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How Title Insurance Works In Commercial Real Estate Transactions

May 10, 2024

One of the most important components of any commercial real estate deal is title insurance. Without it, the risks associated with purchasing and selling real estate would probably be too great for both buyers and sellers.

Since 1874, title insurance has existed in various forms in the United States. The more knowledgeable you are about title insurance and its function in commercial real estate transactions, the more equipped you will be to protect your assets and negotiate excellent bargains.

What Is Title Insurance?

Like other types of insurance, title insurance protects the buyer against issues with the property's chain of title. It can be used in residential and commercial real estate transactions.

In the purchase and sale of commercial real estate, title insurance is essential since the sums of money involved are greater, the transactions more complex, and the title itself is frequently more difficult.

What Is Covered By Title Insurance

The legal right to use and alter property as you see fit and to assign ownership of any interest or portion to third parties through a deed is known as a title. A deed, on the other hand, is a signed legal document about the transfer of ownership of an item to a new owner.

Now, while it's a legal document, not all deeds grant complete ownership of the asset, and liens or other restrictions may impose limitations on the ownership rights of real estate.

That's when title insurance comes in -- it assures the seller that the property they're buying is indeed what it is stated by the seller. If a third party claims they are the true owners of the property and not the seller, the buyer will be covered by title insurance. Although each policy is a little bit different, in general, title insurance will pay for the buyer's legal costs during the title dispute and compensate them if the buyer's property is awarded to a third party.

The Role of the Title Search

A title search is done by a title insurance firm before issuing a policy. To do this, every recorded property transfer in question must be examined. We call this type of investigation a title search.

In addition to determining ownership, the title search examines any liens and other encumbrances—such as easements—that have been placed against the property. Every attempt is made to guarantee that the outcomes of each lien and transfer are understood during the title search.

Before the title insurance policy is issued, the buyer and seller can review the preliminary title report that is provided after the title search.

Different Types of Policies and Endorsements

Usually, title insurance providers offer two different kinds of coverage. Owner's policies and loan policies exist. The purpose of loan title insurance is to protect the bank's or another lender's investment if a title issue arises later. The purpose of an owner's title insurance policy is to shield the property owner or buyer from future title difficulties discoveries.

In addition, title companies provide a range of endorsements for title insurance policies that protect against non-title-related risks. These endorsements might address zoning disputes, border errors, and environmental concerns. Depending on the risk factors and property value, the cost of the endorsements varies significantly.

How To Get Title Insurance

There are a lot of title insurance companies in Indiana alone. In commercial real estate transactions, title insurance agents frequently serve as escrow agents, therefore the buyer and seller must decide which title company to utilize. Before closing, the title insurance firm is involved in the process from the beginning. The title insurance process starts once the due diligence phase is concluded and continues until the sale is finalized.

The industry guidelines for the issue of title insurance on commercial real estate are governed by the American Land Title Association (ALTA).

Using Title Insurance In Commercial Real Estate

In commercial real estate transactions, title insurance plays a crucial role in both the due diligence stage and the closing procedure; meanwhile, it's considered as a part of formality in residential transactions.

Due to the high risks involved in commercial real estate, everyone involved—from the buyer and seller to the lender or lenders—has a responsibility to ensure a successful title insurance issuing process.

Title Insurance -- Who Pays And Who Owns the Policy?

The buyer usually covers the cost of the loan title insurance if a lender is involved in the transaction. The policy's cost is frequently included in the loan's total cost. If there are several lenders, each will need a different policy.

Home or property buyers may also want to obtain an owner's title insurance policy. This coverage may occasionally be covered by the seller as part of the closing fees. Practically speaking, though, the buyer bears the final financial burden of the owner's title insurance coverage since the seller will simply include it in the selling price.

The person who pays for title insurance may not always be the one who benefits from it. Even though the buyer could be paying for the loan policies, the lenders—not the buyer—will be the ones who profit from them if something goes wrong with the property.

The reason buyers should have a separate owner's policy is because of the question of who gains from the insurance. The buyer will benefit from the policy should there be any issues with the title down the road, even if the seller is paying for it.

a title insurance agent and his clients

The Role Of Title Insurance Agents

In commercial real estate transactions, title insurance agents frequently play a crucial role, but they are largely insignificant in residential real estate transactions.

The title insurance agent will oversee the prompt completion of the title search, keep the buyer and seller informed regarding its progress, and ensure the preliminary report is issued. For little to no additional cost, the title agent will typically also serve as an escrow agent. He or she keeps the closing procedure running smoothly.

What Happens When There's An Issue With The Title?

While the majority of insurance policies you purchase are meant to shield you from potential future problems, title insurance protects you from potential past events that you may not yet be aware of.

You need to file a claim with the title insurance provider if someone comes forward to contest your ownership rights or title to the property. The title insurance provider will typically look into the challenge and defend you against it, depending on what your policy covers and what endorsements you purchased.

A commercial real estate attorney will be involved very early on in the procedure to assess the claim and work toward quickly resolving any objections. However, property title issues can take years to resolve, just like any other legal problem.

The Preliminary Title Report

The preliminary title report is among the most crucial records in the whole commercial real estate transaction. The title insurance provider will provide a preliminary title report outlining its results after the title search is finished. Any liens or other encumbrances that are currently placed against the property's title will be displayed in this report. It will also show which title the seller holds over the asset. The title report will specify when and to whom any property rights, such as mineral or water rights, were transferred if they have ever been sold.

What Preliminary Title Report Means To The Seller?

The seller can evaluate the preliminary report and contest any conclusions when it is released. The seller has the right to request that any inaccuracies be fixed and a new preliminary report be produced.

The seller can conduct their own research or refer back to the title insurance policy they were given when they bought the property if the report reveals that they do not have the clear title they believed they did.

Before the preliminary title report is made final, the seller has a brief window of opportunity to raise any concerns.

What The Preliminary Report Means To The Buyer

To ensure the report supports the seller's claims regarding title and property rights, the buyer must carefully analyze it. The preliminary report will serve as the basis for the policy. It is the buyer's final opportunity to back out of the agreement without suffering significant financial penalties if there is anything they are uncomfortable with.

If the report contains errors, the buyer may also object to it.

Accepting The Preliminary Report

The parties will accept the report and it will become final once the concerns from each party have been addressed. The title insurance policy provided to the buyer and lenders will include the final report.

The remainder of the deal will proceed swiftly once the report has been approved and the insurance has been issued. The money will be sent to the seller and the completed title documents to the buyer by the title insurance agent serving as an escrow agent.

Final Note

Commercial real estate transactions are made feasible by title insurance, which also facilitates a seamless closing procedure. Without title insurance, lenders would never be willing to take a big financial risk on complex deals, and consumers would be far less likely to make purchases from complete strangers.

We hope this helps!

If you have questions on title, title insurance, and the like, leave a comment or send us a message today!

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8315 W. 10th Street
Indianapolis IN 46234
317-214-6023

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