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What is Title Insurance?

Buying an investment property is one of the biggest purchases anyone can make. To protect the investment from tangible, physical damage like fire, storms or vandalism, hazard insurance is often purchased. What if mistakes are made related to the legal ownership involving the property being purchased? This is where title companies and title insurance come into play. While hazard insurance is easy for most of us to understand, title insurance is often an afterthought, as it occurs automatically as part of every transaction at a title company.

If you are new to real estate investing, you may not be completely aware of why you close at a title company in the first place. Also, there are many investor programs and seminars out there that discuss acquiring real estate without stepping foot into a title company. Many of these “no money down” strategies can create enormous problems for investors, the most important one is losing money! Before we spend time addressing why you should purchase title insurance, let’s make sure there is a thorough understanding of what a title company does.

Value of a Title Company

A title company is a neutral third party that assists in the conveyance (or transfer) of ownership between sellers and buyers of real property. Title companies make sure that the title (proof of ownership) to a given property is legitimate, and free and clear of all liens and judgments before a transaction is closed. Title companies offer insurance on the title to the buyer (called an owner’s policy) and also to the lender (called a mortgagee’s title policy) if the property is going to be financed. These title insurance policies ensure there are no other claims against the property, for example, by other family members or heirs, or by vendors who may not have been paid by the seller of the property for work performed.

A Real-World Example

Consider the following: You buy a house that is deeply distressed.  You execute the documents, money changes hands, and you take possession of the property. Two months later, an heir to the property has their attorney contact you stating they have legal rights to the property and are going to sue for possession. Maybe this happened to be from an estranged sibling of the seller, who is still entitled to their share of the property. You are blindsided by this.

Scenario A:  You closed this transaction by getting the deed to the property conveyed to you directly by this seller or someone who claimed to be the owner of the record, without closing at a title company. You trusted the tax records and thought no one else needed to be involved from the seller side. Also, you were super excited about the deal and just wanted to focus on getting possession. The seller was behind on their mortgage, and your plan was to catch up on the note and start making payments. You even gave this seller $10K for the deed to the property, as this was an incredible deal that you didn’t want to lose. Now you are in a situation where you are most likely going to lose money and/or the property. If you think this hasn’t happened before, think again. There are many stories out there similar to this one.

Scenario B:  You closed this transaction through a title company.  You call the title company who issued the policy and file a claim. At this point, the title company will handle the heirship issue, and you will either be getting money back or be allowed to keep the house.

Performing transactions without a title company can be a recipe for disaster. Not only can you lose all of the money invested and/or the property, but you may also be in a situation where you need to hire an attorney to defend yourself, potentially costing thousands of dollars in legal fees.  

While there are many federal regulations regarding real estate transactions, most real estate laws are governed by the states. Title companies understand not only how heirship issues are addressed, but also how liens and encumbrances to title impact a specific deal, based on the laws in your state. Relying on them is critical to having a successful transaction, and protecting you as an investor.


As a long-time private hard money lender in Texas, we have seen many title issues not get resolved in the closing timeframe of the buyer and seller. In fact, many may not get resolved without legal pursuit. However, doing all of the research to discover what is needed to effectively close a real estate transaction is what a title company gets paid to do. This is why closing at a title company and buying title insurance should not be a consideration, but a requirement in every real estate transaction you pursue in Texas.