Real estate 101: Title
“Who holds title on the property?” “The title company discovered there’s a cloud on title.” “When escrow closes, the home’s title will be recorded in your name.”
Understanding title is crucial to understanding ownership in real estate. Purchasing a home with a clear title is important and protects the buyer, but the subject of title is a little abstract. Let’s dive in and learn about property owners’ rights.
What is title?
Property title is a legal concept and not a physical document. Title tells us who owns the property and it represents the owner’s legal rights and use. These rights are called the bundle of rights, which include the following:
Right of Possession: to possess the property
Right of Control: to use the property and dictate what activities take place
Right of Enjoyment: to enjoy the property however you wish
Right of Disposition: to rent, sell, or transfer ownership of the property
Right of Exclusion: to limit who can enter the property
Selling the property transfers the title (and bundle of rights) from the seller to buyer. A property deed is a legal document transferring ownership from the previous owner to the new one. The deed is the physical document proving the owner holds title to the home.
The history of ownership for a property is called the chain of title. During a transaction, the chain of title will need to be inspected. The title company conducts a title search, combing through public records to determine any encumbrances (limitations) and ensure the person selling the home is truly its owner. If the title company discovers a title defect, or cloud on title, the transaction may come to a halt until the cloud is resolved.
Why is title search, and clear title, important?
Let’s imagine Sam buys a condominium. Decades ago, the condo had been sold but it was supposed to be willed to a long-lost heir. One day, this heir knocks on Sam’s door. If the heir can prove rightful ownership, Sam could lose their property. Here’s another scenario - Jamie buys a renovated home and doesn’t realize the previous owner never paid their contractor. Whether they like it or not, Jamie is now legally responsible for the debt.
A title search could’ve caught Sam’s cloud on title or alerted Jamie of the encumbrance. The following are a few title defects that may be discovered during a title search:
Liens: legal claims against property that can be used as collateral to satisfy a debt (tax, mechanic’s, HOA, etc.)
Easements: rights to enter someone’s property for specified purpose
Court proceedings or legal action
Past title claims or deed errors
Most properties have some kind of encumbrances on them like a primary mortgage or an easement for a utility company to access a utility pole. These encumbrances don’t result in title search problems.
If a title problem emerges after you’ve purchased a property, title insurance can protect you from related financial loss.
Methods for holding title
There are many different ways for an owner, or owners, to hold title on a property and they vary from state to state. Each method changes how ownership interest is divided up and how ownership will be passed on when an owner dies. The way the title is vested has significant legal and tax consequences. It may be wise to consult an attorney or tax professional to determine the best form of ownership for you. Without going into tremendous detail, here are five of the most common ways for individuals to hold title:
Sole ownership: One person holds property in their name only. They do not share ownership interest with anyone else
Community property: California is a community property state. Property in California obtained by one spouse during the marriage is considered equally owned by both spouses and both hold title
Joint tenancy: Two or more co-owners share equal, undivided ownership interest in a property. All co-owners have equal right to possess the property
Tenancy in common (TIC): Similar to joint tenancy, two or more co-owners share interest but with TIC, the interest is split up however the owners choose. One person could own 60% interest, one person could own 25%, and one person could own 15%. All co-owners have equal right to possess the property
Living trust: Property is held in a trust by the owner and for the owner. The owner is both the trustee and the beneficiary
TL;DR
Title refers to a property’s true owner and their rights to their property. Title and a deed are not the same thing. Title is a legal concept whereas a property deed is a physical, legal document that transfers ownership and shows proof of title. Chain of title reflects a property’s ownership history and is inspected by title companies during a title search. Title searches can discover clouds on title and pause a transaction. Title insurance can protect buyers after the sale is complete. There are many methods to holding title which vary state-to-state and the manner in which title is held is very important. Title is a safeguard that protects the interests of property owners and ensures the integrity of real estate transactions. Behind every property lies a title, a key to secure and legitimate ownership.
