We need to press on.

  1. John Smith visits a $100 asset protection specialist. After his meeting and an espresso with a little lemon twist John now understands he can not only get probate protection, but really protect his assets instead of hiding them by putting the property into a land trust and then naming an additional beneficiary. John deeds his property into a land trust again transferring both legal and equitable title to his trustee. He then subsequently sets up an assignment of beneficial interest to someone not directly related to him. Did the title company get to make a buck selling a new title policy to John? No. John?s original title policy still covers the title interest into the land trust. A new title policy will only be required when John and his other beneficiary direct the trustee to sell the property to the new owners since it will be required by their lender. Continuing here, it does not matter if you transfer some, all, or part of the beneficial interest in the trust. That only matters with respect to the DOS clause. The trustee is still the owner, and the title insurance remains in effect.

Let?s go back to the original question. Should I buy title insurance when I take over a property subject to using a land trust? It all depends on how risk averse you are. An evasive answer, but let?s see why. First of all, you cannot under any uncertain terms buy title insurance to protect your title interest in the property. Why? Because you don?t have a title interest to protect! When you do business this way you are not acquiring title to the property. Instead, you are receiving a personal property interest in the trust that owns the property. Personal property interests play by a whole different set of rules from those laid out for dealing with that which belongs to the King, real property. You are really dealing with a derivative security interest here.

So what are you getting for those of you that buy title insurance when you complete a transaction like this? We?ve already shown the previous owners? title policy continues to cover the property into the trust and through to the new owner against previous defects in title. At this point for your premium the title company can only guarantee that no new liens or defects have been caused by the current owners during their ownership period have attached to the property. Well guess what? Isn?t what they are doing guaranteeing the same information that would show up in a title report that you could easily read yourself? I mean, either there are or are not liens there. You don?t need to translate, interpolate, or extrapolate.

So what about unrecorded liens out there? Aren?t you getting some protection there? Couldn?t they come along after the property goes into the land trust and bite you like a snake? Think back to what I said before that would be very important. The owners transfer legal and equitable title to the property to the trustee. They don?t own it any more! How can a lien that has not attached to the property suddenly attach after the owners have divested themselves completely of title to the property? The judgment creditor has other avenues of recourse assuming they could find the asset, but attaching a lien to the property is not one of them.

So what is my personal course of action looking to protect my interest in acquiring a property in this fashion? Before putting the property into the land trust and assuming the beneficial interest I?ll run some preliminary title work. If it comes back clean I?ll go ahead with the transaction. After I take 100% of the beneficial interest I?ll name an additional unrelated beneficiary as holding interest in this fashion protects the property from future claims of creditors since you cannot partition a co-beneficiary interest in personal property so as to attach a lien or force sale of the underlying property.

Nowhere in there did I buy title insurance. What is my exposure? I?m covered against defects in title through the previous owner?s title policy. I?m exposed to a blemish that the title company running the report may have missed from the time the current owners took title to the property; nothing prior. I?m also exposed to anything attaching between the time I have the report run and the property is actually deeded into trust. Now it is your decision. Is covering yourself against these two eventualities worth paying for a full title policy, or is that a risk you are willing to take and keep the title premium in your pocket?

Now to address TRandle?s point. Even if the person you originally bought the property from end?s up with a tax lien after the fact remember they no longer own the property and have no interest in the property for the IRS or anyone else to take a piece of. The trustee is the titled owner. There should be no reason why the seller?s subsequent problems can affect the property in any way.

The more I learn about land trusts the more I am convinced they are simply the single most powerful tool any investor can have in their tool box. Now I?m sure this is going to generate a whole lot of questions and challenges, but looking at my schedule I don?t know how available I?m going to be in the next couple of days. I can?t make any promises about how promptly I can defend my position. It?s midnight here now and I had other things that I really should have been doing. I?m pretty sure I am going to miss a deadline for tomorrow as it is, and I?ve got to wrap up some deals before I lose them this weekend. Just thought I ought to see if I could close the loop on this.

WilliamGA and HR … what are you thoughts? - Posted by Monique

Posted by Monique on February 22, 2001 at 11:24:32:

We had an interesting discussion on this topic the other night in the chat room.

Check out the thread referenced by Jerry.

I’m thinking that even if an investor has nothing in the deal (took over SubjTo and gave the seller nothing), the risk is that the investor may not have a remedy for title issues when the buyer is ready to buy.

What are your thoughts?


Re: False Alarm? Title Insurance - Posted by Rob FL

Posted by Rob FL on February 21, 2001 at 22:27:41:

I’m quite interested in this myself coming from a title insurance background and all. I don’t see any reason why putting a title into a trust would nullify the need for title insurance in any way. Just because there is some off the record assignment of beneficial interest which is personal property, this doesn’t mean that the real property title cannot be affected by a multitude of other issues.

If JGoodsen is still out there, I wish you would post some specific examples to help clarify what you were saying. Come on, please, please.