NYC-based boutique law firm Pardalis & Nohavicka brings the latest legal updates from the world of real estate. Pardalis & Nohavicka handles an eclectic array of matters, representing individuals and business owners in civil litigation, criminal cases and business transactions, currently litigating and representing clients throughout the United States and around the world.
Before delving into the necessity of title risk management, let’s quickly define what is title insurance: Title insurance is an essential protection for real estate owners and lenders against any liens, third-party ownership claims, document recordation defects, fraud, as well as easements and encroachments regarding the title of the property. In essence, it protects the owner’s lawful possession of a property against any other claims, including potentially undisclosed heirs of previous owners.
Generally, buyers and lenders are the main consumer category for title insurance as the latter need a lender’s policy when issuing a mortgage loan, while owners need it for any unexpected issues that may arise with the property’s title that were not discovered during the property title search process.
While buyers of real estate are not legally required to purchase title insurance, it’s risky not to. Here are some of the most important aspects to consider.
1. Risk of multiple conveyances by the same party: When purchasing real property, an owner can conceivably convey the deed to multiple parties.
For example, New York is a race-notice jurisdiction. That means that whichever party records their deed first will be given priority of title — but only if that party did not know of prior unrecorded claims on the same property. This type of buyer is referred to as a bona fide purchaser for value (BFP). A BFP is someone who exchanges value for property without any reason to suspect any issues in the transaction. Therefore, the BFP will be considered to have legitimate legal title to the property.
Notably, the date of actual conveyance stated on the deed will have little bearing on who owns the property. So, even if you bought and paid for the property and received a deed in return from the owner, you will not have priority of ownership against a BFP who has also received a signed deed from the same owner, but who recorded the deed before you did so.
That said, any buyers after the date of recording would be considered to have notice of an existing owner, so they would not be considered a BFP. However, keep in mind that recording a document can often take a few days to a few weeks, depending on whether the transaction occurs during a busy season.
2. Attorney requirement: Attorneys are unlikely to advise their clients to purchase real property without title insurance because attorneys recognize the overwhelming practicality and cost-to-benefit ratio in favor of obtaining title insurance. Additionally, advising clients otherwise could be considered malpractice.
3. Lender requirement: Finally, if you’re financing your purchase, the lender will require you to pay for the lender’s title insurance policy. That means you’ll also be required to pay for all searches, endorsements, recording fees and a survey, if applicable, that are needed by a title company to issue such a policy. Of course, some of these items will be required anyway when purchasing title insurance for the owner.
4. Post-closing deed fraud: In this digital age, it’s easier than ever to close a real estate transaction. But this has also made it easier for deed fraud to occur. Plus, because parties don’t have to physically attend a closing, the owners could conceivably be impersonated (although not easily) and documents could be forged. As a result, unbeknownst to the real owner, the property could be transferred to a BFP. The BFP would then be considered to have legitimate legal title to the property.
Then, if the defrauded owner didn’t have title insurance, they would have to spend their own time and money to sue the defrauder and the BFP. Obviously, this is costly and not a situation that one would want to be caught in. Granted, there are other ways that one could verify the legitimacy of the transfer, but they’re much more difficult without the assistance of a title company, which generally has more extensive experience and methods available to conduct the necessary due diligence.
In that case, it makes even more sense for buyers to pay the additional owner’s premium to obtain title insurance because a good portion of the work and fees necessary to insure title to the real property will have already been completed and paid for.
John Pak serves as the Real Estate Chair at the Law Offices of Pardalis & Nohavicka. He is a transactional attorney specializing in acquisitions, dispositions and leasing. A graduate of Brooklyn Law School, he received his BA in Political Science from New York University. Prior to joining PN Lawyers, John owned his own private law practice for 15 years and a title company for 6 years.
Taso Pardalis is a founding partner of the Law Offices of Pardalis & Nohavicka, a leading full- service NYC law firm with offices in Manhattan, Queens and WeWork. Taso may be a well-known attorney with many cases making headlines in major media outlets, but at heart, he is a true entrepreneur that believes in supporting the small business community. His areas of concentration are: Intellectual Property, Trademarks, Corporate, Business Law and Real Estate Law.