Ahh yes, the infamous Preliminary Title Report, or as we call it in the biz: The Prelim. This is one of the many documents in a real estate transaction that is meant to disclose all significant knowledge of a property’s current condition to the buyer. The prelim, however, is one of the most important disclosures.
The prelim includes important information about a property including its legal description, ownership, vesting, and anything else that might be recorded such as liens, easements, or encroachments.
A title insurance company will start by conducting a title search. It will scour county records looking for every bit of recorded information it can find about the property. These findings are what make up the prelim, which is what they base the title insurance policy on. Liens, or other potential title problems, will be listed in the “exceptions” section.
So without further Ado, here are 3 important parts of the title report you should carefully review.
The Legal Description
This is not the pretty description you read on property flyers raving about all of the home’s upgrades and amenities. The legal description reads like a dry legal brief. It describes the property’s location relative to surrounding streets and intersections.
If the property is a condo or PUD (planned unit development), then the legal description will also include other rights transferred with title such as parking spots, use of pool, or other amenities and/or easements.
Here’s an example of a property’s legal description from a real prelim (although I did randomly change all the numbers to make it fictional)
THE LAND REFERRED TO HEREIN BELOW IS SITUATED IN THE CITY OF LONG BEACH, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AND IS DESCRIBED AS FOLLOWS:
LOT 63 AND 49 IN BLOCK NO. 2, TRACT NO. 5894, IN THE CITY OF LONG BEACH, COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, AS PER MAP RECORDED IN BOOK 73, PAGE(S) 38 AND 39 OF MAPS, IN THE OFFICE OF THE COUNTY RECORDER OF SAID COUNTY.
What does home ownership actually mean? Defining “Title”
Taxes
You can’t talk real estate (or any other kind of asset) without talking taxes. The preliminary title report will always list taxes as the primary lien against a property. These need to be paid if the sale is going to close.
The report will indicate whether or not the taxes have been paid, and no transfer of title can occur if there are taxes owed.
Also, since property taxes are in the primary position, all other liens are secondary. This means that any proceeds from selling a property are first applied toward taxes before they can be used to settle any other liens, like mortgage loans.
The silver lining? Property taxes are tax deductible!
Mortgage Liens
Mortgage liens are generally the next items listed after property taxes on a prelim. There can be multiple mortgages on a single property, but that doesn’t mean they are all equal. When you hear a loan referred to as a “1st, 2nd, or even 3rd Trust Deed,” this is where the loan stands in the payoff hierarchy.
If there are two loans on a property that is being sold, the 1st Trust Deed gets paid off first, or at least after property taxes. If there are not enough proceeds left to pay off the 2nd Trust Deed, then the lender holding that note is going to be “shorted” by the remaining amount. This is what is referred to as a short sale.
This means that there is not enough money to pay all of the lien holders, so the only way for the sale to close is for someone to agree to receiving less money than they are owed. As you can imagine, this makes short sales a bit more complicated and cumbersome than typical transactions.
So, there you have 3 very important sections to look into on the prelim. Keep in mind, that this is by no means an exhaustive list of things to watch out for.
Here are a few more that you should pay special attention too:
Are there any easements – If the owner of another property has some sort of access or use rights to the subject, that would be an easement. Easements stay with the property no matter how many times it is sold or transferred. An easement is evidenced by a recorded agreement, and can only be removed if both parties agree to it.
What are the CC&Rs – Generally a condo, PUD, or any property subject belonging to an association will be subject to CC&Rs (Covenants, Conditions, and Restrictions). Potential buyers should always review the CC&Rs for a property as they will be subject to these rules once they become the owner.
Additional restrictions such as historic oversight or zoning – Every municipality has its own rules about what you can use a certain piece of land for. This is what zoning is all about. If you plan to tear down a building and build apartments, you would definitely want to make sure that the zoning allows you to use the land for that purpose first! Some properties in a designated historic district can also subject to additional rules about remodeling, gardening, or any number of other things. All of these restrictions would also show up on a preliminary title report.
So There You Have It
A preliminary title report is chuck full of invaluable information that no potential buyer should be without. Every title company will require a prelim before writing a title insurance policy, which protects you from any of these 6 scary title issues.
Is it required to buy title insurance?