Thursday, March 29, 2012

Is a buyer responsible for a lien that does not appear on a title report, but is filed before the real estate closing?


Over the past couple of weeks, we received variations on the following question from homeowners, contractors, and others: "Is a buyer responsible for a lien that does not appear on a title report, but is filed before the real estate closing? Will the buyer be responsible for paying the lien, such as tax or mechanic's liens, that did not appear in the title report?”
The short answer is that it depends on the state. We should start out by saying that a mechanics lien filed the day of or the day before a real estate closing is extremely rare.  The risk of a mechanics lien being filed is minimal to the purchaser because it almost never happens.  However, from the purchasers point of view, this is the exact reason that a buyer should protect themselves from undiscovered mechanics liens with title insurance. In many states, the rate that you pay for title insurance is regulated by statute, and is well worth the price. You can ask your closing attorney what the current rate is. Owner’s title insurance protects you against the possibility that undiscovered claims or liens pop up after closing. 
According to the American Land Title Association and Realty Title, title companies find and fix problems with the title in 25% of transactions - usually without the the borrower or lender even knowing it! In addition, title companies pay millions of dollars each year in claims. Title insurance provides significant value to lenders and homeowners. Before closing, title insurers search the public records for all matters affecting title. The search entails examining the records in the offices of the Register of Deeds, Clerk of Courts, and other municipal and county officials. These records include recorded documents, judgments, liens, taxes, street easements, sewer assessments, special taxes and other matters that could affect property ownership. This process, called a title search, provides early warnings of title flaws that must be dealt with before the property can be sold or refinanced. In those transactions where title insurance is involved, the title company must determine insurability of the title as part of the search process. This leads to the issuance of a title policy, which insures the existence or non-existence of rights to the property. The title insurance company will, at its own expense, defend the title and will pay losses within the coverage of the policy if they occur.

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