Title Commitment

What is a Title Commitment?

A title commitment is a crucial document in real estate transactions, serving as a promise from a title insurance underwriter to issue a title insurance policy. This promise is contingent upon certain conditions being met by the closing date. Essentially, it's a preliminary report on the status of a property's title, outlining who currently owns the property, its legal description, and any recorded liens, encumbrances, or defects that could affect the ownership. For real estate investors, understanding and thoroughly reviewing a title commitment is a non-negotiable step in the due diligence process, as it reveals potential legal hurdles that could jeopardize an investment.

Why It's Crucial for Investors

For real estate investors, the title commitment acts as an early warning system. It provides a comprehensive snapshot of the property's legal history and current status, allowing investors to identify and address potential title defects before they become costly problems. Issues such as unreleased mortgages, undisclosed easements, property tax liens, or judgments against previous owners can significantly impact a property's value and marketability, or even prevent a clear transfer of ownership. By reviewing the commitment, investors can ensure they are acquiring a clear and marketable title, protecting their investment from future legal challenges.

Key Components of a Title Commitment

A standard title commitment is typically divided into several schedules, each providing specific information critical to the transaction. Understanding these schedules is fundamental to interpreting the document effectively.

Schedule A: The Basics

• Effective Date: This is the date and time through which the title search has been completed. Any documents recorded after this date will not appear on the commitment.
• Proposed Insureds: Identifies the parties who will be insured by the title policy. This typically includes the buyer (for an owner's policy) and the lender (for a lender's policy).
• Estate or Interest to be Insured: Specifies the type of ownership interest being transferred, usually fee simple.
• Current Record Owner: States the name of the current legal owner(s) of the property as per public records.
• Legal Description of the Property: Provides the precise legal description of the land, which must match the purchase agreement and deed. This is crucial for identifying the exact boundaries of the property.
• Policy Amount: The dollar amount of the title insurance policy, typically the purchase price for the owner's policy and the loan amount for the lender's policy.

Schedule B-I: Requirements

This schedule lists the conditions that must be satisfied before the title company will issue the final title insurance policy. These are typically actions that need to be taken by the buyer, seller, or lender to clear the title.

• Payment of Purchase Price: Confirmation that the full purchase price has been paid.
• Execution and Recording of Deed: The deed transferring ownership from seller to buyer must be properly signed and recorded in the public records.
• Release of Existing Liens: Any outstanding mortgages, judgments, or other liens against the property must be paid off and formally released.
• Payment of Property Taxes: All current and delinquent property taxes must be paid.
• Satisfaction of Judgments: Any judgments against the seller or previous owners that attach to the property must be satisfied.
• Proof of Identity and Authority: Requirements for parties to provide identification or proof of corporate authority if applicable.

Schedule B-II: Exceptions

This schedule lists items that the title insurance policy will NOT cover. These are existing defects, liens, or encumbrances that will remain on the title after closing. Some exceptions are standard, while others are specific to the property being insured.

• Standard Exceptions: These are general exclusions that typically appear on all title policies unless specifically removed. They often include unrecorded easements, boundary disputes, or claims of parties in possession.
• Specific Exceptions: These are particular to the property and are discovered during the title search. Examples include recorded easements, covenants, conditions, and restrictions (CC&Rs), mineral rights, or specific unreleased liens that the buyer agrees to take subject to.
• Taxes and Assessments: Exceptions for current year taxes not yet due and payable, or future assessments.
• Rights of Tenants: If the property is tenant-occupied, the rights of existing tenants under their leases will be an exception.

The Title Commitment Process

The process of obtaining and reviewing a title commitment is a standard part of nearly every real estate transaction. It begins shortly after a purchase agreement is executed and typically concludes at closing.

Step-by-Step: From Order to Issuance

1. Order the Title Search: Once a purchase agreement is signed, the escrow officer or closing agent orders a title search from a title company. This search involves examining public records related to the property's history.
2. Conduct the Title Search: The title company's examiners review deeds, mortgages, liens, judgments, easements, property tax records, and other public documents to uncover any issues affecting the property's title.
3. Generate the Title Commitment: Based on the findings of the title search, the title company prepares and issues the title commitment, detailing the current status of the title and the conditions for issuing insurance.
4. Review and Due Diligence: All parties involved (buyer, seller, lender, real estate agents, attorneys) receive and review the title commitment. This is the buyer's critical opportunity to identify and question any potential issues.
5. Address Requirements and Clear Exceptions: During the due diligence period, any requirements listed in Schedule B-I must be fulfilled, and any concerning exceptions in Schedule B-II should be investigated and, if possible, resolved or removed.
6. Closing and Policy Issuance: Once all conditions are met and the transaction closes, the title company issues the final title insurance policies (owner's and lender's) to the respective parties.

Reviewing and Understanding Your Title Commitment

As an investor, your thorough review of the title commitment is paramount. Do not simply glance over it; delve into the details, and if anything is unclear, seek professional guidance.

What to Look For

• Accuracy of Information: Verify that all names, legal descriptions, and property addresses are correct and match the purchase agreement.
• Unreleased Liens or Mortgages: Look for any outstanding financial claims against the property that the seller is obligated to clear. These must be satisfied before closing.
• Easements and Rights-of-Way: Understand any rights granted to others to use a portion of the property, such as utility easements or access rights. These can impact property use and development.
• Covenants, Conditions, and Restrictions (CC&Rs): These are rules governing the use of the property, often found in planned communities or HOAs. They can restrict what you can build or how you can use the property.
• Encroachments: Check for any structures on the property that illegally extend onto a neighbor's land, or vice versa. A survey can help identify these.
• Judgments or Bankruptcies: Ensure there are no judgments against the seller that could attach to the property, or any active bankruptcies that could delay or complicate the sale.

