So let’s say in 1950, let me write this down, in 1950, there was a plot of land that the city owns and says, hey, you know what, we could use some revenue, or we would want someone to build a house. There’s a housing shortage in this city. Let’s sell it to someone who maybe might build a house on it. So you have the city, who is the original owner of this particular plot of land, and they transfer title of that plot of land to, let’s say it’s a developer who’s going to be the first owner. So, they transfer title of that land to a developer. So, I’ll just call them the developer right over here, and when they transfer title, they record that by filing a deed, so filing a deed with the county. And you sometimes file it with the city, sometimes with the county. So, this is at the county’s office right over here. So, this is the county. We’re going to assume that we filed these things with the county.
All right, fair enough. Let’s say the developer lives in that house for some time. Actually, maybe the developer lives in that house for a while, and he and his wife, they unfortunately pass away. And so it gets, in 1970– So, let’s say it’s in 1970, they pass away. And so, in their– And maybe they didn’t even have a will, and so it just gets transferred to their closest relative. And let’s say that the developer had a brother-in-law is the closest relative, and so the property gets transferred to the brother-in-law. So let me write this down, brother-in-law, brother-in-law of the developer. Brother-in-law of the developer now has title, and that will be reflected. That will be reflected in another deed. So, let’s call this deed one, and this will be recorded in the county recording office. This is deed two. And then, let’s fast forward now to 2000. The brother-in-law and his family has lived there for a while. And so, now it is the year 2000, and they are looking to sell the house, and there is a buyer who’s interested in that house.
So this is, we’ll call this owner three, but before she buys the house, she prudently wants to do– wants to make sure that the title is clean, that this brother-in-law really does have title, that has ownership, not just possession of the house, that there aren’t any liens on the house, some back taxes or some contractor that did work that claims it was never paid, whatever it might be. So she, owner three, hires a title search company to do a title search, and they go to the county recording office, and say, okay, look, it was sold from the city to the developer in 1950, and then the developer and his family passed away in 1970, and so then it was transferred legally to the brother-in-law.
And so they say, hey, the title is clean. You can buy this house. So owner three, she decides to buy this house. She pays for it, however much money, and then the title is transferred, and the evidence of that is deed number three. So you might say, okay, this is all good and well. This seems like a very reasonable thing to do. She has nothing to worry about, but what if, what if right after owner three pays all of this money to the brother-in-law, let’s say in 2001 someone shows up and says, hey, look, I was the developer’s long lost child.
I had the rights to this, not the brother-in-law. So, I lay claim. I lay claim to this house. So, this right over here. So, someone says this should have been me. This should have been me. And so, therefore, they claim that this was not a valid transaction. If this isn’t a valid transaction, then this also is not a valid transaction, and then they could take this whole thing into court, which is not going to be a pleasant thing. It’s not going to be a pleasant thing for owner three. So, I know what you’re thinking. How does an owner three protect themselves from some random thing that might happen like this, especially because a house is the most important transaction you make? If this happened, you get bogged down in a big lawsuit, and who knows what might happen.
This could be a nightmare for owner three, and that’s why title insurance exists. Title insurance. The whole purpose of title insurance is, okay, you should do a title search. You should make sure that the title is clean, that there aren’t any liens or encumbrances, any claims to the property, and that everything has been filed. You would also have a nonclean title if somehow these people didn’t file this properly, if deed two is shady or didn’t have all of the proper language.
But even if you do all of that, you’re not 100 percent sure that there might not be some other weird or bizarre claims or that something might have been overlooked in the title search. And so, to protect yourself, you get title insurance, and most lenders, because most of the time when houses are bought, the lender is putting up the majority of the cash for it, and in the case that the borrower isn’t able to pay it, the lender takes possession of the house, most lenders make you get title insurance, so that they can be protected for this exact scenario. Now you can imagine, let’s say owner three took out a mortgage, and then all of a sudden all this craziness happens.
It might be easier for them to just walk away from the mortgage, and then the bank is left with all of this messiness. So, the bank has a huge incentive to have title insurance. And the whole point of title insurance is to protect this owner or the person who comes into ownership of the house, from any of this messiness that might actually ensue. So although a bank, whoever is giving you the loan for your house, might insist that you have title insurance, it’s probably a good idea, even if you were buying the house in cash, even if no one was forcing you to do it, just so that you make sure that you’re protected against these type of things. And just to be clear, it’s not a hugely costly type of insurance, because these things are rare. So these are rare events, but you still want to protect yourself against them happening. Titles insurance | Housing | Finance & Capital Markets.