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Author: inparadise Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 127805  
Subject: The importance of title insurance Date: 11/18/2011 9:08 AM
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We were supposed to settle today on our riverfront house in rural VA. Given that I am typing this from my couch at home rather than being on the road, it's a given that closing has been postponed.

To refresh your memory, this is the property on which we were unable to get a lender to take a mortgage on, primarily due to the paucity and lack of correlation between the comps and the property in question. So even though the appraisal came in at a price that the sellers would agree to, the banks still bailed. We negotiated the purchase price down even lower than the appraisal, and decided to go forward with the purchase, paying in cash.

Paying in cash eliminates a number of mandatory fees that have to be paid for when getting a mortgage, including flood insurance and title insurance. However, given that the seller was in default on his mortgage, it was a no brainer to us to go for the buyer's title insurance. Good thing too.

Surprisingly, the issue that evolved was not back taxes or the delinquent mortgage...those would have been discovered in the normal closing anyway. Nor did he have liens on his property, particularly given that the seller was the builder for the property. No, the issue this time was an existing gas lease on the property that had originated in 1979 and had never been removed from the deed, even as the original 100 acres got carved up into many smaller parcels and the lease got removed on many of those deeds.

While immediately I envisioned a driller pulling up unannounced to begin construction of a well, the reality is that this is not the primary issue for this property. VA has been very aggressive in fighting the Marcellus Shale gas drillers, now that the industry has renewed interest in the area with the improvements in the economics of drilling since they first explored the region in the 1970's. For many reasons, we don't believe it is probable that the drillers will ever make it to the area we are buying in. Possible? Well, what isn't? Probable, no.

So what is the issue then if I don't think a gas driller will be able to get the county and state OK to drill? The title insurance company is willing to cover risk from gas drilling, on an exception basis. But what happens when we improve and expand the structure to the point where we can refinance into a mortgage, or go to sell it to someone who will require title insurance? According to the lawyer issuing the insurance, as long as we stay with the same company they will have to continue to insure it, but as sellers we do not get to choose the insurance co, and I'm not willing to be roped in to zero choice in insurers. By giving an exemption on the title insurance and allowing us to buy an encumbered title, they are passing the risk of not being able to finance the property down from the seller to us, and that risk is not priced in to this property.

We have insisted that they clear this old lease off the title before we will buy the property. Without the title search, we would have only become aware of the issue upon refinance or resale.

And how were we made aware of the issue? No one called us. They were prepared to put these papers in front of us to sign at closing, but because I am the only one actually attending closing and DH needed to sign some docs ahead of time, we received the paper work less than 48 hours before closing. We were only "informed" of the situation when I read the papers DH had to sign. Just thinking about how close I came to packing up the car for the 7 hour trip just to tell them no deal at the closing table has me fuming. Even more astonishing is that they only emailed us the documents he needed to physically sign, and not the accompanying pages that explained what he was signing, so he would have been signing his agreement to things he actually never read!

I don't care how little time they have allocated between closings...read everything and don't let them rush you. Better yet, insist on them emailing you all the papers for closing ahead of time so that you can review them at your relative leisure, much less stressful than the eye glazing closing.

FWIW,

IP
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