Titles insurance | Housing | Finance & Capital Markets | Khan Academy

ruticker 02.03.2025 23:23:36

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So, let's say in **1950**, there's a plot of land that the city owns. It 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's the original owner of this particular plot of land, and they transfer title of that plot of land to, let's say, a developer who's going to be the first owner. They transfer title of that land to a developer, so I'll just call them **the developer** right over here. When they transfer title, they record that by filing a deed—filing a deed with the county. Sometimes you file with the city, sometimes with the county, so this is at the county's office right over here. We're going to assume that we file these things with the county. Alright, 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 unfortunately pass away. So, it gets to **1970**. Let's say it's in **1970** they pass away, and maybe they didn't even have a will. It just gets transferred to their closest relative. Let's say that the developer had a brother-in-law as the closest relative, and so the property gets transferred to the brother-in-law. Let me write this down: **Brother-in-law of the developer** now has title, and that will be reflected in another deed. Let's call this **Deed 1**, and now this will be recorded in the county recording office. This is **Deed 2**. Now, let's fast forward to **2000**. The brother-in-law and his family have lived there for a while, and now it is the year **2000**. They are looking to sell the house, and there is a buyer who's interested in that house. So, this is—let's call this **Owner 3**. But before she buys the house, she prudently wants to make sure that the title is clean; that this brother-in-law really does have title, that he has ownership—not just possession of the house—that there aren't any liens on the house, some back taxes, or some contractor that claims they were never paid, whatever it might be. So, she, **Owner 3**, hires a title search company to do a title search. They go to the county recording office and say, "Okay, look, it was sold from the city to the developer in **1950**. Then the developer and his family passed away in **1970**, and so then it was transferred legally to the brother-in-law." They say, "Hey, the title is clean; you can buy this house." So, **Owner 3** decides to buy this house. She pays for it—however much money—and then the title is transferred. The evidence of that is **Deed 3**. You might say, "Okay, this is all good and well. There seems like a very reasonable thing to do; she has nothing to worry about." But what if, right after **Owner 3** 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 to this house." So, this right over here—someone says, "This should have been me." 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 they could take this whole thing into court, which is not going to be a pleasant thing for **Owner 3**. I know what you're thinking: How does **Owner 3** 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 could get bogged down in a big lawsuit, and who knows what might happen? This could be a nightmare for **Owner 3**. That's why **Title Insurance** exists. 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 non-clean title if somehow these people didn't file this properly, if **Deed 2** is shady or didn't have all of the proper language. But even if you do all of that, you're not 100% sure that there might not be some other weird or bizarre claims or that something might have been overlooked in the title search. To protect yourself, you get title insurance. 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, the lender takes possession of the house. Most lenders make you get title insurance so that they can be protected for this exact scenario. You can imagine, let's say **Owner 3** 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. 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—the 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 someone was forcing you to do it, just so that you make sure that you're protected against these types of things. And just to be clear, it's not a hugely costly type of insurance because these things are rare. These are rare events, but you still want to protect yourself against them happening.

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