What is Title Insurance in NYC and Why Do You Need It?
Title insurance is often one of the more perplexing aspects of buyer closing costs in NYC. It can cost thousands of dollars, and many buyers don’t fully understand what it is and why it’s necessary. So, let’s delve into what exactly title insurance is and why it’s crucial when purchasing property.
What is Title?
In the realm of real estate, ‘title’ essentially signifies the right to own and utilize a piece of property. Title insurance is designed to ensure that when you’re buying a property, you are doing so without any lingering claims or encumbrances that could compromise your ownership rights.
Indeed, it may sound peculiar – the concept of title complications and title insurance is predominantly an American phenomenon.
To better comprehend title insurance, it’s beneficial to explore some scenarios where title issues may arise:
1. Fraud – In the most extreme cases, a seller may try to sell a property that they don’t actually own. This is akin to the saying about selling a bridge in Brooklyn. If you were unfortunate enough to buy the Brooklyn Bridge from a passerby but had the foresight to secure title insurance, you’d be protected from such fraudulent claims.
2. Unknown Owners – This scenario is quite common when a property is inherited. An heir might sell the property, only for another heir to emerge later on claiming that the first seller didn’t have the exclusive right to sell. This can also occur amidst divorces and numerous other situations.
3. Liens – A lien is essentially a financial claim attached to a property. Whoever owns the property is responsible for settling this debt, so it’s crucial that you don’t unknowingly purchase a property burdened with liens. Examples can include unpaid property taxes or debts owed to a contractor, also known as a ‘mechanic’s lien’. The most common lien is a mortgage, but this is typically paid off at the closing of the property sale.
What Does Title Insurance Do?
In the process of obtaining title insurance, it’s important to understand that there are two distinct entities involved: the title agency and the actual insurance company, each with their own specific responsibilities.
Title Agency – There are numerous title agencies across the country, acting as the salesforce in the title insurance process. They identify transactions and present them to the insurance companies that issue the policies. As part of their role, title agencies conduct searches and ensure any potential title issues are addressed prior to the closing.
Most title issues are discovered and resolved by the title agency before the closing. Your contract stipulates that the seller must provide “clear title,” so if any imperfections arise, it becomes the seller’s responsibility to rectify them.
Title Insurance Company – Once the title agency identifies and resolves any title defects, the file is forwarded to a title insurance company, which is responsible for issuing the policy. Three major companies dominate the title insurance industry: Fidelity National, First American, and Stewart Title.
While you may interact with a title agency such as Sally’s Title Agency, it’s important to note that Sally herself doesn’t issue the policy. Instead, one of the three aforementioned companies will handle the policy issuance. If an issue arises after closing, such as the discovery that the person selling you the Brooklyn Bridge didn’t actually own it, you would file a claim with the insurance company for reimbursement. Sally’s role is primarily in facilitating the process and ensuring compliance.
It’s crucial to highlight one significant distinction: title insurance solely insures the purchase price of the property. For example, if you buy an apartment for $800,000 and encounter a title issue twenty years later when the apartment is valued at $1,500,000, your coverage would still be limited to the original purchase price of $800,000. While there are policies available that offer coverage for appreciated value at an additional cost, the standard policy typically purchased by most buyers only provides coverage based on the initial purchase price.
Who Selects Your Title Insurance Company?
While your attorney typically offers guidance in this decision-making process, it’s ultimately your choice since you are the one responsible for the associated costs.
Given that the title agency plays a critical role in conducting thorough title research, it’s essential that they possess the necessary expertise and understanding of the nuances specific to New York City real estate. We’ve encountered instances where NYC attorneys have expressed frustration with buyers who insist on using title agencies recommended by their relatives or located in different regions like Long Island. While these agencies might excel in their respective areas, not being familiar with the intricacies of NYC real estate can potentially lead to complications.
However, as long as you select a reputable and knowledgeable title agency, you shouldn’t encounter any objections or issues. It’s crucial to work with professionals who have a deep understanding of the local real estate market and can effectively navigate the complexities unique to New York City.
How Much Does Title Insurance Cost In NYC?
