After months of searching you've finally found your perfect dream home. But is it perfect? Will you be purchasing more than just a beautiful home? Will you also be acquiring liens placed on the property by their prior owners? Have documents been recorded that will restrict your use of the property? A Preliminary Title Report (Prelim) will provide you with the opportunity, prior to purchase, to review matters affecting your property, which will be excluded from coverage under your title insurance policy unless removed or eliminated before your purchase. To help you better understand this often-bewildering subject, the California Land Title Association has answered some of the questions most commonly asked about preliminary title reports.

What is a Prelim?  A prelim is a report prepared prior to issuing a policy of title insurance that shows the ownership of a specific parcel of land, together with the liens and encumbrances thereon, which will not be covered under a subsequent title insurance policy.

What role does a Prelim play in the real estate process?  A prelim contains the conditions under which the title company will issue a particular type of title insurance policy. It lists, in advance of purchase, title defects, liens and encumbrances that would be excluded from coverage if the requested title insurance policy were to be issued as of the date of the prelim. The report may then be reviewed and discussed by the parties to a real estate transaction and their agents.  Thus, a preliminary report provides the opportunity to seek the removal of items referenced in the report that are objectionable to the buyer prior to purchase.

When and how is the Prelim produced?  Shortly after escrow is opened, an order will be placed with a title company to begin the process involved in producing the report. This process calls for the assembly and review of certain recorded matters relative to both the property and the parties to the transaction. Examples of recorded matters include a deed of trust recorded against the property or a lien recorded against the buyer or seller for an unpaid court award or unpaid taxes. These recorded matters are listed numerically as "exceptions" in the prelim. They will remain exceptions from title insurance coverage unless eliminated or released prior to the transfer of title.

Will the Prelim disclose the complete condition of the title to a property?  No. The report does not show the condition of title, but merely reports the current ownership and matters that the title company will exclude from coverage if a title insurance policy should later be issued.

Is a Prelim the same thing as title insurance?  Definitely not. A prelim is an offer to insure, it is not a report of a complete history of recorded documents relating to the property. A prelim is a statement of terms and conditions of the offer to issue a title insurance policy, not a representation as to the condition of title.  These distinctions are important for the following reasons: first, no contract or liability exists until the title insurance policy is issued; second, the title insurance policy is issued to a particular insured person and others cannot claim the benefit of the policy.

What should I look for when reading my Prelim?  You will be interested, primarily, in the extent of your ownership rights. This means you will want to review the ownership interest in the property you will be buying, as well as any claims, restrictions or interests of other people involving the property. The report will note in a statement of vesting the degree, quantity, nature and extent of the owner's interest in the real property. The most common form of interest is "fee simple" or "fee" which is the highest type of interest an owner can have in land. Liens, restrictions and interests of others, which are being excluded from coverage, will be listed numerically as "exceptions" in the prelim. These may be claims by creditors who have liens or liens for payment of taxes or assessments. There may also be recorded restrictions, which have been placed in a prior deed or contained CC&R'S (covenants, conditions and restrictions). Finally, interests of the third parties are not uncommon and may include easements given by a prior owner, which limits your use of the property. When you buy property you may not wish to have these claim or restrictions on your property. Instead, you may want to clear the unwanted items prior to purchase. In addition to the limitations noted above, a printed list of standard exceptions and exclusions listing items not covered by the title insurance policy may be attached as an exhibit item to the report. Unlike the numbered exclusions, which are specific to the property you are buying, these are standard exceptions and exclusions appearing in title insurance policies. The review of this section is important, as it sets forth matters which will not be covered under your title insurance policy, but which you may wish to investigate (i.e., government laws or regulations governing building and zoning).

Can I be protected against title risk prior to the close of the real transaction?  Yes. Title companies can protect your interest through the issuance of "binder" and "commitments." A binder is an agreement to issue insurance giving temporary coverage until such time as a formal policy is issued. A commitment is a title insurer's contractual obligation to insure title to real property. Discuss with your title insurer the best means to protect your interests.

How do I go about clearing unwanted liens and encumbrances?  You should carefully review the preliminary report. Should the title to the property be clouded, you and your agents will work with the seller and the seller's agents to clear the unwanted liens and encumbrances prior to taking title.

Who can I turn to for further information regarding the Prelim?  Your real estate agent and your attorney, should you choose to use one, will help explain the prelim to you. Alliance Title & Escrow Company can also be helpful sources.

CONCLUSION: In a business which is directed at risk elimination, the efforts leading to the production of the prelim, which is designed to facilitate the issuance of a policy of title insurance, are perhaps the most important functions undertaken.

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