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After
months of searching, you've finally found it -- your perfect
dream home. But is it perfect?
Will you be purchasing more than just a beautiful home? Will
you also be acquiring liens placed on the property by prior
owners? Have documents been recorded that will restrict your
use of the property?
The preliminary report will provide you with the
opportunity, prior to purchase, to review matters affecting
your property which will be excluded from coverage under
your title insurance policy unless removed or eliminated
before your purchase.
To help you better understand this often bewildering
subject, the Land Title Association has answered some of the
questions most commonly asked about preliminary reports.
What is a Preliminary Report?
A preliminary report is a report prepared prior to issuing a
policy of title insurance that shows the ownership of a
specific parcel of land, together with the liens and
encumbrances thereon which will not be covered under a
subsequent title insurance policy.
What role does a Preliminary Report play in the real
estate process?
A preliminary report contains the conditions under which the
title company will issue a particular type of title
insurance policy.
The preliminary report lists, in advance of purchase, title
defects, liens and encumbrances which would be excluded from
coverage if the requested title insurance policy were to be
issued as of the date of the preliminary report. The report
may then be reviewed and discussed by the parties to a real
estate transaction and their agents.
Thus, a preliminary report provides the opportunity to seek
the removal of items referenced in the report which are
objectionable to the buyer prior to purchase.
When and how is the Preliminary Report produced?
Shortly after escrow is opened, an order will be placed with
the title company which will then begin the process involved
in producing the report.
This process calls for the assembly and review of certain
recorded matters relative to both the property and the
parties to the transaction. Examples of recorded matters
include a deed of trust recorded against the property or a
lien recorded against the buyer or seller for an unpaid
court award or unpaid taxes.
These recorded matters are listed numerically as
"exceptions" in the preliminary report. They will remain
exceptions from title insurance coverage unless eliminated
or released prior to the transfer of title.
What should I look for when reading my Preliminary
Report?
You will be interested, primarily, in the extent of your
ownership rights. This means you will want to review the
ownership interest in the property you will be buying as
well as any claims, restrictions or interests of other
people involving the property.
The report will note in a statement of vesting the degree,
quantity, nature and extent of the owner's interest in the
real property. The most common form of interest is "fee
simple" or "fee" which is the highest type of interest an
owner can have in land.
Liens, restrictions and interests of others which are being
excluded from coverage will be listed numerically as
"exceptions" in the preliminary report. These may be claims
by creditors who have liens or liens for payment of taxes or
assessments. There may also be recorded restrictions which
have been placed in a prior deed or contained in what are
termed CC&Rs--covenants, conditions and restrictions.
Finally, interests of third parties are not uncommon and may
include easements given by a prior owner which limit your
use of the property. When you
buy property you may not wish to have these claims or
restrictions on your property. Instead, you may want to
clear the unwanted items prior to purchase.
In addition to the limitations noted above, a printed list
of standard exceptions and exclusions listing items not
covered by your title insurance policy may be attached as an
exhibit item to your report. Unlike the numbered exclusions,
which are specific to the property you are buying, these are
standard exceptions and exclusions appearing in title
insurance policies. The review of this section is important,
as it sets forth matters which will not be covered under
your title insurance policy, but which you may wish to
investigate, such as governmental laws or regulations
governing building and zoning.
Will the Preliminary Report disclose the complete
condition of the title to a property?
No. It is important to note that the preliminary report is
not a written representation as to the condition of title
and may not list all liens, defects, and encumbrances
affecting title to the land, but merely report the current
ownership and matters that the title company will exclude
from coverage if a title insurance policy should later be
issued.
Is a Preliminary Report the same thing as title
insurance?
Definitely not.
A preliminary report is an offer to insure, it is not a
report of a complete history of recorded documents relating
to the property. A preliminary report is a statement of
terms and conditions of the offer to issue a title insurance
policy, not a representation as to the condition of title.
These distinctions are important for the following reasons:
first, no contract or liability exists until the title
insurance policy is issued; second, the title insurance
policy is issued to a particular insured person and others
cannot claim the benefit of the policy.
Can I be protected against title risks prior to the close
of the real estate transaction?
Yes, you can. Title companies can protect your interest
through the issuance of "binders" and "commitments."
A binder is an agreement to issue insurance giving temporary
coverage until such time as a formal policy is issued. A
commitment is a title insurer's contractual obligation to
insure title to real property once its stated requirements
have been met.
Discuss with your title insurer the best means to protect
your interests.
How do I go about clearing unwanted liens and
encumbrances?
You will wish to carefully review the preliminary report.
Should the title to the property be clouded, you and your
agents will work with the seller and the seller's agents to
clear the unwanted liens and encumbrances prior to taking
title.
Who can I turn to for further information regarding
Preliminary Reports?
Your real estate agent and your attorney, should you choose
to use one, will help explain the preliminary report to you.
Your escrow and title company can also be helpful sources.
CONCLUSION: In a business which is directed at risk
elimination, the efforts leading to the production of the
preliminary report, which is designed to facilitate the
issuance of a policy of title insurance, is perhaps the most
important function undertaken.
Articles by CLTA
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