Why Is Title Insurance Important?

There are many reasons why purchasers of real property are prudent in securing a title insurance policy. Perhaps, one of the most important reasons is to protect against fraudulent lawyers, real estate brokers; and title insurance agents. A real life scenario, which Romanowsky Law is currently handling, is illustrative.

A young man (“Client”) is approached by a real estate broker who explains that he is aware of a multi-family property for sale and, because the seller is in arrears on the property, he must quickly sell the property to avoid foreclosure. He says an excellent price can be had for the right buyer. The broker has already identified the Client as having excellent credit and, because the Client is a first time property buyer, this seems like an excellent opportunity to invest in the real estate market. The Client agrees to proceed. The broker informs the Client that he will need to apply for a mortgage, and he provides Client with some appropriate forms and documents to fill out. The broker says he will secure an attorney to handle the transaction, which should take approximately 45 days to close.

Weeks later, the broker reports to the Client the good news that the Client has been approved for a loan, and the seller has approved a purchase price of $300,000. Later, the broker informs the client that everything is ready to go, and that the attorney charged with the responsibility of closing the transaction has given him a package of documents typical to those signed in customary closings and directs the client to meet him at a local luncheonette where the closing takes place. The client meets with the broker, signs the stack of papers, and is informed that the attorney will record the deed into the client’s name, and will use the loan proceeds to payoff any prior liens/mortgages on the property granted by the prior owner (the seller).

The client is not aware that missing from the stack of papers he signed is any application for a commitment for title insurance. Nor is the client aware that this is not the first time that the broker and attorney responsible for the closing have committed a fraud upon unsuspecting buyers.

Indeed, the client had been approved for a loan for $300,000 and amongst the documents he signed in the luncheonette was a promissory note whereby the client agreed and promised to pay back the bank $300,000 over the next 30 years. When the loan proceeds were delivered to the attorney, the attorney and the broker used the proceeds for their own personal purposes rather than to payoff the existing liens on the property. The broker is now living in another country and the law has caught up with the attorney, who is now incarcerated.

In the meantime, the deed transferring title from the seller to the client was never recorded. This means the client does not own the property, but he owes the bank $300,000. Furthermore, because the mortgage, which he executed, was never recorded, the bank from which he “borrowed” $300,000 does not have collateral for its loan. Thus the ONLY thing liable for the note – is the Client.

Had the Client secured title insurance, the client could turn to the title insurance company, which would have protected him against this loss. Instead, the Client is now embroiled in litigation involving the seller, the seller’s bank, the Client’s bank, and of course the fraudulent attorney and vacationing broker.

The lesson: Be sure a reputable attorney who procures title insurance for your benefit supervises your real estate transaction!