Title Insurance: Preliminary vs. Full Coverage Reports - What You Need To Know When Buying Real Estate At Foreclosure Auctions

A recent story at FXstreet.com describes the importance of understanding a property profile report(1) when buying real estate, the difference between a preliminary (also known as a non-insured) title report and a "full coverage" title report, and alludes to the practice by real estate investors of relying on the preliminary (non-title insured) report as a basis for purchasing real estate at foreclosure auctions.

From the story:

• There has been litigation in the last few years related to the non-insured often free reports that investors have been given and use when purchasing foreclosure properties. These investors have relied on these reports to document all of the liens against the property.
• What has been happening is that after property has been purchased (often on the courthouse steps), the investor finds out that there are additional liens on the property. The investor is now responsible for those liens.
• Investors have tried suing title companies for misinformation. The cases don't have merit because the title company never provided a guarantee as they do with the "full coverage title search."(2)

For the story, see Property Profile and Title Report: What You Need to Know and Why.

(1) A property profile report will help you determine three things about a prospective real estate purchase:

• Who the legal owner of the property is and do they have the right to sell the property,
• The loans and liens that exist on the property,
• The restrictions related to use of the land.

(2) In a related story, see Lexology: Title information: you get what you pay for (requires paid subscription; if no subscription, GO HERE, or TRY HERE, then click appropriate link for the story), which describes the recent case, Soifer v. Chicago Title Co., 187 Cal. App. 4th 365 (Cal. App. 2nd Dist., Div. 3, 2010), where an experienced investor in distressed real estate who was the winning bidder at a foreclosure sale, and who relied on a preliminary (non-insured) title report, was left holding the bag on a $1 million loss when the report failed to disclose an existing lien.

• In Soifer, a court held that a title insurer could not be held liable for providing free, yet erroneous, email advice about loan seniority to a bidder who relied on the advice when purchasing a property at a foreclosure sale.
• The court reasoned that if, under long-established California law, a title insurer cannot be held liable for mistakes in a preliminary title report, it certainly could not be held liable for more informal advice sent in an email message.
• While consistent with existing statutes and legal precedents, this holding may come as a surprise to many in the real estate industry who, over time, have come to rely heavily on informal opinions of title and preliminary title reports from their local title company.