What should you watch out for in a title commitment? Mindi McLain, a Texas attorney and co-owner of a law firm, also co-owner of a real estate investment company. She represents investors, developers, lenders and real estate projects throughout Texas and a few other states.
Tell us some of the biggest issues that you have found in a title report before.
I have had some big messes, I don’t even know how to describe how messed up a property can be. At least in Texas, title insurance is pretty standard. It’s it’s rare that you have a client that’s says, No, I don’t want title insurance, I don’t want to pay for it. And that happens, it can be expensive, because ours is based on the sales price of the property. And it’s a set premium, it’s set by the state, the companies don’t have any room to negotiate that price for you. So if it’s a big enough deal, the title insurance can be an expensive cost, so all the more reason to do it. But sometimes you can have a small deal, your client is only going to spend $10, 20, $30,000, and they don’t want title insurance. But sometimes those are the worst.
Deals that are too good to be true are typically not good deals. I’ve had a few deals where, especially if you’re buying something from a family, it could be residential or commercial, but it’s just been in a family for a long time, and then somebody down the road decides they want to sell it, most of the problems that you see are with people that have died in the chain of title ad nothing’s been done. There hasn’t been a probate of their estate, there hasn’t been an affidavit of heirship. You’re trying to build a family tree, and it has 80 branches, and they had six kids and they had 12 kids. I’ve had a lot of them, small deals, but we had to just go and find all these heirs that were lost.
And there’s really nothing you can do. You can’t just say Oh, forget Joe Bob, he doesn’t matter, he’s probably in Alaska, we don’t know how to find him. No, you have to find him, you really need him unless you just want to risk it later file a lawsuit and try to clean it up down the road. I’ve done a lot of that, I feel like I put on my PI hat, and I’m a private investigator and I’m trying to find lost heirs, and I’m driving around all over Texas, meeting people at their farms, or wherever they want to meet to say, Hey, did you know that you have a 1/64th interest in this property? And would you mind signing this deed? So those can be wrecks, but it can usually be worked out.
Another issue that I’ve seen more frequently is that same kind of issue. It’s a family, and several people have died. And we’re dealing with heirs. And we find that one of the heirs is a minor, meaning they’re under the age of 18. But they’ve come into title on a property. In Texas, you can get around that, but you have to get a court order allowing a parent to sell that property on behalf of the minor. And then the proceeds from the sale have to go into the court registry, and then it sits there until they turn 18. And then they can go and cash out their inheritance. That happens if someone dies and their heir just happens to be seven or eight years old, or 14 years old. They still are an owner of that property, but legally, they don’t have capacity to own property or to sell property. And so you have to involve a parent or a guardian.
Some of the worst things I’ve seen are people buying property and not fully reviewing everything that’s in Schedule B and then finding out that there’s a restriction on their property that they didn’t know about. The title company is not going to necessarily tell you hey, you can’t use this property that looks like a retail store, you can’t use it for retail. They’re just going to note in their commitment that there’s no restriction, or a deed, or subject to whatever it was in this document. If you go back and read it, and you bought a property and you wanted to use it for a funeral home, and then you later found out that there’s actually a restriction on that property that says it can’t be a funeral home, or a tattoo parlor or whatever it is that you wanted it to be, then you have a problem because the purpose that you wanted that property for you cannot do it legally because there’s a restriction. And that wouldn’t be a covered claim, if that restriction was an exception to your policy.
Also leases, some people will see that there’s a memorandum of a lease recorded, and they won’t really dig into what the lease actually says and ask the seller, Can I see that lease ahead of time? And maybe the tenant either had an option to purchase a property or a right of first refusal or something like that. And they come back later and say, actually, you didn’t have a right to buy this, I had a right to buy it. So they try to undo the sale.
And then in Texas, at least where I live, it’s a little bit more rural, and a lot more agricultural driven, so people are getting savvy to all the ways that you can generate income from rural properties. And so that includes not just oil and gas leases, and mineral production, but also solar farms, wind farms, all types of alternative energies. That’s still being developed under Texas law, what that means for the surface owner, versus the mineral owner, versus somebody who has a right to wind or other energy production. But that could really be something that’s huge in the future. If you bought a property subject to some prior reservations of wind, solar, mineral, or water, I’m sure that for you guys in California, that’s a huge deal. And it is here too.
