What you need to know about preliminary reports

You’re probably wondering, “What is a preliminary report?” In a nutshell, it’s a document that officially establishes legal ownership of a property. You might say it’s one of the most important pieces of documentation involved in the sale of a home.

A title company puts these reports together to issue title insurance to the buyer. They can be obtained by contacting the county assessor or ordering them from a title company for $75-$250.

What does a preliminary report show?

You can expect to find the following information in a preliminary report:

1. A detailed legal description of the property (including a detailed account of the property boundaries, lot size and any established easements or encroachments)

2. Any liens or outstanding debts against the property (including unpaid property taxes or even unpaid invoices to contractors who’ve completed work on the property)

3. Any restrictions regarding the use of the property (which sometimes includes CC&Rs for condos)

Why are preliminary reports important?

These reports are important for a few reasons. For starters, some homeowner associations may have restrictions that regulate anything from additions (like pools and accessory dwelling units) to exterior paint colors to a maximum height of hedges. These restrictions are sometimes outlined in the preliminary report. As such it’s important to review the report so that you’re aware of any limitations on the property before you commit to buying. If you are financing the sale, title insurance will most likely be required by your lender.

Before the title company issues a policy, they will investigate county records to verify that the title is clear (free of any defects or judgments) and the seller has the right to sell the property. If any issues are uncovered during the discovery period, your title company will assist with resolving those before you close.

In the case of unpaid taxes, for example, you can typically resolve the issue with the seller by requesting they pay the judgment or having the amount deducted from the sales price and settling it yourself.

What does title insurance cover?

Once the title is transferred into your name, its accuracy is insured by the title company who holds the policy. This places the liability for any damages incurred due to errors in the report squarely on the shoulders of the title company. That said, the scope of that coverage will depend on the buyer.

It’s also important to note that while lenders require borrowers to purchase a lender policy, they might not require borrowers to purchase an owner policy as well. A lender policy relieves you of any obligation to your lender; however, it will only cover their losses, not yours. For that reason, it’s smart to consider getting a policy to protect yourself from ownership claims.

Ownership claims can come at any time and in many forms. A claim can come in the form of a spouse whose name was never removed from the title after a divorce or even an unknown heir of the estate of the previous owners. Any errors in the report could result in you losing your right to ownership as well as any money you have invested into the property. An owner policy will help you recoup any financial losses caused by an error in the title report.

How much does title insurance cost?

The cost of a title insurance policy varies by state and is based on factors like the lender, purchase price of the home and down payment amount.

Example 1

• Policy Holder: First American

• Title Location: Dallas, TX

• Purchase Price: $300,000

• Down payment: $50,000

• Policy cost: $2,218.30

Example 2

• Policy Holder: First American

• Title Location: Atlanta, GA

• Purchase Price: $300,000

• Down payment: $50,000

• Policy cost: $1,505

Example 3

• Policy Holder: First American

• Title Location: Phoenix, AZ

• Purchase Price: $300,000

• Down payment: $50,000

• Policy cost: $2,245

Example figures sourced from First American Title’s fee calculator.

Final Thoughts

Regardless of where you purchase your policy, having one will help you recoup financial losses in the event of total loss of the property due to an error in the title report. Think of it as a safety net for one of the biggest purchases you’ll ever make.

This article is not a substitute for advice from a licensed real estate agent regarding your particular situation. It is meant for informational purposes only and is not intended to be construed as financial, tax, legal, or insurance advice. Opendoor always encourages you to reach out to an advisor regarding your own situation.

Further reading