Newlyweds Bob and Mary were going to build a home on vacant land. This is where they would settle down to their new life together and start a family—what could be more exciting?! They went to a closing company known to cut cost to its customers.
The purchase price of the lot was $150,000, and the home construction was going to cost $500,000. So the total purchase price was $650,000 (land plus home construction).
At Closing, the couple paid $130,000 in cash (20% of the total purchase price), and got a loan for $520,000 (for the remaining part of the total purchase price). The Seller provided an Owner’s Title Policy for the land he was selling them; that policy covered the $150,000 of the purchase of the lot.
Yea, hooray—Bob and Mary closed on the lot purchase and construction loan, and they were so happy. Their house was built and they moved in. With discipline, hard work, and a little luck on a stock market investment, Bob and Mary paid a substantial amount over the next four years, reducing their principal. So now their $520,000 loan was only $100,000 left in principle. Good for them…or was it?
As it turns out, the supposed “Seller” had the same name as his grandfather. Not a problem, except his grandfather was the legitimate owner of the land. Four years after the grandson “sold” the land to Bob and Mary, the grandfather passed away. The estate went into probate, and suddenly Bob and Mary receive notification from the heirs. Bob and Mary had bought into a fraudulent sale on the land where they’d built their house.
So Bob and Mary contacted the closing company that had issued the title insurance. That’s when they learned they only had coverage for that $150,000 for the purchase of the lot—not for the total purchase price. They had no financial protection on the $520,000 construction loan.
Goodbye $130,000 in cash at closing!
Goodbye $420,000 in four years of discipline, hard work, and investment dividend!
The $150,000 policy would pay off the $100,000 left on the principal of their loan, and give them only $50,000 to start over—less than half of what they had at closing.
At that closing four years ago, the closing company could have simultaneously issued an owner’s title policy that would have increased their coverage to at least the $520,000 construction loan amount. It would have cost the couple a $25 fee, that’s all. But the closing company—who truly didn’t understand title insurance or how to explain cost—had cut Bob and Mary a large slice of heartbreak and homelessness.
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