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.
