Title Contingency
A title contingency allows the buyer to verify that a home's title is clear of any liens or other issues before completing the purchase of the home. The buyer does this by reviewing a title report.
A title is a legal document listing the history of ownership of the home. Buyers get a preliminary title report from an escrow agent or attorney within a week after they reach mutual acceptance on an offer. The report identifies all parties with a lien (or legal claim to the property), any items that need to be cleared from title before the new buyer can take possession, and any easements or encroachments on the property. Once the transaction closes, the buyers will receive a final title policy recording their names as the new legal owners along with the principal loan amount. This information is part of a county's public records.
During the home purchase, your attorney or escrow firm will work with a title review company, who will research your title and generate a preliminary report. This report will include information about previous title transfers, liens, encroachments, and easements on the home. Here's a sample PDF of a preliminary title report.
Once you receive the report from the title company, you'll have a few days to review it and call out any problems that you find. If you have any questions or concerns about any issues called out on your title report, you should talk to the title agent who sent you the report. You may also wish to include your agent in the conversation, but remember that an agent may have an interest in getting you to complete the purchase, even if the title search turns up a legitimate problem. The title agent will have the best and least-biased understanding of the report, and should be able to answer any questions you have.
Tip!
A clear title has no issues, such as easements. A marketable title, however, may have easements or other issues that are not considered conflicts of ownership. By default, your contract may only give you the right to receive a marketable title; you may be obligated to purchase a home where you're forced to give land access to a neighbor, or where you're not permitted to build in a way that obstructs your neighbor's view. Before you make your offer, discuss your title review with your agent -- find out whether your title will be clear or marketable.
If there are any problems with the title, the title company will usually work with the seller to fix them. The may be simple clerical errors, or the seller may be required to take action before being allowed to sell the home. This action may include repaying loans, municipal fines, tax penalties, or other debts, and obtaining proof of payment from the lienholder.
Sometimes, the issues in a title report will not halt the sale outright, but may give the buyer a reason to reconsider the purchase. For instance, an easement on the property may give a neighbor permanent rights to access the home's driveway, or may prevent a new owner from obstructing a neighbor's view by adding a second story to the home. These easements may interfere with the buyer's plans for the property. In these cases, the buyer would be able to back out of the deal without losing any earnest money, if the title contingency allowed it.