Recording Title, Title Insurance, and Owner’s Extended Coverage: 3 Tips for Buying Colorado Residential Real Estate
What is Title Insurance?
While homeowners and auto insurance provide protection against future events such as fires, tornadoes, hail damage and collisions, Title Insurance provides protection from past events concerning the ownership of property. When you buy property, the seller transfers the title to the property to you. Title to property means legal ownership of that property. If you borrow money to buy property, or if you refinance your mortgage, you have to buy a loan title policy because the lender requires it.
Why do I need title insurance?
Title insurance helps ensure the seller can transfer a title to you. If a problem with the title comes up after you buy or refinance a property, title insurance can help. Though title insurance does not guarantee there will be no problems with a title, it does guarantee that no unresolved issues with the title exist which would prevent a sale or refinance of a property. The title insurance policy is the title insurance company’s vow to address problems missed during the title search and ensure the property is clear of any outstanding defects or liens. Sometimes if issues with the title cannot be fixed, the policy may pay your lender. It is important to know that homeowner’s insurance will not cover issues with the title.
Here are a few tips you should consider when buying your Colorado residential real estate.
Tip #1: Promptly and properly record your deed — What is a race notice state?
State laws, called recording statutes, control how property ownership is determined. Colorado’s recording statute is known as a race-notice statute. This means that a person who purchases property (a “bona fide purchaser”) and records the deed first in the county where the property is located will own the property. This is important if the seller sold the property to more than one person.
For example, let’s say a seller sold property to Buyer 1 and in a different transaction, sold the same property to Buyer 2. In some states, Buyer 2 will have valid legal ownership to the property since they purchased the property last. However, in race notice states like Colorado, ownership is determined by whoever records their title first.
However, this is only the case if both buyers (1) purchased the property in good faith with no knowledge of the other sale and (2) paid valuable consideration for the property (i.e., not receiving it through gift or bequest). If the second purchaser knew that the property had already been sold, they will not win a claim of ownership even if they recorded first. This is to protect the interest of a buyer who bought in good faith.
Although most sellers are not out to defraud multiple buyers, in any event, if you have recently purchased a home or plan to in the near future, you should promptly record your purchase property with the county clerk to avoid confusion and delays regarding title in the future.
Tip #2: Insuring the title — What is the process?
There are two types of title insurance: lender’s insurance and owners’ insurance. Lender’s title insurance is the most common. Most lenders require the borrower to purchase it to cover the lender’s interest in the property if the seller does not pass valid title of the property. Owner’s insurance, in contrast, covers an owner’s interests in the title of the property. Usually the coverage of owner’s insurance is the same as the purchase price of the property. This helps to ensure the owner can recover the price paid for the property if any issues arise regarding title of the property. In Colorado, title insurers compete on pricing, so you should shop around for the best possible policies.
When applying for title insurance, the first thing you will receive is a title commitment. The title commitment essentially confirms that the insurer will issue you the title insurance policy after closing, including the same terms, conditions, and exclusions that are in the actual title insurance policy. There are two parts to the title commitment. The first is Schedule A, which covers the basis of the transaction and includes your and the seller’s names and the legal description of the property. The second is Schedule B, which contains the requirements and exceptions.
The requirements section of Schedule B lays out your obligations to get coverage, including paying the mortgage and providing documents satisfactory to the insurer. Regarding the exceptions section, when an owner takes out an ordinary or basic title insurance, these six items are not covered by the policy:
Parties in possession (claims or rights by a person who has possession of the property)
Unrecorded easements
Survey issues (e.g., any encroachment, encumbrance, violation, variation, or adverse circumstance that would be disclosed by an accurate and complete land survey of the property)
Unrecorded mechanics’ liens
The “gap” (the time between the effective date of the last issued title commitment and the date the insured deed or deed of trust is recorded); and
Unpaid taxes, assessments, and unredeemed tax sales prior to the year of closing.
Tip #3: Think about getting Owner’s Extended Coverage — What is OEC?
Owner’s Extended Coverage (“OEC”) provides you with a broader policy by insuring you against issues not covered in the basic policy. This is done by “deleting” some of the exceptions that appear in Schedule B of the title commitment. In Colorado, the standard or general exceptions which may be deleted are:
Rights or claims of parties in possession not shown by the public records.
Easements or claims of easements not shown in the public records.
Survey issues like discrepancies, conflicts in boundary lines, shortage in area, encroachments, and any facts which a correct survey and inspection of the land would disclose not shown in the public record.
Mechanics liens, including any right to a lien, for services, labor or material heretofore or hereafter furnished, imposed by law and not in the public records.
Naturally, OEC comes at an extra cost. However, because the OEC section of the standard real estate purchase contract allows for the buyer to opt-in to OEC coverage, as well as provides who pays for it: the buyer, the seller, or a 50/50 split, the additional cost for OEC may be a point of negotiation between you and the seller depending on any unique risks the property bears. Similarly, some insurers refuse to delete some exceptions.
For example, if the property was recently built or renovated, an insurer may refuse to indemnify against mechanic’s liens which an unpaid contractor is more likely to have on a property with recent improvements. Additionally, getting the broader coverage may require other obligations such as submitting affidavits and getting a new survey.
Buying a home is stressful and complicated. Navigating recording statutes, title insurance, and whether you need owners extended coverage only adds to it. But if you follow these three tips you are well on your way. However, if you’re looking to purchase residential property in Colorado and want to know how an experienced real estate attorney can streamline likely the largest investment of your life, or if have questions about title insurance, fill out an interest form today to see if GLO can help you.
GLO has prepared this blog to provide general information on legal issues that may be of interest. This blog does not provide legal advice for any specific situation and this does not create an attorney-client relationship between any reader and GLO or its attorneys. GLO engages clients only through specific fee arrangements and signed engagement letters. GLO does not guarantee any results.