When closing a vacant land transaction, one of the most crucial steps is conducting a title search. As a real estate investor, it is essential to ensure that the person you're buying the property from has a clear title. This means verifying that you're buying from the actual property owner and not someone who doesn't legally own it.
Why is a Title Search Important?
The importance of a title search can be likened to buying a car. Imagine seeing a car for sale in someone's driveway and approaching the owner to inquire about it. If they don't own the car but still offer to sell it to you, there's obviously something wrong.
In the real estate business, encountering situations where a property doesn't have a clear title is more common than one might think. Issues can arise when the proper paperwork wasn't filed to transfer ownership or when buyers fail to do their due diligence.
What to Look for in a Title Search
A title search goes beyond verifying ownership. It is also crucial to be aware of any outstanding liens or mortgages on the property. Sometimes sellers conveniently neglect to disclose these encumbrances, and it's up to you to uncover them.
During a title search, you should look for indications of liens or mortgages in the chain of title. These documents will appear separately and may require the seller to eliminate them by paying off the appropriate parties.
Additionally, you should check if there are any deed restrictions on the property. Deed restrictions limit what an owner can do with the property and may appear as a separate document or in previous deeds.
Another important consideration is determining if there are any existing easements or rights of way on the property. These can affect the usability and setbacks of the property, especially if you plan to develop it. Understanding existing easements is essential before adding any improvements.
Failing to identify issues in the title search can result in these problems becoming your own after closing the deal.
When Should You Buy Title Insurance?
While title insurance can provide a guarantee that the title has been reviewed and is free from any hidden issues, it may not always be necessary. Title insurance policies are often costly, and for smaller deals, the cost may outweigh the benefits.
If you're new to conducting title searches or don't have the time to delve into the documentation, a title company is a good option. They have the expertise to review the chain of title and identify any issues before you purchase the property. It offers peace of mind and protection in case any mistakes were made.
However, for deals involving smaller parcels of land or properties with a lower market value, it may not be cost-effective to purchase a title insurance policy. In such cases, conducting your own title search could be a viable option.
How to Order a Title Search
There are several ways to order a title search and acquire all the necessary documents related to the property's title history.
-
Hire a Local Abstractor: You can order an "abstract of title" from a local title agency or a professional abstractor. You can find an abstractor through a simple Google search or by contacting the County Recorder's office.
-
Hire a Local Title Company: Contact your title agency and request a title search. Although this may be more expensive, it is a reliable option if you can't find an abstractor.
-
Hire an Online Abstractor: If local abstractors are not available, you can find professional abstractors who provide services nationwide. Companies like ProTitleUSA and contractors on platforms like Fiverr offer this service.
-
Title Research on DataTree: DataTree is a data service that allows you to research properties and generate lists. It requires a paid subscription, but it is a cost-effective and efficient option.
The Cost of a Title Search
The price for an abstract of title can vary depending on the provider and the county. Typically, it ranges from $75 to $150. The abstractor will compile historical records on the property, including deeds, mortgages, and liens.
When conducting a title search, it's vital to ensure that the chain of ownership follows a logical progression. Any gaps or breaks in the chain of title should be addressed before closing the deal.
Knowing When It's Worth the Price
While doing your own title search may save money, it also comes with risks. Mistakes can occur, and there's a possibility of missing crucial information that a title company would catch.
For deals involving properties with a higher market value, it is generally worth hiring a title company to handle the title search. It ensures a thorough examination of the property's title history and provides peace of mind, knowing that experts are responsible for any mistakes.
Conversely, for inexpensive properties, conducting your own title search may be sufficient. However, always consider the value and profit margin of the property before making a decision. The cost of hiring a title company may be justified in most cases.
By understanding the process and taking the necessary steps to verify a clear title, you can avoid potential legal and financial issues and confidently close your real estate transactions.