Common Title Issues and How to Address Them

Discovering a title issue is not necessarily a deal-breaker, but it requires prompt action and often negotiation. Here are common issues and typical resolutions:

• Unreleased Mortgage: Often, a previous mortgage was paid off but never formally recorded as released. The seller must contact their former lender to obtain a release of lien and have it recorded.
• Property Tax Liens: Delinquent property taxes create a lien. The seller is typically responsible for paying these off at or before closing. Funds from the sale are often used for this.
• Judgment Liens: If a seller has an outstanding judgment against them, it can attach to their real property. These must be satisfied, often by the seller paying the judgment creditor, before a clear title can be conveyed.
• Errors in Public Records: Clerical errors in recorded documents can create title defects. These may require corrective deeds or affidavits to rectify.
• Undisclosed Heirs: If a previous owner died without a clear will or proper probate, there might be unknown heirs with a claim to the property. This can be complex and may require legal action to quiet title.

Real-World Examples of Title Commitment Issues

Understanding these issues through practical scenarios can highlight their impact on real estate investments.

Example 1: Unreleased Mortgage Lien

An investor, Sarah, is under contract to purchase a single-family rental property for $350,000. The title commitment reveals an unreleased mortgage from a previous owner, recorded for $150,000, dating back 15 years. The current seller confirms they paid off this mortgage when they purchased the property five years ago, but the release was never recorded.

• Impact: Without a recorded release, the title company will not issue a clear policy, as the prior mortgage appears to still be an active lien. This creates a cloud on the title.
• Resolution: The seller must contact their previous lender to obtain a certified copy of the mortgage satisfaction or a new release of lien. This document then needs to be recorded in the county records. This process can take several weeks, potentially delaying Sarah's closing.
• Investor Takeaway: Always build in sufficient due diligence time (e.g., 30-45 days) to allow for resolution of such issues. Sarah's attorney reviewed the commitment promptly, allowing time to address the issue before her loan commitment expired.

Example 2: Undisclosed Easement Dispute

David, a developer, plans to purchase a 5-acre parcel for $750,000 to build a small multi-family complex. The title commitment reveals an old, vaguely worded easement granting a neighboring property owner the right to access a well located on David's proposed property. The neighbor claims this easement also grants them a right-of-way across David's entire parcel for farming equipment.

• Impact: The broad interpretation of the easement by the neighbor could severely restrict David's development plans, making a significant portion of the land unusable for construction.
• Resolution: David's real estate attorney reviews the original easement document and local property laws. It's determined the easement is only for well access, not a general right-of-way. However, the ambiguity requires a formal agreement with the neighbor, or potentially a quiet title action, to clarify the scope. David negotiates a specific, limited access path with the neighbor, recorded as an amendment to the easement, costing him $5,000 in legal fees and a $10,000 payment to the neighbor for cooperation.
• Investor Takeaway: Easements can significantly impact property use. Always investigate ambiguous easements and consider the cost of resolution or negotiation in your investment analysis. A survey is often critical in these situations.

Example 3: Property Tax Lien and HOA Dues

Maria is purchasing a condo for $280,000. The title commitment shows a $3,000 delinquent property tax lien from the previous year, plus $1,200 in unpaid Homeowners Association (HOA) dues, which also constitute a lien under the HOA's covenants.

• Impact: Both the tax lien and HOA lien must be paid off for Maria to receive a clear title. If not paid, these liens would transfer with the property, making Maria responsible for the seller's debts.
• Resolution: The title company ensures these items are paid directly from the seller's proceeds at closing. The $3,000 tax lien and $1,200 HOA lien are deducted from the seller's funds, ensuring Maria receives a property free of these specific encumbrances.
• Investor Takeaway: Always review Schedule B-I and B-II carefully for all types of liens, not just mortgages. Property taxes and HOA dues are common sources of liens that must be cleared by the seller.

The Role of Title Insurance

The title commitment is the precursor to title insurance, which provides crucial protection against financial loss due to title defects.

Owner's Policy vs. Lender's Policy

• Owner's Policy: Protects the buyer (investor) against losses from title defects that existed prior to the purchase but were unknown at the time of closing. This policy's coverage amount is typically the purchase price of the property.
• Lender's Policy: Protects the lender's interest in the property. If a title defect arises that affects the lender's lien priority, the policy covers their loss up to the loan amount. Most lenders require this policy.

Benefits of Title Insurance

• Protection Against Hidden Defects: Covers issues not discoverable by a standard title search, such as forged documents, errors in public records, or undisclosed heirs.
• Legal Defense Costs: If a claim is made against your title, the title insurance company will cover the legal costs to defend your ownership.
• Peace of Mind: Provides assurance that your investment is protected from future challenges to your property ownership.
• Marketability: A clear, insurable title makes your property easier to sell or refinance in the future.

Conclusion

The title commitment is far more than just a formality; it is a critical safeguard in real estate investing. By meticulously reviewing this document, understanding its components, and proactively addressing any identified issues, investors can mitigate significant risks and ensure a smooth, secure transfer of property ownership. Engaging with experienced real estate attorneys and title professionals throughout this process is invaluable, providing the expertise needed to navigate complex title matters and protect your valuable real estate investments.