What is a Preliminary Title Report?
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Preliminary Title Reports Explained
Whenever real estate is bought or sold, it’s important for the buyer (or the buyer’s closing agent) to perform a title search to verify they are buying a property with a clear chain of title and no outstanding liens or other encumbrances of record.
In other words, the buyer wants to be 100% certain that the person selling the property actually owns 100% of the property, and no other parties have a claim to it.
When a title representative has performed a title search to verify the history of the chain of title, a preliminary title report is essentially a list of any findings or issues that currently appear in a property’s title work and it includes a list of any liens or encumbrances that will not be covered by title insurance. The report also shows if anyone other than the seller has a legal claim to the property.
In a sense, the preliminary title report (or title commitment) is a checklist of items the title company needs to receive before they can finalize and close a real estate transaction and issue the corresponding title insurance policy. It also represents the list of outstanding issues that cannot be covered by the title insurance policy.
Why is a Preliminary Title Report Needed?
When a real estate transaction is closed by a title company, a preliminary title report is always prepared by the title insurance underwriter prior to closing.
While it’s prudent for a property buyer to read and understand what the title commitment says, the average person is not overly familiar with how to decipher what this document says.
This is especially true for foreclosed and bank-owned properties which are often sold as-is.
One benefit of working with a real estate attorney to close a real estate transaction is that the buyer can lean on the attorney’s expertise to identify and resolve any problems that appear on the preliminary title report.
The preliminary report provides essential information buyers need to know before they invest, such as:
- The legal description of the property. This includes the property’s location and boundaries in relation to nearby streets and intersections. In the case of condos and planned unit developments (PUD), the legal description includes common areas, parking, storage, and easements that convey with the property.
- Whether the seller has the right to sell the property. Buyers need to know they can obtain a clear title after the sale and that no other parties will turn up in the future claiming ownership. The preliminary title report includes the dates of all prior sales and the names of all parties in the transaction.
- The existence of any tax liens against the property. Tax liens take precedence over other types of liens, which means once the property is sold, outstanding taxes must be paid even before the mortgage. A warranty deed for the property can’t be recorded if there are outstanding tax liens. If a quit claim deed is used, title to the property remains subject to the tax liens.
- If the property is being used as collateral for a mortgage or other loan. Lenders that have a legal interest in the property must be paid before ownership can change hands. If the title to the property is conveyed by deed, the title remains subject to the mortgage. Mortgage liens are listed below any tax liens. There may be more than one mortgage lien, and they must be paid in the order listed. If the proceeds of the sale aren’t enough to pay off the mortgages, the lien holders must agree to the short sale.
- Whether there are any other judgments or liens. There may be liens against the property for unpaid child support or spousal maintenance, HOA fees, or outstanding home improvement bills. This is important, especially in foreclosed properties, because the buyer may be responsible for settling outstanding liens once the lender has received its mortgage payoff.
- Any CC&Rs (covenants, conditions, and restrictions) associated with the property. If the property is part of an HOA or PUD, there may be limitations that affect the buyer’s use of the property. If not paid by seller at the time of sale, unpaid HOA dues must be paid by a purchaser.
- Any easements or rights-of-way associated with the property. These agreements give others legal access to or rights regarding the use of the property. Buyers need to know how these arrangements affect their plans for the property.
- Other unusual restrictions. Occasionally a property may be subject to special planning and zoning restrictions or subject to regulations (if it is located in a historic district, for example). These restrictions may affect how the buyer can use or develop the property.
How is a Preliminary Title Report created?
The preliminary title request can be initiated in a number of ways depending on the type of real estate transaction. If the property is being financed, the lender will contact the title company shortly after an escrow account is opened to begin the process.
Investors who are shopping for bank foreclosures and auction properties often request a preliminary title report before making a bid on a property that interests them.
Sellers may also request a preliminary title report to identify any issues that need to be addressed before the property is listed. In some areas, a preliminary title report is routinely included in the disclosures.
Once the title company receives the request, they begin to collect and review records such as any outstanding mortgage(s), deeds of trust, land contract memorandums, liens, unpaid taxes, and court awards affecting the property.
Any issues with the property will be listed as exceptions in the preliminary report. Any exceptions will not be covered in the title insurance policy unless they are cleared prior to the title transfer.
Owner’s Policy vs. Lender’s Policy
Not all title insurance policies are created equal.
Some title insurance policies are written specifically to cover the lender and their loan amount, to ensure their collateral interest in a property. These policies are commonly known as mortgage insurance policies.
Other title insurance policies are written to cover the owner for the entire purchase price of the property, subject to the exceptions that are listed in the policy. When real estate is purchased with third party financing, it’s a common requirement for the buyer/borrower to pay for the lender’s policy.
Does a Preliminary Title Report Disclose All Title Issues?
The preliminary title report only lists the property’s current owner and any issues the title insurance won’t cover if a policy is issued later. It may not include all defects and liens, and it is not a guarantee of a clear title.
Buyers should view the preliminary report as a list of terms and conditions the title company is placing on the offer to insure. It shouldn’t be construed as a guarantee on the condition of the title.
Reviewed by Mark H. Zietlow, Innovative Law Group