How can a property title become unreliable? How to protect yourself from the major of all problems: purchasing a home without having the legal right to do it? Well, at first we need to clarify a very important aspect.
Transferring a property title in the US doesn’t necessarily require the presence of a notary public or an attorney. You can write the deed yourself and then the buyer can just keep it in his safe without recording it at the county court house and bring it out later, when the time is right.
This fact introduces an “empty spot” in the property title chain and later, when we’ll try to sell the house and the new buyer will ask for a title search, we will find out that there is an empty spot and therefore the title is not “marketable”, as they call it in technical jargon.
Before purchasing a house it is always advisable to employ a title company, that is a company that will do a full research on the title to make sure there is no gap in it. The title company will give us a statement to the effect that the title is marketable and that there are no liens on the property. It will also issue a title insurance to warranty for the research job that the title company has performed.
But be careful, the title insurance covers only errors that have been performed by the title company in researching the official records. Therefore, let’s say that the title company has overlooked a lien that was present and had been recorded before the search. And let’s say that such a lien reduces the value of the house we want to sell. We can use the title insurance for covering the costs of removing such a lien.
But the title insurance will not cover any valid deed that has not been recorded and that somebody might have kept in his safe. So let’s say that the seller sells the house twice: first to a relative who gets a deed directly from the seller and doesn’t record it and then to you, through a title company. You buy the house all right and then after some time the relative comes to you with his deed and demonstrates that it has been signed an notarized before you bought the house. This invalidates your deed and you’ll have a to hire an attorney to straighten the issue, but you might not be covered at all by the title insurance.
Therefore it is always good to read the title insurance contract and check on any exclusion of coverage. Or even better it is advisable for you to have a consultant who can help you check on this and make sure you are really covered: it could be your Realtor or an attorney or even your title company, if you have a very trusting relationship with them.