People carve off all of those different aspects of a property, and they try to keep them. So you may think you’re buying an entire property, but you’re buying land that has no water, no wind rights, no solar rights, and no mineral rights, and that could really devalue your ability to develop that property in the future.
Those are some of the bigger issues that I’ve seen over the years. Lots and lots of stories. But if we can catch it ahead of time, we can usually either fix it, or we know what we’re getting into. And we can renegotiate or even back out of a deal if it doesn’t make sense. But if you get your title report or get your title commitment, and you don’t review it, really dig into it, you could end up with some surprises that you didn’t see coming until later.
I had a property in contract a couple of years ago, and there was a party wall agreement, the property shared one of the walls with the neighboring property. And this agreement was done in the early 1900’s. And the title company sent us a document that was not the actual agreement. So number one, they send us the wrong document. And number two, it took them quite a few days to find that agreement. What if they didn’t find it? Does such a thing happen?
The title company doesn’t always have the complete agreement. If you look back in old records, there’s all kinds of things that are recorded and that are publicly available that you would never record now. People’s personal information and complete lease agreements that are 10, 20, or 50 pages long. That’s not really standard practice anymore. Most people want to keep things private. Most likely, if you’re recording something now, an agreement like what you’re talking about, or a lease or something, you’re just going to record a memorandum that says X party and Y party signed an agreement on this day, and it affects this property, and it describes the property and it may give a few details about the agreement, but it’s not going to be the complete agreement.
So you’re actually going to have to go hunt it down. The title company may just drop that into their exceptions, that the memorandum of lease and any lease associated with that, or the party agreement memorandum and any agreement that goes along with that or not, are not included in your title insurance coverage. And so if that were the case, and you made a claim later, or somebody made a claim against you and you tried to make claim on your title insurance, they could just deny coverage and tell you that it’s not a covered event. Or if it was out there and they didn’t catch it, then they might have to actually cover your claim and either pay your damages or represent you in the event you were trying to defend something.
The more we go digital with all of our records, it probably will be easier to make mistakes, because everything is still manually entered and keyed in, and you have to use search terms and sometimes something is misspelled, or weird spaces are put in, and something doesn’t come up when you search.
My very first job out of law school was at a title company. And we were really small, just a one county little place. Our system was not technology driven whatsoever. A realtor would come by and they would bring in a contract, and we would enter it all in our system. We had these paper cards that we kept and we would go through the card system, do a little search yourself. And then you take your notes, and run across the street to the courthouse. And you would go through the books that were there. They have a written grantor grantee index. And that’s how you would search, you would just go through these books. And I would spend all day at the courthouse, just searching, going through books, pulling out documents, making copies, putting them back in the book. I don’t know how many times these documents have been copied. And that’s obviously not super efficient.
And that’s not the way that the future is going to look for us, it’s going to be very computer driven. And everything’s going to be online and you just search. But again, mistakes happen when you have to manually enter things like that. I don’t know what that’ll look like, but maybe someday title insurance won’t be needed. For now, I think you’re in a better position to review everything that you get. A lot of times, if this property has already changed hands before you, they may already have a file on it. They might just be bringing it forward, and it doesn’t take that much time. The more transactions they do, the more they can build those records and those files, so when you bring in a contract 10 years from now, they’ve already looked at this property multiple times, and they’ve records on it, and it makes it more efficient. But they’re not going to catch everything.
There are mistakes on all sides. And that’s just the nature of how many documents there are and how voluminous it can be. I live in a city, but it’s not anything like Houston, or Harris County, so I can’t imagine trying to keep up with all those records, everything that gets recorded all the time, and others are recording, and there is still in person recording. It’s just a lot. I think there’s always going to be a chance for mistakes, but you do the best you can to review what’s in front of you. If you see something, don’t be afraid to ask about it, or ask your closer, ask your your realtor, whoever it is that you’re dealing with.
But there’s somebody in the title company that built that title commitment for you, they’ve reviewed the records, they work in abstracting, so don’t be afraid to go back and ask, What about this? What is that? Why is that wrong? Even when they’re reviewing everything and they’re entering it, so that they can give you a title commitment, they may miss some numbers and letters and things. They might tell you it’s Volume One, page two, but that might not be right. That document may not even be what you really want to look at. Put on your investigator hat on, do a little work yourself to get everything reviewed until you feel comfortable that you understand what those documents are and how it affects your property, and you’ll be better off for it.