The cost of title insurance typically falls within the range of 0.4% to 0.5% of the purchase price. However, the exact amount will depend on factors such as the purchase price itself and whether or not you are obtaining a mortgage.
It’s worth clarifying a common misconception that New York State sets the pricing for title insurance. In reality, the Department of Financial Services approves rates that are established by each individual title insurance company, as well as the Title Insurance Rate Service Association (TIRSA). It’s important to note that all major title insurers are members of TIRSA, meaning that prices remain consistent across the board, regardless of which company you choose.
To determine your precise title insurance costs, the easiest approach is to request a quote from your chosen title insurance provider. This quote will provide a detailed breakdown of the total cost, allowing you to understand exactly where your funds are allocated.
For a general overview, you can refer to a screenshot from TIRSA’s rate manual, which provides a sense of the rates applied in different scenarios.
Allow us to break it down into a few essential steps:
Calculate the Owner’s Policy: Apply the applicable rate to each increment of the purchase price, as indicated on the left side of the rate chart.
Calculate the Lender’s Policy: Apply the relevant rate to each increment of the mortgage amount, as specified on the right side of the rate chart.
Discount the Lender’s Policy: When you purchase both the Owner’s Policy and the Lender’s Policy together, the cost of the Lender’s Policy is reduced by 70%.
To simplify the estimation of your title bill, we have developed a spreadsheet that can assist in providing an estimate tailored to your specific transaction.
It’s important to note that in addition to the policy costs, your title bill will also include ancillary expenses such as lien searches and recording fees. These additional costs typically amount to around $1,000, regardless of the purchase price.
Do You Need Title Insurance in NYC?
There are two primary reasons why most NYC buyers are required to obtain title insurance.
First, your lender will typically require a Lender’s Policy to protect their interests in the mortgage amount. Since the property serves as collateral for the loan, the lender wants to ensure they are safeguarded against any potential fraud or unforeseen issues related to the property’s title.
Even if you are purchasing the property with cash, many attorneys in NYC insist on title insurance as part of the transaction. Attorneys are tasked with minimizing risk for their clients, and they may view waiving title insurance as exposing you to unnecessary risks and complications.
It’s important to note that when purchasing a co-op in New York City, title insurance is not required. This is because when you buy a co-op, you are acquiring shares in the building and the right to occupy a specific unit, rather than owning the unit itself. This distinction not only saves you from needing title insurance but also exempts you from the mortgage recording tax.
However, as part of the due diligence process for co-op purchases, your attorney will still conduct a lien search on the co-op to ensure there are no outstanding issues or liens affecting the entire building. Although this search incurs lower costs compared to a comprehensive title insurance policy.
Is Title Insurance A Ripoff?
Just like any other type of insurance, title insurance can be incredibly valuable, but everything comes at a cost. Auto insurance is crucial when you encounter an accident, but you wouldn’t shell out $10,000 per year for it.
You might be taken aback to discover that less than 1% of what you shell out for title insurance actually goes toward settling claims.
The three dominant companies – Fidelity National, First American, and Stewart – all have public records, allowing us to see the percentage of revenue they anticipate to lose. This is referred to as their “loss reserve” –
Fidelity National – 4.5%
First American – 4.0%
Stewart – 4.6%
And bear in mind, this is drawn from their share, which constitutes about 15% of what you pay. To put it another way, if you spend $1 on title insurance, less than $0.01 is genuinely expended on settling claims. We at SPiRALNY will let you determine whether title insurance is an unwise expenditure!
How To Save On Title Insurance in NYC
With title insurance rates essentially fixed and policy rebates banned in New York State, there isn’t much room to save. That being said, at SPiRALNY, we have two ideas to help alleviate some of the costs associated with title insurance.
– While policy rates are essentially fixed, there is flexibility in the fees you pay to research the property. We encourage you to reach out to us at [email protected] for more information on how we can assist you in finding potential savings in these research fees.
– Additionally, as a luxury brokerage in New York City, we offer a commission rebate to our buyers. This rebate can cover up to 2% of your purchase price and can be utilized towards various closing costs, including the cost of your title insurance policy.
Disclaimer: This post is intended for informational purposes only. It is not a substitute for professional advice. Please consult with the relevant professionals to address your specific needs and circumstances.