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Titles insurance | Housing | Finance & Capital Markets | Khan Academy - YouTube
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- [Voiceover] So let's say in
1950, let me write this down,
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in 1950, there was a plot
of land that the city owns
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and says, hey, you know what,
we could use some revenue,
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or we would want someone to build a house.
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There's a housing shortage in this city.
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Let's sell it to someone who maybe
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might build a house on it.
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So you have the city,
who is the original owner
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of this particular plot of land,
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and they transfer title of
that plot of land to, let's say
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it's a developer who's
going to be the first owner.
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So, they transfer title of
that land to a developer.
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So, I'll just call them the
developer right over here,
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and when they transfer
title, they record that
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by filing a deed, so filing
a deed with the county.
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And you sometimes file it with the city,
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sometimes with the county.
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So, this is at the county's
office right over here.
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So, this is the county.
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We're going to assume that we
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filed these things with the county.
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All right, fair enough.
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Let's say the developer lives
in that house for some time.
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Actually, maybe the developer
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lives in that house for a while,
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and he and his wife, they
unfortunately pass away.
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And so it gets, in 1970--
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So, let's say it's in
1970, they pass away.
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And so, in their--
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And maybe they didn't even have a will,
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and so it just gets transferred
to their closest relative.
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And let's say that the
developer had a brother-in-law
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is the closest relative,
and so the property
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gets transferred to the brother-in-law.
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So let me write this down, brother-in-law,
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brother-in-law of the developer.
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Brother-in-law of the
developer now has title,
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and that will be reflected.
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That will be reflected in another deed.
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So, let's call this deed one,
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and this will be recorded in
the county recording office.
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This is deed two.
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And then, let's fast forward now to 2000.
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The brother-in-law and his family
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has lived there for a while.
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And so, now it is the year 2000,
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and they are looking to sell the house,
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and there is a buyer who's
interested in that house.
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So this is, we'll call this owner three,
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but before she buys the house,
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she prudently wants to do--
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wants to make sure that
the title is clean,
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that this brother-in-law
really does have title,
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that has ownership, not just
possession of the house,
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that there aren't any liens on the house,
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some back taxes or some
contractor that did work
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that claims it was never
paid, whatever it might be.
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So she, owner three, hires
a title search company
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to do a title search, and they go to
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the county recording
office, and say, okay, look,
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it was sold from the city
to the developer in 1950,
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and then the developer and his
family passed away in 1970,
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and so then it was transferred legally
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to the brother-in-law.
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And so they say, hey, the title is clean.
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You can buy this house.
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So owner three, she
decides to buy this house.
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She pays for it, however much money,
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and then the title is transferred,
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and the evidence of that
is deed number three.
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So you might say, okay,
this is all good and well.
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This seems like a very
reasonable thing to do.
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She has nothing to worry
about, but what if,
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what if right after owner
three pays all of this money
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to the brother-in-law, let's say in 2001
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someone shows up and says, hey, look,
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I was the developer's long lost child.
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I had the rights to this,
not the brother-in-law.
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So, I lay claim.
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I lay claim to this house.
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So, this right over here.
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So, someone says this should have been me.
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This should have been me.
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And so, therefore, they claim that
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this was not a valid transaction.
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If this isn't a valid transaction,
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then this also is not a valid transaction,
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and then they could take
this whole thing into court,
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which is not going to be a pleasant thing.
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It's not going to be a
pleasant thing for owner three.
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So, I know what you're thinking.
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How does an owner three protect themselves
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from some random thing that
might happen like this,
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especially because a house is
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the most important transaction you make?
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If this happened, you get
bogged down in a big lawsuit,
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and who knows what might happen.
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This could be a nightmare for owner three,
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and that's why title insurance exists.
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Title insurance.
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The whole purpose of title insurance is,
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okay, you should do a title search.
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You should make sure
that the title is clean,
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that there aren't any
liens or encumbrances,
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any claims to the property,
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and that everything has been filed.
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You would also have a nonclean title
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if somehow these people
didn't file this properly,
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if deed two is shady or didn't have
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all of the proper language.
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But even if you do all of that,
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you're not 100 percent sure
that there might not be
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some other weird or bizarre claims
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or that something might
have been overlooked
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in the title search.
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And so, to protect yourself,
you get title insurance,
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and most lenders, because most of the time
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when houses are bought,
the lender is putting up
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the majority of the cash for it,
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and in the case that the
borrower isn't able to pay it,
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the lender takes possession of the house,
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most lenders make you get title insurance,
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so that they can be protected
for this exact scenario.
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Now you can imagine, let's say owner three
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took out a mortgage,
and then all of a sudden
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all this craziness happens.
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It might be easier for
them to just walk away
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from the mortgage, and then the bank
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is left with all of this messiness.
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So, the bank has a huge incentive
to have title insurance.
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And the whole point of title insurance
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is to protect this owner or the person
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who comes into ownership of the house,
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from any of this messiness
that might actually ensue.
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So although a bank, whoever
is giving you the loan
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for your house, might insist
that you have title insurance,
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it's probably a good
idea, even if you were
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buying the house in cash,
even if no one was forcing you
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to do it, just so that you make sure that
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you're protected against
these type of things.
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And just to be clear,
it's not a hugely costly
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type of insurance, because
these things are rare.
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So these are rare events,
but you still want to
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protect yourself against them happening.
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