In the paper business, you often see property transferred from one party to another without title insurance. Mr. A works out a deal with Mr. B (a friend, a relative or someone in trouble), Mr. B signs a grant deed or quitclaim deed to Mr. A, and Mr. A takes it to the county recorder.
Why an uninsured transfer is risky
Such a transaction is legal if every step is taken within the law. But the potential for error or fraud is great. The title is questionable enough that Mr. A will probably have to go back to Mr. B someday, when he wants to sell or borrow against the property. Hopefully Mr. B is still alive, and still happy with the deal he made.
When a deed can be void or voidable
According to Real Estate Law in California by Bowman and Milligan, a deed may be void or voidable under many circumstances, including when:
- It was obtained by fraud.
- It was signed by someone whose incapacity has been judicially determined.
- It was signed by someone of unsound mind whose incapacity has not been judicially determined.
- It was signed by someone “entirely without understanding.”
- It was signed by a minor.
- It was materially altered in escrow without the grantor’s knowledge or consent.
- It was obtained through mistake, undue influence, duress or menace.
And the list goes on.
Three stories of clouded titles
A typical scenario: Mr. B signs his house over to a relative because he is afraid of being sued and doesn’t want to lose the house to a judgment creditor. Later the relative decides to sell the house or borrow against it. On investigation, it turns out Mr. B believed the relative was simply “holding the house for him” and had promised to give it back.
Regardless of what actually happened, and regardless of who is right, the potential for a title problem is immense. A lender relying on that title for a deed of trust would be at risk.
The “gift” from an aunt
A true story: Mrs. Borrower came to me with a free-and-clear house she had acquired a few weeks earlier and wanted a loan. The house was a “gift” from “an aunt.”
On investigation, the grantor turned out not to be related to Mrs. Borrower at all. She lived in a nearby rest home. The staff said Mrs. Borrower had come by to keep the residents company, had befriended the grantor and visited her often. Recently she had taken the grantor away for a weekend trip. The date on the grant deed matched the date of the trip.
The friend with good credit
Another true story: Mr. Borrower deeded his house to Mr. Friend, who had “good credit,” so Mr. Friend could get a “good loan” for him. When that didn’t work out, Mr. Friend deeded the house back. Neither transfer was title-insured.
The title company insisted on a statement of information from Mr. Friend and learned he was married, so it required his wife to sign the quitclaim back to Mr. Borrower. After many outraged objections from Mr. Friend, it came out that his wife “thought they owned the house.” Her husband had told her so, and she didn’t know he had given it back.
Insist on title insurance
The moral of the story: in California, an uninsured transfer amounts to a cloud on the title. In the old Western movie, Hopalong Cassidy steps in to save the ranch for the pretty girl who deeded it to the town bully at gunpoint. Today the ranch would do the bully no good unless the transfer went through escrow with title insurance.
Watch out for the uninsured deed. You may be looking at a legitimate transaction that is technically legal, but for practical purposes the transfer isn’t complete. In the worst case, such as a grantor who has died or “changed his mind,” the new owner may have to go to court to quiet title.
Insist on title insurance in any transaction you buy or broker.
Short videos on title insurance and escrow
These three short videos, recorded by a title company representative, cover the basics.
