Hidden Pitfalls: Why Reading Title Exceptions is Essential for Real Estate Investors

As a real estate investor, it's crucial to be thorough and diligent when reviewing all documents related to a property transaction. One often overlooked but critical document is the title commitment; specifically, the section detailing exceptions. Ignoring this section can lead to costly and frustrating issues down the line. Within this article, I discuss the importance of understanding title exceptions and illustrate it with a real-life example of an investor who learned this lesson the hard way.

Understanding Title Commitments and Exceptions
A title commitment is a document issued by a title company that outlines the terms under which it will provide title insurance. It consists of several sections, including the schedule of exceptions. These exceptions are specific items not covered by the title insurance policy, meaning the title company will not protect the buyer against claims related to these items.

The Importance of Reading Title Exceptions
Many investors, particularly those new to real estate, may skim over or ignore the exceptions section, believing it to be less pertinent to the closing process. However, these exceptions can contain critical information about restrictions, easements, and rights that affect the property. Failing to review these details can result in significant financial and operational setbacks.

A Real-Life Example: The Dangers of Ignoring Title Exceptions
Consider the case of John, a seasoned real estate investor. John found a promising property with the potential for a lucrative lot split. Eager to move forward, he quickly reviewed the title commitment but did not thoroughly read the exceptions, dismissing them as irrelevant to his immediate goal of closing the deal.

Among the exceptions was a clause concerning ditch rights. Ditch rights refer to the legal right of a property owner to use water from a ditch, often for irrigation or drainage. These rights can also include the maintenance and access rights of the ditch owner, which can significantly affect property usage and development.

The Problem
After closing the deal, John proceeded with his plans to split the lot, only to discover that the property’s ditch rights made the lot split unfeasible. The ditch rights allowed the ditch owner access to parts of the property that John intended to divide, rendering his plans impossible without infringing on those rights.

The Claim and Denial
Frustrated, John filed a claim with the title insurance underwriter, seeking compensation for his inability to split the lot. However, his claim was denied. The reason? The title company had clearly listed the ditch rights as an exception in the title commitment. Since these rights were explicitly excluded from coverage, the title insurance did not apply to this issue.

Lessons Learned
John’s experience underscores the vital importance of thoroughly reading and understanding the exceptions listed in a title commitment. Here are key takeaways for real estate investors:

1. Identify Potential Issues Early: By carefully reviewing the exceptions, you can identify potential issues that might affect your plans for the property, such as easements, restrictive covenants, or in John’s case, ditch rights.

2. Seek Clarification: If you encounter terms or items you don’t understand, seek clarification from your title company or legal advisor. Understanding the full implications of these exceptions can save you from future headaches.

3. Adjust Your Plans Accordingly: Knowing about exceptions beforehand allows you to adjust your investment strategy. You might negotiate with the seller to resolve certain issues before closing or decide not to proceed with the purchase if the exceptions significantly hinder your intended use of the property.

4. Protect Your Investment: Being aware of and addressing potential title issues before closing
ensures that your investment is protected and aligns with your business objectives.

Conclusion
Reading the exceptions on a title commitment is not just a formality; it is a crucial step in safeguarding your real estate investments. Ignoring these details can lead to significant financial loss and operational setbacks, as illustrated by John’s unfortunate experience.

As a diligent investor, always take the time to thoroughly review and understand all aspects of the title commitment, especially the exceptions, to ensure a smooth and successful investment process. Elevated Title is here to guide you every step of the way, ensuring your investments are protected and your real estate transactions are successful.