A title is a title, right? Not necessarily. Title companies issue three types of title in a real estate transaction. While you may be told you have a “clear” title, it’s most likely a marketable title. Both clear titles and marketable titles are a good thing, but they do have different characteristics.
What is a Clear Title?
A clear title gives the owner free reign over their property. It doesn’t have any tenants, liens, easements, or is subject to a loan. There are no financial encumbrances from prior owners.
Truly “clear” properties are pretty rare. Most homes at least have an easement to allow utility access. It’s common to have a financial encumbrance; Bloomberg reported in 2019 around 63% of United States households owe a mortgage or some other home line of credit on their property.
What is a Marketable Title?
Most titles issued by Independence Title are marketable titles. These have encumbrances on the deed, but none of the encumbrances cause concern for litigation or property sale.
Typically, marketable titles have a land-use encumbrance. As previously mentioned, most homes have a utility access easement. Other land-use easements include zoning restrictions or building restriction lines. Land use incumbrances can’t usually be changed, but their existence doesn’t always make the property any less desirable.
Sometimes marketable titles and their land-use restrictions may reduce the property value, but not necessarily its enjoyment or usage. As an example, the property may have a public access walkway to the beach.
A property can have a marketable title if defects can be fixed at or before closing. We would consider a mortgage to be a serious title deficit, but since the mortgage will be removed when the buyer provides funding to close the transaction, it doesn’t stop the deal from moving forward.
What makes a title unmarketable?
When a property has some kind of encumbrance that would impact its ability to transfer, we consider it an unmarketable title. Most often, these relate to financial encumbrances like tax liens, but it may involve land-use like zoning violations.
These things must be removed or fixed before the property can be transferred. Otherwise, it is a litigation risk. If you need a mortgage, the lender is less likely to approve a mortgage for a property carrying financial liens or unmarketable title.
How do you tell the difference in titles?
The preliminary report issued by the title search company will explain any encumbrances and restrictions. The report will note any land use or financial claims that would make the property clean, marketable, or unmarketable. The report may give you time to request any problems to be rectified.
Why the title distinction?
Anything that impacts your ability to use and enjoy the property is a title defect. Most title defects are acceptable. It makes sense that the utility company needs access to your property to read the meter, to install utility lines, to fix your water if it’s busted, and so on. The distinction between a clear title and a marketable title is the industry’s way of calling attention to what is attached to the property you call home and anything that may influence its enjoyment or impact your ownership.