Buying a Property Without Title Insurance in Texas

Getting Title Insurance in Texas

We’ve written before about the vital role that title companies play in protecting buyers of Texas real estate from undiscovered liens and other defects and encumbrances clouding the title to the property they are purchasing. Proceeding with closing on a real property purchase contract without the safety net of a policy of title insurance is an extremely risky proposition and not one that we would recommend if it can be avoided. Sometimes, however, it may not be possible to obtain title insurance on a desired transaction. Sales involving wraparound mortgages, for example, are frequently uninsurable, as are purchases of properties that have quitclaim deeds in their chains of title. Our firm also receives requests from time to time from clients who have already signed contracts to purchase properties without realizing the importance of having a policy of insurance and want to know if there is anything they can do to protect themselves. What steps can a person wishing to purchase (or already obligated to purchase) a property for which title insurance is unavailable do to guard against liens and other title defects?

Our recommendation to clients in this situation is to commission a title search report from a title company and a title opinion from a real estate attorney.

Title Search Reports and Title Opinions

Title companies have access to physical or online databases called “title plants” that allow them to search for recorded instruments that affect a given property. Title companies usually use their title plants to search for possible issues negatively affecting the title to a property and help their underwriters decide whether or not to extend insurance coverage to a given property sale. For a fee, however, most title companies will prepare a standalone title search report, performing the same type of search on a property that they would perform in preparation of issuing a policy of title insurance, but instead compiling the results in a written report for the customer.

Dedicated title search services also exist. These businesses have access to title plants but only use them to conduct title research and do not provide insurance. Since researching title is their main business, the range of title search options they offer may be greater than those of title companies that make their money chiefly from the insurance premiums they collect and only offer title searches as a secondary service.

Once you have a title search report in your hands, an experienced real estate attorney can examine the report, interpret the results, and give you an opinion as to whether the seller of the property in question can convey good, clean title or whether there are clouds on the title that would negatively affect your ability to resell the property in the future.

What if a Lien is Discovered But I’ve Already Signed the Contract?

If the title search turns up defects on the title of a property that cannot be easily corrected, the remedy for the prospective buyer who has not yet signed a purchase contract is simply to walk away from the deal. Even if the buyer has already signed the contract by the time the title defect is discovered, however, Texas law provides a remedy so long as the transaction has not yet closed.

Texas Property Code Section 5.016 provides that the seller in a real property transaction in which no title insurance is issued must provide the buyer with a written disclosure listing all liens affecting the property. The disclosure must contain a slew of specific facts, including the amount of the debt secured by the lien, the terms of the underlying loan or contact, if any, the amount of property taxes owed on the property, and more. The disclosure must be given to the buyer as well as each individual lienholder no fewer than seven days before the execution of the purchase contract or the day ownership changes hands, whichever is earlier. If no such disclosure is provided prior to the buyer signing the contract, then the buyer is entitled to terminate the contract for any reason on or before the seventh day after the buyer receives the notice. This effectively means that if the seller never gives the notice, the buyer is entitled to terminate the contract at any time before closing occurs if a lien is discovered on the property.

Section 5.016 is not a quite a get-out-of-jail-free card for purchasers who discover a lien on the property prior to closing. Subsection (c) of the statute lists a number of categories of transactions to which the statute does not apply and should be double-checked prior to asserting a right to terminate. Section (d) also makes termination unavailable when the seller reasonably believes that the lien will be removed from the property within thirty days of closing and takes the required steps to make that happen. Thus, if a buyer terminates a contract under Section 5.016 when the seller is willing and able to have the lien removed within a short period of time, the buyer may be liable for breach of contract.

If you are considering purchasing a property for which a policy of title insurance is not likely to be available, a professionally prepared title report together with the advice of a skilled real estate attorney can help protect you from liens and other clouds on title.

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