Insurable v. Marketable Title in Real Estate Transaction

Brad Jones

 

The current real estate market is fast paced and more complex than ever before.  Many sellers of real property want to know they can move their properties as fast as possible without encountering costly delays brought on by unexpected title problems.  Larger institutional sellers (e.g., banks) will attempt to prevent some of these unexpected delays by contracting to convey title under a seemingly less stringent standard in order to get their deals closed in the shortest amount of time possible.  Often, this is done by agreeing to sell “insurable” title to prospective buyers.  But, what is the buyer actually getting with insurable title?

The quality of title you receive to your property in many residential real estate transactions is the difference between “insurable” title and “marketable” title.  The typical North Carolina or South Carolina real estate contract requires the seller to convey marketable title.  However, in some types of transactions, the seller will only offer to convey insurable title.  In many instances, it is the bank or government owned (i.e., REO) transactions in which the seller would be obligated to convey, at the minimum, insurable title.  It is only after a problem arises that many buyers realize they contracted and agreed to accept insurable title.  But, what is the difference?

A marketable title is a title that is free and clear of any defects or clouds that a reasonable buyer would find objectionable.  This is a fairly stringent standard, but buyers should also be aware that a marketable title does not have to be a perfect title.  Real estate transactions are handled by human beings who sometimes make mistakes, and the documents in any given title are likely to contain some sort of minor mistake.  These can be minor typographical errors, superficial form defects, and other deviations that do not raise questions about the intent of the parties to a transaction or the recorded instrument in question.  So, to put it simply, a seller would be able to convey marketable title if an examination shows no doubt as to their ownership of the property and that there are no clouds or encumbrances which would not be cleared at the closing of the transaction.

Insurable title calls for a somewhat less rigid standard when compared to a marketable title.  An insurable title may contain some cloud or defect that would otherwise make it unmarketable, but a reputable title insurer has been informed of the defect and agrees to offer title insurance that affirmatively covers the buyer or does not except to the defect.  In other words, there can be a known problem affecting the title, but the title insurer will protect the buyer from damages or losses which may result from that problem, up to the limits of the title insurance policy.  Common defects found in insurable titles include uncanceled prior owner mortgages, questionable easements for access, and unresolved judgment liens against prior owners.

Knowing the difference between marketable and insurable title will help buyers understand what they are purchasing.  Buying property with insurable title is not necessarily a bad thing, but it is important to know the implications and potential problems with buying property under this standard.  An insurable title might not be a worse quality title, but it may relieve the seller of an obligation to clean up a problem with the title before closing, if one is encountered.  If you are unsure about your sales contract and what its terms mean to you, an attorney at Black, Slaughter & Black, P.A., can work with you and assist you with your particular situation.