Yes, You Still Need Title Insurance for New Construction

Land-Related Title Issues

One common misconception about title insurance is that it protects the owner from hidden risks to the home itself. But owner’s title insurance actually covers the dirt the home sits on.

While the home may be new, the land is not. The title search goes back through the entire recorded history of the land, which may have had multiple owners before the builder purchased it.

At some point in the past, the parcel was also likely part of another larger parcel or may have been subdivided many times. Each subdivision process carried the potential for errors, disputes, or unresolved legal matters that could affect the current title.

Land that was improperly subdivided

Improper subdivision can lead to a range of title issues. If it was subdivided and sold to different owners without clear delineation or legal documentation of property boundaries, there may be disputes over the legal ownership. There may also be access issues. For example, a parcel may lack proper easements for access to public roads or utilities, limiting the usability of the land.

Zoning and land use issues

The subdivided parcels may have unresolved zoning issues, which can impact property use and become encumbrances on the title. For example, if a zoning violation leads to a lien or legal judgment, this becomes a title issue that must resolved to establish a clear chain of title.

Mechanics Liens and New Construction

A mechanics lien is a legal claim made against a property by contractors, subcontractors, or suppliers who have not been paid for work done or materials supplied to improve that property. Mechanics liens ensure that they have the right to seek payment - using the property itself as collateral. If the owner fails to settle the debt, the claimant can force a sale of the property to recover that debt.

Also known as builder liens, mechanics liens can remain undiscovered at closing because contractors have up to six months after the work has been completed. Mechanics liens can occur with small, independent builders or larger, more well-known builders.

For example, a builder will often hire several subcontractors to work on building a new residential community. But issues with payment can occur when there are disputes over the quality of the work. Imagine a situation in which one of the subcontractors, who is responsible for the electrical work in several homes, completes their job as described in the contract. However, the developer withholds payment from the electrical subcontractor because they're unsatisfied with the work. After several attempts to resolve the issue fail, the electrical subcontractor files a mechanics lien on the properties they worked on within the new community to secure the amount they are owed. This will affect the titles of all the affected homes.

Mechanics liens can also occur with older homes that have recently been remodeled. For example, a homeowner may hire a contractor to complete several repairs before listing the home for sale. The home sells quickly, and the homeowner never pays the contractor for the repairs. Although that individual no longer owns the home, the contractor can still file a mechanics lien against the property; unfortunately, this is inherited by the new homeowner.

Fortunately, an enhanced owner’s title insurance policy protects homeowners from mechanics liens that are filed after the sale is complete. Unlike a standard policy, the enhanced owner’s policy offers post-policy coverage for certain risks, including mechanics liens. This coverage includes the cost of settling the claim as well as any associated legal fees.

Title Issues that Impact New Construction

In addition to mechanics liens, there are other title issues that can uniquely impact newly constructed homes.

Easements

An easement is an encumbrance that allows someone other than the property owner to use a piece of property. Easements, such as utility easements, must be disclosed in a property survey and are excluded from title insurance coverage.

Undisclosed easements can affect newly constructed homes when rights to use the property, which weren’t apparent at the time the land was purchased or during construction are discovered or established post-construction.

For example, a homeowner may discover after moving into their new home that a utility company has the right to access a portion of their property to maintain underground cables. This easement was neither identified nor disclosed during construction or the title search.

Encroachments and Boundary Disputes

An encroachment is an encumbrance that occurs when an individual violates the property rights of another homeowner. These are often accidental, but like easements, they must be identified and disclosed. Encroachments or boundary disputes can arise when there are inaccuracies in the initial property surveys or when newly built structures cross property lines.

Honest mistakes can happen - even when interpreting property boundaries. If a builder or contractor incorrectly interprets these boundaries, the result may be a structure such as a garage that is partially constructed on the neighbor’s land. This may go undiscovered for years, and resolution may require legal costs, compensation to the neighbor, and modifications to the structure.

A boundary dispute can occur when a homeowner discovers that the actual property lines differ from those assumed during construction. For example, if a homeowner decides to build a fence around their home after moving in, they may discover that their actual property is smaller than expected. Resolution, which may include the re-establishment of correct boundaries or compensation for loss of land, can be frustrating and costly.

In all of these cases, an enhanced owner’s title insurance policy protects the homeowner. The policy will not only cover the cost of resolution, but it will also cover any associated legal fees. All the homeowner needs to do is submit the claim to their title insurance provider, who will then take care of everything else.

Other Title Issues

Newly constructed homes are subject to all of the hidden risks that older homes are. Remember, title issues impact not only the home but the entire property.

These risks include:

• Liens, such as tax liens, judgment liens, or other mortgages
• Errors in recording
• Undisclosed heirs or contested wills
• Forgery or fraud

  
  

As with other home loans, mortgage lenders will require a loan policy for mortgages on new construction. However, the lender’s title insurance only protects the lender’s interests in the home. The homeowner must purchase owner’s title insurance to cover their own interests.

Title insurance provides homeowners with peace of mind and protection against any hidden risks or unforeseen title defects. Because newly constructed homes are uniquely at risk for post-policy title issues, an enhanced owner’s title insurance policy is often recommended. An enhanced policy covers all of the risks a standard policy will cover as well as other, less common title risks.

The title professionals at South Oak Title and Closing can explain the difference between standard and enhanced coverage and help you decide which policy is right for you. Contact us today with your questions, or order your title and schedule a closing today.