In most real estate purchase transaction processes from the contract through closing, a title insurance company will do a thorough search for all documents recorded that reference the property being purchased. They could be past deeds, surveys, mortgages, notes, divorce documents, and others. The point is to discover any possible threats to the legal and full ownership of the property on behalf of the new buyer.
The research process yields a document called either a title insurance binder or a title insurance commitment. This document binds the title insurance company to provide a policy of title insurance to the buyer. The policy protects the ownership interests of the buyer(s). Should there be some claim that threatens that ownership or the full use of the property by the new owners, the title insurer comes to their defense and may even pay out loss claims.
This title insurance binder will have a section called “Exceptions.” This section itemizes conditions, documents or ownership interests that are “excepted” from coverage; meaning they’re not covered. You see, the policy is intended to protect the owners from unknown situations, not known and previously recorded documents or situations. Examples seen in many title binders include:
There are others, but let’s talk about what these exceptions mean and why they are in this status. We’ll use very common subdivision covenants as our example. When you’re buying a home in an established and recorded subdivision, there will be a large document that outlines the “rules” for living there, including restrictions on what you can do with and on your property. Yes, you can be restricted from doing some things even though you own your property. Examples of these restrictions include:
Let’s say that you’re buying a home and the title company has an Exception for the Subdivision Covenants and Restrictions as recorded in the county records. They provide you with a copy of those covenants and restrictions, and you’re expected to read them to make sure that you can live with them after you buy your home. You delve into them, and you don’t have a problem with not being able to raise chickens, but you do find that you can’t have an external storage building. You’re limited to the structures already in place, the home and garage. Even though there is a yard with plenty of room for a storage structure, you can’t have one.
If you are an avid woodworker and planned on a workshop structure, you have a problem. It’s great that the problem is discovered before you close on the home, allowing you to decide if you want to give up half of your garage because you can’t add your building. The exception means that you can’t later make a claim against your homeowner policy because you can’t have a workshop building, as you should have known about the restriction.
You can see the pattern here. Anything that’s already in existence and legal and limiting the use of the property will be an Exception to coverage. Even if you can have that storage building or workshop, and you mistakenly place it right in the middle of an underground utility easement, you can’t make a claim for damages if it is uprooted or damaged by the gas company making repairs to their line.
It is very important that buyers take the time to read their restrictive covenants and understand all of the Exceptions to coverage. You should ask all of the questions necessary to understand each and every exception.
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