Understanding Preliminary Reports

After months of searching, you've finally found it -- 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 prior owners? Have documents been recorded that will restrict your use of the property?

The preliminary report 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.

What is a Preliminary Report?

A preliminary report is a report prepared prior to issuing a policy of title insurance that shows:

• The ownership of a specific parcel of land
• The liens and encumbrances affecting the property
• Matters which will not be covered under a subsequent title insurance policy

Role in Real Estate Transactions

A preliminary report contains the conditions under which the title company will issue a particular type of title insurance policy. The report lists, in advance of purchase:

• Title defects
• Liens
• Encumbrances

These items would be excluded from coverage if the requested title insurance policy were to be issued as of the date of the preliminary report.

Benefits of Review

The report may be reviewed and discussed by:

• The parties to a real estate transaction
• Their agents
• Their attorneys

This provides the opportunity to seek the removal of items referenced in the report which are objectionable to the buyer prior to purchase.

How is the Report Produced?

Shortly after escrow is opened, the title company begins the process of producing the report by:

1. Assembling recorded matters
2. Reviewing documents related to:
   • The property
   • The parties to the transaction

What to Look For

When reading your preliminary report, focus on:

1. Ownership Rights

   • Review the ownership interest in the property
   • Understand claims, restrictions, or interests of others

2. Statement of Vesting

   • Shows degree, quantity, nature and extent of the owner's interest
   • Most common form is "fee simple" or "fee"

3. Exceptions

   • Listed numerically in the report
   • May include:
     • Claims by creditors
     • Liens for taxes
     • Recorded restrictions
     • CC&Rs (covenants, conditions and restrictions)
     • Easements

Important Considerations

1. Limitations of the Report

   • Not a written representation of title condition
   • May not list all liens, defects, and encumbrances
   • Reports current ownership and excluded matters only

2. Difference from Title Insurance

   • Preliminary report is an offer to insure
   • Not a report of complete title history
   • No contract exists until policy is issued

Protection Before Closing

You can be protected against title risks prior to closing through:

• Binders: Temporary coverage until formal policy is issued
• Commitments: Title insurer's contractual obligation to insure once requirements are met

Clearing Unwanted Items

If you find unwanted liens and encumbrances:

1. Review the preliminary report carefully
2. Work with the seller and their agents
3. Clear unwanted items before taking title

Resources for Help

Several parties can help explain the preliminary report:

• Your real estate agent
• Your attorney
• Your escrow officer
• Your title company

Conclusion

In the risk elimination business of title insurance, the preliminary report is perhaps the most important tool. It facilitates the issuance of title insurance by identifying potential issues before they become problems.