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Understanding Preliminary Reports
After months of searching, you've finally found it -- your perfect dream home.
But is it perfect?
Will you be purchasing more than just a beautiful home? Will you also
be acquiring liens placed on the property by prior owners? Have documents been recorded
that will restrict your use of the property?
The preliminary report will provide you
with the opportunity, prior to purchase, to review matters affecting your property which
will be excluded from coverage under your title insurance policy unless removed or eliminated
before your purchase.
To help you better understand this often bewildering subject, the
Land Title Association has answered some of the questions most commonly asked about preliminary
reports.
What is a Preliminary Report?
A preliminary report is a report
prepared prior to issuing a policy of title insurance that shows the ownership of a specific
parcel of land, together with the liens and encumbrances thereon which will not be covered
under a subsequent title insurance policy.
What role does a Preliminary Report play in the real estate process?
A
preliminary report contains the conditions under which the title company will issue a
particular type of title insurance policy.
The preliminary report lists, in advance of purchase,
title defects, liens and encumbrances which would be excluded from coverage if the requested
title insurance policy were to be issued as of the date of the preliminary report. The
report may then be reviewed and discussed by the parties to a real estate transaction
and their agents.
Thus, a preliminary report provides the opportunity to seek the removal
of items referenced in the report which are objectionable to the buyer prior to purchase.
When and how is the Preliminary Report produced?
Shortly
after escrow is opened, an order will be placed with the title company which will then
begin the process involved in producing the report.
This process calls for the assembly and
review of certain recorded matters relative to both the property and the parties to the
transaction. Examples of recorded matters include a deed of trust recorded against the
property or a lien recorded against the buyer or seller for an unpaid court award or unpaid
taxes.
These recorded matters are listed numerically as "exceptions" in the preliminary report.
They will remain exceptions from title insurance coverage unless eliminated or released
prior to the transfer of title.
What should I look for when reading my Preliminary Report?
You
will be interested, primarily, in the extent of your ownership rights. This means you
will want to review the ownership interest in the property you will be buying as well as
any claims, restrictions or interests of other people involving the property.
The report
will note in a statement of vesting the degree, quantity, nature and extent of the owner's
interest in the real property. The most common form of interest is "fee simple" or "fee" which
is the highest type of interest an owner can have in land.
Liens, restrictions and interests
of others which are being excluded from coverage will be listed numerically as "exceptions" in
the preliminary report. These may be claims by creditors who have liens or liens for
payment of taxes or assessments. There may also be recorded restrictions which have been
placed in a prior deed or contained in what are termed CC&Rs--covenants, conditions
and restrictions. Finally, interests of third parties are not uncommon and may include
easements given by a prior owner which limit your use of the property. When you buy property
you may not wish to have these claims or restrictions on your property. Instead, you
may want to clear the unwanted items prior to purchase.
In addition to the limitations noted
above, a printed list of standard exceptions and exclusions listing items not covered
by your title insurance policy may be attached as an exhibit item to your report. Unlike
the numbered exclusions, which are specific to the property you are buying, these are standard
exceptions and exclusions appearing in title insurance policies. The review of this section
is important, as it sets forth matters which will not be covered under your title insurance
policy, but which you may wish to investigate, such as governmental laws or regulations
governing building and zoning.
Will the Preliminary Report disclose the complete condition of the
title to a property?
No. It is important to note that the preliminary report is
not a written representation as to the condition of title and may not list all liens,
defects, and encumbrances affecting title to the land, but merely report the current ownership
and matters that the title company will exclude from coverage if a title insurance policy
should later be issued.
Is a Preliminary Report the same thing as title insurance?
Definitely
not.
A preliminary report is an offer to insure, it is not a report of a complete
history of recorded documents relating to the property. A preliminary report is a statement
of terms and conditions of the offer to issue a title insurance policy, not a representation
as to the condition of title.
These distinctions are important for the following reasons:
first, no contract or liability exists until the title insurance policy is issued; second,
the title insurance policy is issued to a particular insured person and others cannot
claim the benefit of the policy.
Can I be protected against title risks prior to the close of the real
estate transaction?
Yes, you can. Title companies can protect your interest through
the issuance of "binders" and "commitments."
A binder is an agreement to issue insurance
giving temporary coverage until such time as a formal policy is issued. A commitment
is a title insurer's contractual obligation to insure title to real property once its
stated requirements have been met.
Discuss with your title insurer the best means to
protect your interests.
How do I go about clearing unwanted liens and encumbrances?
You
will wish to carefully review the preliminary report. Should the title to the property be
clouded, you and your agents will work with the seller and the seller's agents to clear the
unwanted liens and encumbrances prior to taking title.
Who can I turn to for further information regarding Preliminary Reports?
Your
real estate agent and your attorney, should you choose to use one, will help explain
the preliminary report to you. Your escrow and title company can also be helpful sources.
CONCLUSION: In a business which is directed at risk elimination, the efforts
leading to the production of the preliminary report, which is designed to facilitate
the issuance of a policy of title insurance, is perhaps the most important function undertaken.
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