The U.S. system for the transfer of real estate is unique in the world. We transfer ownership by private contract between parties; no advance government approval is required. By contrast, many European countries have a centralized, government-managed land registration system, which requires government review before property transfers are effective. Among the many benefits of the U.S. system are the speed of the transfer, which in our system depends only on the parties being ready to close.
Once the parties have closed, it is only then that we place the transfer document (deed) in the government land records. These records are kept at the county (or similar local government) level. Importantly, the local government officials who keep these land records do not vet documents for truthfulness or accuracy. To the contrary, they have a duty to accept any documents that are in a proper format.
U.S. system of property rights is unique
For over 250 years, our system favoring the free transfer of real estate between private parties without prior government approval has built wealth and fostered economic growth. The advantage of this system of local property records is that it keeps the claims to ownership close to the property itself. U.S. property rights are established under state rather than federal law, making the shift to a centralized, national land registration system unworkable without a significant rewrite of private property law.
But there are tradeoffs to our approach. First, since the government does not vet land records before accepting them, private parties must do so. Second, and relatedly, any real estate dispute that is not settled by the parties must ultimately be decided in court. Litigation can be lengthy and expensive. This makes detecting problems from prior transactions particularly important. Doing so is difficult, high-risk work, since a mistake could mean losing the property.
Anyone undertaking this “title review” must first establish that the seller has ownership of the property. This requires searching through the documents of earlier transfers to trace ownership of the property through time, seeing whether the trail ends with the current seller. Second, it requires determining whether others have any claim or interest on the property. For example, people claiming they are owed payment can attach claims – called “liens” – to the value of the property. These may be mortgages, tax liens, HOA liens, child support judgments, etc. Beyond the research work, the answers to these questions are rarely cut-and-dry, and often require judgment calls.
Furthermore, the records themselves are not necessarily complete or accurate. Some claims need not be placed in the land records to be considered legitimate by a court. Nor are the land records authoritative. As noted, anyone can record a claim and even take it to court, regardless of its legitimacy. Fraudsters can register bogus claims for ownership and then attempt to sell the property to an unsuspecting buyer, often disappearing with the cash before the fraud is discovered. Litigation often erupts when the legitimate owner discovers the fraudulent sale, leaving the true owner and defrauded buyer shouldering the costs of the lawsuit.
Critical role of title insurance
That’s where the story of title insurance begins. Title insurance policies solve these problems by protecting buyers against legal challenges to their ownership. Title insurance goes well beyond an “attorney opinion,” which only opines that the “evidence” of ownership as shown by the public record appears to support the legal transfer of the property from one owner to another. By contrast, title insurance wraps its title review with a duty to defend against claims challenging the legality of the transfer, including bearing the burden and cost of going to court if necessary. And should the sale be void, title insurance can pay back the full value of the property to the insured party. Since evidence of ownership may not always appear in the public record, nor are the land records necessarily accurate or authoritative, there is always a risk of a legal challenge inherent in our system of private property rights in the U.S. Given this inherent risk, it is always wise to purchase a title insurance policy to protect the purchase of real estate in the U.S.
Kurt Pfotenhauer is the vice chairman of First American Title Insurance Company
This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.
To contact the editor responsible for this piece: zeb@hwmedia.com.
