Title Examination and the Closing Process

Title Examination – process of verifying the ownership rights being offered by the seller of property

Marketable Title – a title that is free and clear of all past, present and future claims

Insurable Title – one that a title insurance company is willing to insure

Title of Perfect Record – public records show no defects whatsoever (best)

Title Opinion – statement by a lawyer that summarizes the findings of a title search through public records

Title Insurance – an insurance policy guaranteeing against any deficiencies in the title

A title search involves researching the ownership (chain of title) of property through all public records. Normally performed by an attorney or title examiner.

Recording system – any document affecting title to real property must be recorded (with county records in Texas at the county courthouse). Relates to owners, tenants, mortagees, lien holders, etc. Generally, must be signed by the grantor and witnessed by a notary public. Failure to record an interest may cause the loss of that interest. Public records is key to the system of ownership.

Grantor and Grantee Indexes – Lists of each grantor and grantee for a property. When transfer occurs to a new owner, the new owner is added to the grantee index and the previous owner is added to the grantor index. Makes tracing ownership easier.

Tax records must also be checked to make sure that all taxes have been paid. Similarly, court records must be searched to make sure there is no judgment filed against the property.

Title Abstract – a written summary of the chain of title for a property (used in Texas, mostly in smaller counties). Can be performed by non-attorney employees of an abstract company. Contains not only deeds and conveyances, but also mortgages, easements, wills and tax liens. A lawyer will normally review it.

Title Insurance – Purchased to provide protection in case the acquired title is defective. Can make exceptions to restrictions of record, e.g., in Texas, restrictive covenants, discrepancies in boundaries, taxes for current and previous years, and rights of parties in possession. The State Board of Insurance sets the rates for all policy titles in Texas. Title insurance must generally be in place before mortgage companies will loan money to purchase the property.

Torrens System – a system of land registration in which a title certificate proves ownership (similar to a car title). Not used in Texas.

Title Closings (or Settlements) – the last step in the transaction. Usually, all arrangements occur at the same meeting, i.e., transfer of title, payment of outstanding loans, origination of new loans

Buyer’s Responsibilities

  1. Obtaining the Financing – typically, financing is obtained for 80% of commercial properties and 80-100% of residential properties. Contract for sale normally has a clause conditioning the sale on the ability to obtain financing. Must use good efforts to obtain a loan.
  2. Examining the Title Evidence – Buyer must check the seller’s title in order to discover what encumbrances exist. Also, buyer must inform seller of any defects in order to give the seller the opportunity to correct them.
  3. Surveying the Property – To verify the property lines
  4. Obtaining Property Insurance – this is the responsibility of the buyer
  5. Inspecting the Property – to determine what defects in the property exist, such as utilities, termites, mold, etc.
  6. Zoning Restrictions – for land being developed for a specific use

Seller’s Responsibilities

  1. Preparing the Deed – The actual contract for transfer of title must be prepared by the seller
  2. Removing all Encumbrances – Any encumbrances other than those specified in the deed must have been removed prior to transfer of ownership, such as unrecorded claims of ownership, easements, liens.
  3. Paying the Seller’s Loan – Must pay off loans against the property
  4. Cooperating with Inspectors – must allow inspectors to do the inspection
  5. All valid leases, rent schedules, etc., must be turned over in commercial properties.

Costs at Closing

Paid by Buyer:

  1. Loan Origination Fees
  2. Loan Discount Points
  3. Appraisal Fees
  4. Credit Report Fees
  5. Lender’s Inspection Fees
  6. Mortgage Insurance Premium
  7. Attorney Fees
  8. Hazard Insurance Premium
  9. Recording Fees for the Mortgage

Paid by Seller:

  1. Brokerage commissions
  2. Attorney Fees
  3. Filing fees
  4. Recording fees for satisfaction of Seller’s mortgage

HUD Uniform Settlement Statement