Preliminary Title Reports: What It Is and How to Read them

A preliminary title report (often called a “prelim”) is a document issued by a title company during a real estate transaction that shows the current ownership status of a property and lists potential issues affecting the title.

What Is a Preliminary Title Report?

A preliminary title report (often called a “prelim”) is a document that officially establishes legal ownership of a property and is one of the most important pieces of documentation in a real estate sale. It’s created by a title company before they issue title insurance to identify any potential issues with the property’s title.

Purpose of a Preliminary Title Report

The main purpose of a prelim is to:

1. Ensure the home you’re buying legally belongs to the seller and not an unknown heir who might claim the property
2. List any encumbrances (tax liens, mortgage liens, easements) on the property that could affect you after purchase
3. Help buyers make informed decisions and reveal potential issues that need addressing before closing
4. Give lenders confidence to provide financing for the purchase

Key Components of a Preliminary Title Report

According to the information from Thurston County Title, a preliminary title report typically contains six main sections:

1. The Estate or Interest Covered: Shows what type of ownership is being transferred
2. The Record Owner: Names the current legal owner(s) of the property
3. Legal Description: Detailed description of the property and its boundaries
4. Requirements and Notes: Actions needed to clear the title
5. Easements, Liens, Encumbrances and Other Matters: Anything that affects the title
6. Financial Matters: Outstanding loans, liens, or other financial claims

How to Read a Preliminary Title Report

Most preliminary title reports consist of two main sections – Schedule A and Schedule B:

Schedule A

This section contains basic information about the property and transaction:

• Names of buyers and sellers
• Sale price
• Legal description of the property
• Type of ownership (usually “fee simple” which gives complete ownership rights)

Schedule B

This section lists “exceptions” – issues that won’t be covered by title insurance:

• Special Exceptions: Specific to the property
• Monetary Items: Outstanding loans, liens, taxes
• Property Matters: Easements, covenants, restrictions
• Potential Red Flags: Anything that could complicate ownership

What to Look For When Reviewing

1. Ownership Verification: Confirm the seller is the actual owner of record. If not, that’s a major red flag
2. Liens and Encumbrances: Property taxes are always listed as the primary lien and must be paid before closing. Mortgage liens are typically listed next
3. Easements: Rights granted to others to access parts of the property for specific purposes (utility companies, neighbors, etc.)
4. CC&Rs (Covenants, Conditions, and Restrictions): These may regulate everything from additions like pools to exterior paint colors to maximum hedge height
5. Zoning and Use Restrictions: Restrictions that determine how you can use the property, especially important if you plan to build or modify the property

Red Flags to Watch For

Be particularly alert for:

• Unclear ownership or multiple owners
• Unpaid taxes or liens
• Boundary disputes
• Access issues
• Restrictions that might limit your intended use
• Easements that significantly impact the property’s value or use

What Happens Next?

After reviewing the preliminary title report:

1. Work with your real estate agent, attorney, or title company to resolve any issues
2. The seller typically needs to clear any financial liens before closing
3. Once issues are resolved, the title company issues title insurance
4. Title insurance protects you from undiscovered problems with the title

 

The Importance of Preliminary Title Reports in Due Diligence

Preliminary title reports are essential tools for due diligence in real estate transactions. They provide crucial information that helps buyers, sellers, lenders, and other stakeholders make informed decisions and protect their investments. Here’s why obtaining and properly reviewing these reports is so important:

Risk Identification and Management

A preliminary title report reveals potential problems with a property’s title before finalizing a purchase. This early warning system allows you to:

• Identify unknown claims to ownership that could jeopardize your rights to the property
• Discover liens, judgments, or unpaid taxes that could become your financial responsibility
• Uncover easements or restrictions that might limit how you can use the property
• Find boundary issues or encroachments that could lead to disputes with neighbors

By identifying these issues early, you can address them before they become more serious and costly problems.

Protection for All Parties

For Buyers

Preliminary title reports protect buyers from unknowingly purchasing property with title defects. Without proper due diligence, you might:

• Pay off someone else’s debts attached to the property
• Face legal challenges to your ownership
• Discover you can’t use the property as intended due to restrictions
• Inherit boundary disputes with neighbors

For Sellers

Sellers benefit from preliminary title reports by:

• Identifying and resolving issues before listing, preventing deals from falling through
• Demonstrating transparency and building trust with potential buyers
• Having time to clear liens or resolve disputes before they derail a transaction

For Lenders

Lenders require preliminary title reports because:

• They need assurance that their collateral (the property) has clear ownership
• They want to know their lien position relative to other potential claims
• They must ensure there are no issues that could devalue the property

Timing in the Due Diligence Process

The preliminary title report is a cornerstone of proper real estate due diligence:

1. Early discovery: Obtaining the report early in the transaction process gives all parties time to address issues
2. Negotiation leverage: Issues discovered can be used to negotiate price adjustments or require the seller to resolve problems
3. Decision point: Major title issues might warrant withdrawing from a transaction entirely

Foundation for Title Insurance

The preliminary title report is the basis for title insurance, which protects against:

• Title defects not discovered during the title search
• Future claims against your ownership
• Legal defense costs if your title is challenged

Without a thorough preliminary title report, the title insurance might contain significant exceptions that leave you unprotected against known issues.

Consequences of Inadequate Title Due Diligence

Failing to properly review a preliminary title report can result in:

• Expensive legal battles over ownership rights
• Unexpected financial obligations from undiscovered liens
• Inability to develop or use the property as planned due to restrictions
• Difficulty selling the property in the future
• Loss of investment if severe title problems emerge

Best Practices for Using Preliminary Title Reports in Due Diligence

1. Review thoroughly: Don’t just skim the report; understand every exception and its implications
2. Seek professional guidance: Work with real estate attorneys or title professionals to interpret complex issues
3. Request supporting documents: Ask for copies of referenced easements, CC&Rs, or other documents
4. Follow up: Ensure that agreed-upon issues are resolved before closing
5. Retain records: Keep the preliminary title report and all related documents for future reference

The preliminary title report is not just a formality—it’s a critical tool for protecting your interests in real estate transactions. Thorough review and follow-up on issues identified in the report are essential components of comprehensive due diligence. Remember that while reviewing a preliminary title report can be complex, it’s a crucial step in protecting your investment when purchasing property.