Clear title to real estate is a concept that is usually explained incorrectly, leading to confusion and uncertainty.
But….. “It ain’t that complicated.”
Here’s a clear explanation of what your real estate ownership is, what it means to you and to everyone else, and how you should think about it.
This idea is complicated because when you own real property, there is no actual “Title” document issued by a government agency, that you can hold in your hand, like your car title.
Here’s what you have instead.
DOCUMENTS OF CLEAR TITLE TO REAL ESTATE
When you own real property, there are two types of documents that determine whether or not you own the real estate.
These two documents also determine the extent and reliability of that ownership.
The first type of document are the documents that refer to the “title,” or ownership of the real estate.
These would include documents filed in the public records such as a Warranty Deed, Deed of Trust, Mortgage, and many more.
The second type of document is the document that insures the title.
There is only one. It is called the Owner’s Policy of Title Insurance.
Let’s look at each type of document, and then tie them together.
TITLE CONVEYANCE DOCUMENTS
Clear title to real estate cannot be conveyed by someone who does not have clear title himself.
The person signing a Deed to real estate, transferring ownership of that real estate to someone else, can only convey what is owned, and nothing more.
That person is called the Grantor, and the Grantor only owns what he received in his Deed from the previous owner, because that previous owner can only convey what he owns, and so forth.
And, although you hear the term used everywhere, there is really no such thing as “clear title” to real estate.
“Clear title” would indicate that there are no encumbrances on the property and that there are no questions about ownership.
It is not possible to determine that.
In the United States, with the history of land ownership, considering the early Land Grants, the promoters, the Railroad scams, the crooked Politicians, the illiterate population, the lack of a centralized recording system, surveyors measuring property lines by laying chains on the ground, and even honest mistakes, every parcel of land has some cloud on the title, or some defect in the description from the past 240 years.
There is no such thing as “clear title” to real estate.
TITLE INSURANCE DOCUMENTS
So, what do you get when you buy real estate?
What you get, or what you should insist on getting, is called “insurable title.”
That means that the Title Insurance Company has searched the public records for all of the documents of record that affect the title to the property.
And they have concluded that, although they cannot prove that title is clear, and they don’t even go back beyond 25 years so they wouldn’t know anyway, the Title Insurance Company believes that all factors, know and unknown, that might affect ownership of the property being sold by the Seller, are so unlikely to come up and emerge as a title defect, that they are willing to pay the Buyer for any loss that he may suffer as a result of such defect.
That is “insurable title,” and it is a lot different from “clear title.”
The Owner’s Policy of Title Insurance not only does not guarantee that the Buyer is receiving “clear title,” but also does not guarantee that the Buyer is receiving “marketable title,” or that he will be able to sell the property.
The Title Policy is an insurance policy. It guarantees to reimburse the Buyer for any loss suffered as a result of a title defect. That’s all.
FALSE “CLEAR TITLE TO REAL ESTATE” DOCUMENTS
There are three documents that are mistakenly referred to as “title” to real estate.
Abstract of Title.
Certificate of Title.
Let’s discuss those and understand what they are.
The first document is a Title Opinion.
A Title Opinion is simply the written opinion of someone regarding the condition of the title to a parcel of real estate.
“Condition” means the level of ownership, types of encumbrances, and all other matters that related to the ownership of the property and the use of the property.
A Title Opinion is usually provided by an Attorney, or by the Title Insurance Company, or by another individual or agency with access to the relevant data an with professional expertise.
It is not a Guarantee, or Warranty, of title. It is just an opinion.
ABSTRACT OF TITLE
The second document is an Abstract of Title.
An “abstract” is just a summary of something.
In this case, the Abstract of Title summarized the documents filed in the Real Estate Records of the County in which the property is located, such documents that affect the property in question.
It is just a list of all of the documents, such as Deeds, Mortgages, Liens, Judgments, Grants of Easement, Releases, and so forth.
Someone with relevant professional expertise, such as an Attorney, or a Title Insurance Company employee who examines title, can look at an Abstract of Title, and render a Title Opinion as to the condition of title.
But an Abstract of Title is also not a Guarantee, or Warranty, of title.
It is just a list of the documents of record that affect the title to the property.
And it certainly is not a “clear title to real estate.”
CERTIFICATE OF TITLE
The third document is a Certificate of Title.
A Certificate of Title does not exist for real estate, although you often hear it used incorrectly in that way.
A Certificate of Title is a document that evidences the ownership of certain property which carries a title with it, such as a vehicle.
Some very expensive watches also use this system to document and track ownership.
And there are probably other instances where a Certificate of Title is used.
But there is no Certificate of Title that insures that you are the owner of real estate.
When we started discussing clear title to real estate, I told you that you do not have it, but that I would tell you what you do have.
Well, what you have is a document that is often referred to as a Guarantee of clear title to real estate, and that is an Owner’s Policy of Title Insurance.
However, it also does not guarantee that you have clear title, only that you have ownership of the real estate.
A Title Insurance Policy is just what it says. It is an insurance policy.
And like all insurance policies, it insures you against loss.
But unlike other insurance policies, it does not insure you against loss caused by events that might happen in the future, like a car accident.
An Owner’s Policy of Title Insurance insures you against a loss caused by events that happened in the past, events that now affect your ownership of the property, reduce its value, or restrict your use.
As I said, the Title Policy does not guarantee that you own the property, it just says that you will be compensated for any loss that you suffer due to a defect in, or a condition, the title, provided that the defect or condition was not disclosed to you in the Policy.
The Policy is very careful to not state that you have clear title to the real estate.
In other words, title is not clear, but it is insurable.
It’s the best we can do.
And it works.
An aside here: in my opinion, the most successful real estate investor will be the one with the most information.
I don’t mean data, I don’t mean someone else’s plan, or program, or opinion.
I mean information. And you get that by reading, reading constantly if necessary.
I think you’ll benefit from the few minutes it takes to read them.
I touch on this same concept in more than one of my books, but the one with the most detailed information is “Real Estate Investing Vocabulary Of Terms.” If you would like to preview it, you can go here on this website to look at the first one, use the 3D Flip Reader to look at the Contents and read the first few chapters.
The paperback is available on my Amazon Author Page, along with my other books.
And I have related Articles about real estate investing and other real estate matters from other perspectives on my LinkedIn Page.
I am also active on Quora.com where I have answered over 300 questions, and they have almost 3 Million views.
If you happen to be doing, or if you are considering doing, a Section 1031 Like Kind Exchange, then you should start with a Dictionary, and I have done one, in 3 separate Blog Posts here: Part 1, Part 2, and Part 3. And I have a lot of material for you to consider on my S1031 Exchange website.
You should always check out the credentials of anyone, like myself, who you are relying on for accurate information by looking closely at their Biography. Here’s mine.
If you are undecided which of my books to start with, here are three that I recommend.
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