99.99% of land transactions at arms-length involve Title insurance. Title insurance protects the purchaser in case there is a defect in Title (post-closing) preventing the then-homeowner (you, the current purchaser) from selling the home, or at least selling the home at Market Value. Defects in Title arise when, for example, someone was given proper ownership rights to the property years and years ago, and now is attempting to assert those rights against you. Title insurance is seldom used, but when it is needed, can be more important (monetarily) than life insurance, vehicle insurance, and health insurance combined. But there is one aspect of Title insurance that is important, yet often overlooked.
The Market Value Rider
There is a little known sheet of paper which usually is signed and passed-on at the closing table without so much as a glance. This piece of paper is usually waiver of obtaining a Market Value Rider to the Title insurance policy. It is often explained to purchasers too quickly, and with the often copious amounts of money going into purchasing a home, it is often looked at as an optional additional expense, and rejected by buyers. So just what is a “Market Value Rider?”
A Market Value Rider is just that. It is designed to “ride” the housing market’s ebbs and flows. Basically, if the house has a purchase price of $1,000,000.00, a basic Title insurance company insures up to $1,000,000.00 in damages as a result of a defect in Title. But now, let’s say you purchase a house for $1,000,000.00 and then in 10 years attempt to sell it at the Fair Market Value of $1,800,000.00, the increase in value due to a boom in the economy. Basic Title insurance has you insured for only $1,000,000.00. The other $800,000.00 in equity is lost. Not so if you opted for that $350.00 Market Value Rider at the purchase of the property!
The Market Value Rider will pay out Fair Market Value at the time the insurance policy is invoked. This means when the property is worth $1,800,000.00 10 years after closing, the policy is worth $1,800,000.00 and the equity (which you own) in the home is preserved and not lost. Chances are if your home increased in value 80% over the 10 years, so too did all the other homes in the neighborhood. Therefore, if you say “ehh, well I bought the home for $1,000,000.00 and only have $500,000.00 owed on the Mortgage, I’ll be ok” you are completely wrong. True, you’ll have a nice amount of proceeds from the sale of the home after paying off the Mortgage, but now you will only have $500,000.00 left to buy a new home in a housing market that has increased 80%. It has severely diminished your purchasing power. All because you signed that sheet of paper to save a few hundred bucks at closing.
The Best Waste of Money
Chances are you’ll never even need to look at your title insurance policy, let alone use it. But as my boss always says “you’ve wasted money on dumber things.” This is completely true. You elected to have navigation in your car for an extra $1,200.00. You wanted a nice bottle of champagne to celebrate New Year’s for $250.00. You took a long weekend to go out to the Hamptons for $300.00 a night. And to think – for a one-time payment of a few hundred bucks, you can be protected against defects in Title up to the amount of the Fair Market Value (which can be substantially higher than the purchase price) of your home at any time. I know a Market Value Rider isn’t as sexy as these things, but as the great Howard Smolen always says “you’ve wasted money on dumber things.” Protect your investment and opt for the Market Value Rider.