Three Things to Know About Preliminary Title Reports
After the buyer and seller have reached agreement, but before the close of escrow, the preliminary title report needs review. It’s not going to be one of the most riveting documents you’ll ever read. But you should examine the preliminary title report closely, as it’s one of the most important documents a buyer will receive.
Among dozens of documents that serve to disclose to the buyer important knowledge about the property, the preliminary title report documents ownership, vesting and detail regarding anything that is recorded against the property. For a buyer, the title report will reveal various liens, encroachments, easements and anything else recorded against the property. The title company compiles the report from a search of county records in order to issue title insurance, and any liens against the property are listed as “exceptions” to title insurance.
Here are three important pieces of the title report you should review carefully.
1. The Legal Description
The legal description is everything you won’t see in any Realtor marketing or advertising. It’s the literal description of where the property is located and the boundaries of the property in relation to the nearby streets and intersections. In the case of a condominium or planned unit development (PUD), the legal description will include the property’s interest in any common areas, exclusive or non-exclusive easements, and details on any parking or storage that conveys with the property.
Here’s an example of a legal description from a preliminary title report of a property:
“Beginning at a point on the Westerly line of Fifth Avenue, distant thereon 250 feet Southerly from the Southerly line of Balboa Street; running thence Southerly along the Westerly line of Fifth Avenue 25 feet; thence at a right angle Westerly 120 feet,” and so on.
Legalese? Absolutely. But it’s precise, and necessary.
2. Property Taxes
Property taxes always show up as the primary “lien” on a title report. A property cannot be transferred to a new owner when any outstanding property taxes are due to the city, county or town. As the top lien, they will indicate whether taxes are due or paid in full. Taxes must be settled before any debt holder gets paid.
3. Mortgage Liens
Mortgage liens are generally listed directly below property taxes and they’re always ordered first, second, and third. The largest lien holder generally takes first position, though there are certain conditions where a secondary lien holder will be in first position. When a sale closes, the liens must be paid in the order that they appear on the title report. In the case of a “short” sale, there are not enough proceeds from the sale to pay off the property taxes and all of the lien holders. So one or more lenders will get “shorted” by the amount they’re owed. In order for the sale to close, the lender must agree to the short payoff
Though this list is in no way exclusive, there are a variety of other things that could show up on a title report outside of taxes and loans.
* Easements. If there’s an easement recorded against the property and another owner has access to the property via the easement, that would be recorded against the title report. This stays with the report until both parties agree to remove it. For more on this topic, read “What You Should Know About Easements and Rights-of-Way.”
* CC&Rs. In the case of a condo or PUD, there are Covenants, Conditions and Restrictions (CC&Rs), which are recorded against the property. Any new buyer is buying the condo subject to the rules and regulations documented in the CC&Rs. This is why it’s important for potential buyers to pull these from the report and review them. Once you’re the owner, you’re subject to those rules.
* Restrictions, historic oversights, planning requirements. From time to time, there will be items on the preliminary title report that aren’t run of the mill. If the home is located in a historic district and therefore subject to the rules and restrictions of that district, it will show up on the title. In this case, if there are restrictions about changing the facade of a house or requirements that facade alterations comply with a local historical oversight committee led by the local planning department, a potential buyer needs to know this.
The Last Word on Preliminary Title Documents
As a potential buyer, you and your agent or real estate attorney should scrutinize the preliminary title report. You want the title to be delivered as clean as possible. If the property is subject to special items, or there are issues on the title that would affect your homeownership, you need to know and understand them thoroughly before you close.
Brendon DeSimone is a Realtor® and real estate expert based in San Francisco and New York. He is a contributor to Zillow Blog, has collaborated on multiple real estate books and is often quoted by major media outlets. Follow Brendon on Twitter.
Note: The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinion or position of Zillow.