Subject-to investing can be tricky, but it’s a powerful tool for building wealth in real estate. Today, let’s break down why I generally avoid purchasing title policies on these types of deals.
Understanding Title Policies
Title Policy Basics
When you buy a title policy, the title company does a title run. They check the property’s title records to confirm a clean chain of ownership. This means ensuring everyone who sold the property had the legal right to do so. They also check for liens, which could affect the property’s status. If they miss something and a lien pops up later, the title insurance will cover it by paying it off.
Title Companies Are Insurance Companies
Remember, title companies work like any other insurance company. Their goal is profit, which means charging more for premiums than they will likely pay out in claims. This is why you see title companies everywhere—they’re making a lot of money.
When is Title Insurance Required?
Lenders require title insurance to protect their investment. If you’re borrowing money from a bank or private investor, expect to get a title policy. It ensures the lender’s money holds the first lien position, meaning their claim gets priority if something goes wrong.
Risks Without Title Policies
Potential Lien Issues
Here’s a typical scenario: You buy a property, and everything looks clear. But then, years later, a lien from before your purchase pops up. Without title insurance, this could be a big problem, especially if the lienholder decides to foreclose.
Statute of Limitations
There are limits on how long lienholders can enforce their claims. Different liens have different statutes of limitations. If a lien appears, consult your attorney to see if it’s enforceable. There could be cases where a lien’s enforcement period expires before you even notice it.
Why I Skip Title Policies on Subject-To Deals
Low Likelihood of Claims
Title insurance claims are rare. I’ve seen a room full of investors and only one or two hands go up when asked if anyone has claimed a title insurance policy.
The Math Doesn’t Add Up
In subject-to deals, your cash basis is usually low—maybe $3,000 to $5,000. A typical title insurance policy costs around $1,000. It doesn’t make sense to pay 30% of your investment for this insurance, given the low likelihood of a problem. However, if you’re putting significant money into a property, it might be worth it.
Government-Backed Loans
For FHA and VA loans, title companies can’t issue a new title policy on the existing loan. Conventional loans, though, can have title policies issued.
When to Get Title Insurance
Investing Big Money
If you’re buying a house with cash or putting substantial money into a property, get title insurance. It’s worth the expense for peace of mind.
Consult with Experts
Always talk to your attorney to understand the specifics of your situation. Experienced partners, like my business partner Scott Horn who owns a title company and a law firm, also recommend not getting title policies for subject-to deals unless the circumstances demand it.
Final Thoughts
While title policies provide a safety net against potential title issues, they may not always be necessary for subject-to deals. The low likelihood of claims and the high cost relative to the investment often make title insurance an avoidable expense in these cases. However, if significant money is involved, or if you’re dealing with a conventional loan, it may be wise to consider a title policy.
Always consult with your attorney and experienced partners to ensure you’re making the best decision for your specific situation. Investing smartly means weighing the risks and costs to maximize your real estate wealth-building strategy.
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