a piece of investment real estate for the first time does not need to be a fraught situation. Understanding the basics of real estate and the terminology of real estate investing can make any beginner more comfortable and confident. Unfortunately, with all the details and things moving quickly, some of the fundamental terms and concepts can get lost, like the difference between “deed” and “real estate title”.
It’s understandable that these two different things get confused because they both are related to the ownership of a piece of property, in this case a parcel of real estate. The difference is that a deed is a legal document that transfers ownership, and the title is the legal document showing who owns the property. Deeds are recorded in the public record.
What’s in a Real Estate Title?
So, the title to a piece of real estate is the important, go-to document to define both the property itself and the ownership. Defining the property itself includes both a full legal description of the property and all the rights that come with the ownership. This second point is important because when it comes to owning investment real estate the investors want to be absolutely certain that they can change or develop the property in the way they are planning.
Development rights, mineral rights and even air rights can be separated from the ownership of real estate. A farmer can sell the rights to construct and manage a cell phone tower on his land while retaining title to the land itself. Rights to the trees on a parcel of land are not necessarily on the real estate title. A careful review of what is included in the title is an important step in buying investment real estate.
What are Some Surprises on a Real Estate Title?
While a purchaser would expect a title to show that “all rights” are included in a title, there are a few things that should not be there. One of these bad surprises is a builder’s lien. This is a legal claim made against the title, and has the same effect as a mortgage lien. It is intended to protect the financial interests of someone who believes the owner of the property owes them money.
Easements are another surprise on a title. An easement gives someone else the right to use the property for some specific purpose. A conservation easement, for example, allows someone else to use the land to grow native plants or to be maintained in a natural condition. Some easements allow others to cross the land to get to their property.
Protection against Surprises on a Real Estate Title
[Protecting against financial] because of accidents or mistakes is the job of insurance. Protecting against mistakes regarding real estate titles is the purpose of title insurance. This is a small insurance policy taken out when the title is transferred that protects the financial interests of the new owner and lender, if any. It is the only form of insurance that protects against loss caused by something that happened before the policy was issued.
Title insurance does not pay valid liens. Rather, before the insurance company will issue the policy it checks the public records to identify any liens or other problems with the real estate title. The report is called various things including a “title search”, a “title commitment” or an “encumbrance report”. Any problems identified on the report have to be addressed by the seller before the title can be transferred.
Getting a clear title is the goal of every real estate buyer. A clear title is the first green light a real estate investor needs to move toward a profitable transaction. There may be other bumps in the road, but understanding what makes a clean title and potential problems can make the first time buyer significantly more comfortable when closing on the property.