Real estate deals: The American model
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Unlike in India, many parties are involved in realty deals in the U.S. — the closing agent, title company, attorney, real estate agent, lender, appraiser, surveyor, pest (termite) and building inspection company and insurance agent. A look by S. BALAKRISHNAN
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TRANSACTION RULE: Each new property buyer in the U.S. has to take a completely new policy regardless of how recently the seller had taken a title insurance. PHOTO: RAMESH BABU
We were recently in the U.S. seeing our son, like other young Indian professionals, acquire a house of his own in California. I had also the opportunity to go through a very useful book, Your Real Estate Closing by Sandy Gadow. Like in India, there was a boom in real estate prices in the U.S. also but it has now reached a plateau. A transaction can take, on an average, about 8-10 weeks for completion. In the U.S. investment in property, considered as the largest financial commitment for the majority, is treated with seriousness and with respect for law. Unlike in India, many parties are involved in such transactions- the closing agent, title company, attorney, real estate agent, lender, appraiser, surveyor, pest (termite) and building inspection company and insurance agent. The concerned parties take precaution at every stage and experts are engaged to handle various functions, like inspection of property and documents and insurance against possible and potential defects in title. One such protection, which can be considered as the most vital, is title insurance.
Title Insurance
This system is something unique. Title Insurance (TI) is a guarantee that the buyer gets what he pays for in a transaction for real estate. It guarantees that the real ownership of the property in concern is exactly as stated in recorded documents. It does not, however, cover personal property like furniture, curtains and refrigerator.
TI protects against all imponderables like incompetent past action, clerical errors, an insane or minor person having signed an earlier deed, undisclosed heirs, incorrect interpretation of wills, signing by someone without authority, or any possible forgery in the entire past chain of title signatures. In sum, it insures against claims made by third parties against the title. In the U.S., marital status not correctly stated, can also lead to problems.
In India we do not have this system and it is hoped that with the entry of new players in the general insurance field (including foreign entities) this coverage may be available soon.
The protection provided by an owner's policy continues until he has an interest in it. When he dies his heirs or devisees (beneficiaries to whom the property is willed) remain protected. However, the policy is not assignable or transferable to subsequent purchases of the property. Each new buyer has to take a completely new policy regardless of how recently the seller had a title search conducted and had taken a title insurance.
The insurer may list certain exceptions, that is, things that will not be covered and the purchaser has to find out ways to deal with them. There could also be some easements attached to the transaction, that is, the right of one person to make limited use of another's property, for example the right to cross it or maintain a road or right-of - way or the right to install and maintain public utility services. In such cases the insurer is asked to draw the relevant `plot-map'. The TI policy availed of by my son, is `forever', even after he relinquishes his title, but he cannot assign or transfer the policy to anyone else. The policy insures `i) any one who inherits his title after his death, ii) his spouse who receives the title because of the dissolution of his marriage (typical U.S. prescience); iii) the trustee or successor trustee of a trust to whom the title is transferred after the policy date; and iv) the beneficiaries of the trust upon his death. The premium paid on the policy was just three percent of the insured value.
Termite inspection
Another vital element in sale closing is termite inspection. The parties to a sale transaction in the U.S. will include expert termite inspectors also. It is essential as wood is one of the main building materials there. Even a relatively new house can cause termite problem.
Earlier inspection for termite was confined to the ground floor of a building and its underside. However the process, presently, is more comprehensive; it involves checking for signs of wood damage throughout a building, no matter what the cause.
Inspectors will look for signs of fungus, dry rot, faulty grade levels, earth-wood contacts, water leaks, scattered wood scraps and cellulose debris in the subsoil, and excessive moisture conditions, evidence of subterranean termites, dry wood and damp wood termites and other wood destroying pests such as certain varieties of beetles. The inspection report would advise two types of action to be taken, namely, corrective work to remedy current infestation and preventive work to prevent future or threatened infestation.
Like in India inspectors can take their clients for a ride. A few will not take up inspection unless they are also assigned the job of termite control. When there is more than one way to remedy a problem, some not expensive and others expensive, an unscrupulous inspector may recommend the costlier option. Ms. Gadow cites in her book two revealing instances — an inspector calling for $4,000 worth of work to be done, later satisfactorily completed in another way for just $5.
It is to be noted that neither termite inspection nor clearance of the inspection is required by law. Pest control companies that undertake termite inspection are licensed and regulated by a State Structural Pest Control Board. The Inspection Reports are filed with the Board and the copy filed on any building in the preceding two years, are made available to the public.
(The author is a practising company secretary)
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