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auto insurance online – Titles insuranceHousingFinance & Capital MarketsKhan Academy

Titles insuranceHousingFinance & Capital MarketsKhan Academy

– [Voiceover] So let's say in
1950, let me write this down, in 1950, there was a plot
of land that the city owns and says, hey, you know what,
we could use some revenue, or we would want someone to build a house. There's a housing shortage in this city. Let's sell it to someone who maybe might build a house on it. So you have the city,
who is the original owner of this particular plot of land, and they transfer title of
that plot of land to, let's say it's a developer who's
going to be the first owner.

So, they transfer title of
that land to a developer. So, I'll just call them the
developer right over here, and when they transfer
title, they record that by filing a deed, so filing
a deed with the county. And you sometimes file it with the city, sometimes with the county. So, this is at the county's
office right over here.

So, this is the county. We're going to assume that we filed these things with the county. All right, fair enough. Let's say the developer lives
in that house for some time.

Actually, maybe the developer lives in that house for a while, and he and his wife, they
unfortunately pass away. And so it gets, in 1970– So, let's say it's in
1970, they pass away. And so, in their– And maybe they didn't even have a will, and so it just gets transferred
to their closest relative. And let's say that the
developer had a brother-in-law is the closest relative,
and so the property gets transferred to the brother-in-law.

So let me write this down, brother-in-law, brother-in-law of the developer. Brother-in-law of the
developer now has title, and that will be reflected. That will be reflected in another deed. So, let's call this deed one, and this will be recorded in
the county recording office.

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This is deed two. And then, let's fast forward now to 2000. The brother-in-law and his family has lived there for a while. And so, now it is the year 2000, and they are looking to sell the house, and there is a buyer who's
interested in that house.

So this is, we'll call this owner three, but before she buys the house, she prudently wants to do– wants to make sure that
the title is clean, that this brother-in-law
really does have title, that has ownership, not just
possession of the house, that there aren't any liens on the house, some back taxes or some
contractor that did work that claims it was never
paid, whatever it might be. So she, owner three, hires
a title search company to do a title search, and they go to the county recording
office, and say, okay, look, it was sold from the city
to the developer in 1950, and then the developer and his
family passed away in 1970, and so then it was transferred legally to the brother-in-law. And so they say, hey, the title is clean. You can buy this house.

So owner three, she
decides to buy this house. She pays for it, however much money, and then the title is transferred, and the evidence of that
is deed number three. So you might say, okay,
this is all good and well. This seems like a very
reasonable thing to do.

She has nothing to worry
about, but what if, what if right after owner
three pays all of this money to the brother-in-law, let's say in 2001 someone shows up and says, hey, look, I was the developer's long lost child. I had the rights to this,
not the brother-in-law. So, I lay claim. I lay claim to this house.

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So, this right over here. So, someone says this should have been me. This should have been me. And so, therefore, they claim that this was not a valid transaction.

If this isn't a valid transaction, then this also is not a valid transaction, and then they could take
this whole thing into court, which is not going to be a pleasant thing. It's not going to be a
pleasant thing for owner three. So, I know what you're thinking. How does an owner three protect themselves from some random thing that
might happen like this, especially because a house is the most important transaction you make? If this happened, you get
bogged down in a big lawsuit, and who knows what might happen.

This could be a nightmare for owner three, and that's why title insurance exists. Title insurance. The whole purpose of title insurance is, okay, you should do a title search. You should make sure
that the title is clean, that there aren't any
liens or encumbrances, any claims to the property, and that everything has been filed.

You would also have a nonclean title if somehow these people
didn't file this properly, if deed two is shady or didn't have all of the proper language. But even if you do all of that, you're not 100 percent sure
that there might not be some other weird or bizarre claims or that something might
have been overlooked in the title search. And so, to protect yourself,
you get title insurance, and most lenders, because most of the time when houses are bought,
the lender is putting up the majority of the cash for it, and in the case that the
borrower isn't able to pay it, the lender takes possession of the house, most lenders make you get title insurance, so that they can be protected
for this exact scenario. Now you can imagine, let's say owner three took out a mortgage,
and then all of a sudden all this craziness happens.

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It might be easier for
them to just walk away from the mortgage, and then the bank is left with all of this messiness. So, the bank has a huge incentive
to have title insurance. And the whole point of title insurance is to protect this owner or the person who comes into ownership of the house, from any of this messiness
that might actually ensue. So although a bank, whoever
is giving you the loan for your house, might insist
that you have title insurance, it's probably a good
idea, even if you were buying the house in cash,
even if no one was forcing you to do it, just so that you make sure that you're protected against
these type of things.

And just to be clear,
it's not a hugely costly type of insurance, because
these things are rare. So these are rare events,
but you still want to protect yourself against them happening..

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