7 Questions Before Getting Commercial Real Estate Title Insurance

7 Questions Before Getting Commercial Real Estate Title Insurance

Jan 30, 2024

Commercial real estate transactions can be incredibly complex, demanding months of research and mountains of paperwork. One of the key pieces for any commercial transaction is title insurance, which protects your investment from potential problems with property ownership and encumbrances against the property. But why do business owners like you need it? Here are seven questions to help you understand this essential service.

Q: What should business owners know about the property title before buying commercial real estate?

Simply put, property titles in real estate are a bit different and vary by state. Unlike car titles that come from a single document, real estate titles are formed by a bundle of documents, like a chain, related to the property. Part of the title examination process is to review every owner in the chain of title for the previous 60 years and confirm they have deeded their interest out to the next owner, relinquishing any interest or claim they might have in the property. It might seem tricky, but that’s why commercial title insurance services are a lifesaver. They protect your investment, protecting you against any claims from a prior owner in the chain.

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Q: What are some common title issues?

Title issues can throw a wrench in your ownership rights. Things like liens, which could pop up due to unpaid taxes or contractors’ fees, can stake a legal claim to your property. You might also face encumbrances and restrictions on using your property stemming from easements or zoning laws. Lastly, watch out for errors—  any mistakes or fraud in public records could spell disaster.

Q: What specifics should a commercial property investor consider while shopping for title insurance?

  • Both an Owner’s Policy and a Loan Policy are suggested by the  American Bar Association. A lender’s policy is required by all banks loaning money on real estate. The owner’s policy is your option for insuring your ownership.
  • Relevant endorsements related to covenants and restrictions, environmental coverage, zoning, survey matters, tax parcels, and access.
  • Matters of loss determination and taxes.
  • Special uses under the locality’s zoning ordinances.
  • Mechanic’s lien coverage for new construction projects and unusual loan document covenants that may include aggregation, swaps, or variable rates.

Q: What are the two types of title insurance policies?

  • Loan policies: A title issue can threaten the priority of the lender’s lien on the real estate. The lender’s policy ensures that, regardless of the title issue, their deed of trust is first in line to get paid in the event of foreclosure or a failure of title. It’s part of the deal, and the borrower pays it at closing.
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  • Owner’s policies: Like the lender’s policy, the owner’s policy assures you, the new owner, that your ownership stake in the property is protected. Think of it as title assurance for the owner. If a title issue comes to light after closing and threatens your ownership, this policy is your shield. It’s optional, but the smart money is on getting it for maximum protection. The premium cost can be negotiated with the seller as part of their contribution to closing costs, and once purchased, it is in effect for as long as you own the property and can even be called on after you sell. It’s one time, one premium, and gives you forever coverage on any pre-ownership issue.

Q: Why should I get commercial title insurance services?

Title insurance reduces the risk of losing your property or paying for someone else’s lien that could hit you after closing. Plus, it covers your legal costs if you’re defending a title claim. It sets you up with the confidence that you have a clean,  marketable title when it comes time to sell the property. And the best part: it keeps things simple! You don’t need to sweat attorney fees and court costs if a title issue pops up; you have a one-stop solution with a clear way forward.

Q. How much does title insurance cost?

So, how much does title insurance cost? Well, it’s not one-size-fits-all. It depends on a few things— the type of property you are buying, the state you are buying in, and the purchase price you are paying. There are fees associated with the policy for the title examination and commitment, which are paid for at closing along with your other costs to purchase. In general, an owner’s policy for commercial real estate in Virginia will cost somewhere between $1.00 and $3.00 for every $1,000 of insurance, depending on the policy amount. Again, it’s one time, one premium, and good forever. It’s all about balancing risk with peace of mind.

Q: What’s the process like?

Obtaining a  commercial title insurance policy involves a process that starts with the designation of a title company in the purchase contract. As the one bearing the costs, you must educate yourself about the process and the product. You can do this by researching online about different companies offering title settlement services. Once the contract is signed, forward a copy to the designated title company immediately.

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The title company then initiates an “order.” It examines public records that pertain to the property— a process that typically takes about two weeks based on the complexity of the transaction. The result is a “title commitment,” which is a conditional obligation from the title company to issue a policy insuring the buyer’s title to the property, subject to certain exceptions and requirements.

As the buyer, you should review the commitment and accompanying documents to ensure your buying property aligns with your intended purposes. If there are any issues, address them with the title company, the seller (and their legal counsel) in the due diligence period. Once the commitment requirements are met, and the lender funds the loan, the transaction closes, and the title company issues the buyer’s title insurance policy. Make sure you keep the policy safe and easily accessible for future reference.

Ready to get started? Contact the NexGen commercial title agency for more information and help.

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