How Preliminary Title Reports Work in Real Estate

A preliminary title report is a document prepared by a title company that sets parameters for a title insurance policy on a building or parcel of land. During a real estate transaction, preliminary title reports are run during the escrow process, while the sale is vesting. However, some sellers choose to run a preliminary title report (sometimes called a "prelim") before putting their home on the market.

Preliminary title reports are compiled via title searches of public records. They contain key pieces of information, including:

• Legal description of the property: A property's title report will list a mailing address, a formal description of the property in county records, and in some cases, a tax assessor's parcel number.
• Ownership of a property: Preliminary title reports identify the property owner. In many cases, it also lists previous owners.
• Encumbrances: Title reports list potential title problems such as unpaid taxes, lien holders, easements, and anyone besides the homeowner who might claim use of the property.

Preliminary title reports are important to all parties within a real estate transaction.

1. 1. Current owners and real estate agents: Homeowners and their real estate agents want to know the state of their property before offering it to potential buyers. Properties with outstanding property taxes or liens are less attractive to buyers. Misrepresenting a home's title—even if the seller is unaware of the misrepresentation—can cause unnecessary delays, void a sale, and possibly make the seller subject to a lawsuit.
2. 2. Buyers: Buyers want a clear understanding of the property they are purchasing and do not want to be surprised by tax liens or mortgage liens or other liens such as contractor liens from a previous owner. What's more, if they are borrowing money to purchase the home, their lender will only provide a loan upon the condition of the title. In some home loans, buyers sign a deed of trust that temporarily transfers the home's title to a trustee (usually a title company) until the loan is paid off. Loan monies may only be released upon the signing of such a deed, plus the issuance of title insurance.
3. 3. Title insurance companies: A title insurance company is expected to provide insurance payments in the event a homeowner's claim to the title is contested. These companies will not insure real property unless they can see the full scope of its ownership over the years, along with any encumbrances.

In the world of real estate, a title is a legal right to own a piece of real property such as a building or a parcel of land. Titles are most commonly transferred via a warranty deed, but in some cases, they are transferred by a quitclaim deed (often among family members) or by a bargain and sale deed (often in the instance of foreclosure).

Preliminary reports provide a history of a property's title, as well as any liens made on the property by governments, lenders, contractors, or unpaid garbage collections.

Title insurance is a form of insurance that protects owners and lenders against claims on a property's title. It is the only insurance policy that starts the day you purchase it and goes backward rather than forward; title insurance is basically insurance for the past. This insurance may cover the cost of title disputes, including paying a real estate attorney.
There are two forms of title insurance: owner's insurance and lender's insurance.

• Owner's title insurance: This type of title insurance protects a homeowner if someone else makes a claim to their property's title.
• Lender's title insurance: This type protects a lender if a third party makes a claim to their borrower's title. Typically, the borrower pays for the lender’s title insurance.

All investments, including real estate investments, come with inherent risks which may involve the depreciation of assets, financial losses, or legal ramifications. The information presented in this article is for educational, informational, and referential purposes only. Consult a licensed real estate or financial professional before making any legal or financial commitments.

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