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, together with the liens and encumbrances thereon which will not be covered under a subsequent title insurance policy.

Role in the Real Estate Process

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, and encumbrances that would be excluded from coverage. This allows the buyer and their agents to review and discuss the findings and seek the removal of objectionable items prior to purchase.

Production of the Report

Shortly after escrow is opened, an order is placed with the title company. The title company then reviews recorded matters (like a deed of trust against the property or a tax lien against the buyer/seller) relative to both the property and the parties. These recorded matters are listed numerically as “exceptions” in the report and will remain exceptions from title insurance coverage unless eliminated or released prior to the transfer of title.

What to Look for When Reading Your Report

You will be interested primarily in the extent of your ownership rights and any claims or restrictions of others.

 

• Vesting: A statement of vesting notes the degree and nature of the owner’s interest. The most common form is “fee simple” or “fee,” which is the highest type of interest an owner can have in land.
• Numbered Exceptions: These are specific liens, restrictions, and interests of others being excluded from coverage. They may include claims by creditors, liens for taxes or assessments, CC&Rs (covenants, conditions, and restrictions), or easements given by a prior owner that limit your use. You may want to clear these unwanted items prior to purchase.
• Standard Exceptions and Exclusions: A printed list of standard items not covered by your policy (e.g., governmental laws or regulations governing building and zoning) may be attached. Review this section as well.

Distinctions: Report vs. Policy

A preliminary report is not the same thing as title insurance.

 

• It is not a written representation as to the complete condition of title; it is merely a report of current ownership and matters the title company will exclude from coverage.
• It is an offer to insure, not a statement of final liability. No contract or liability exists until the title insurance policy is actually issued.
• The final policy is issued to a particular insured person, and others cannot claim the benefit of the policy.

Protection Prior to Closing

Yes, you can be protected against title risks prior to closing. Title companies can issue “binders” (an agreement for temporary coverage) and “commitments” (a contractual obligation to insure once stated requirements are met). Discuss the best means to protect your interests with your title insurer.

Clearing Unwanted Items

If the title is “clouded,” you and your agents will need to work with the seller and the seller’s agents to clear the unwanted liens and encumbrances prior to taking title.

Conclusion

The preliminary report is arguably the most important function undertaken in the process of risk elimination, as it is designed to facilitate the issuance of a policy of title insurance. Your real estate agent, attorney, escrow officer, and title company are all helpful sources for further information.