Difference Between Marketable vs Insurable Title in NYC

[ava]

I've heard a well known real estate lawyer try to explain this once. Relevant for new construction purchases where a title company close to the sponsor might clear a title, and make it marketable, or say it is. But it's not actually insurable. Any color?

Obviously it would be a big issue down the road if you try to resell and the next buyer can't get title insurance.

[aslan]

This sometimes comes up in new construction where the sponsor has a preferred title company. I don't think sponsors can legally force buyers to work with their preferred title insurance company, but maybe they might push it with some sort of incentive.

In any case, remember that title insurance rates are generally the same, so title insurance companies must compete on either service or flexibility. So a title company may be a little bit too flexible if they're working with a sponsor.

The sponsor may have asked them for a discount on their title insurance policy on the entire building, in exchange for introducing them to all the future buyers of the separate condo units. As a result, the title insurance company may tend to be flexible in saying that everything is fine.

For example, what if the sponsor has a dispute with a contractor over an invoice of $1 million, say for painting the new construction building. The sponsor says I'll only pay you $750,000. And the dispute is unsettled as the individual condo units are being sold. If the title company is friendly with the sponsor, the title company might say yes no worries the sponsor will take care of it and we'll assume clear title. Let's assume that this preferred title company says the title is clear and provides title insurance to all the buyers, but the invoice never got settled. Now two years later one of the condo owners wants to see, but no other title insurance company will provide insurance because of the ongoing dispute.

This is the difference between marketable title and insurable title, between being basically healthy and being able to secure insurance. Marketable title means it's generally free and clear, but insurable title means the general market will actually provide title insurance to the property. So you want to be very careful in the distinction between the two.

[showtime]

Bear in mind that sponsors used to say that buyers had to use their preferred title insurance company. This was put to a stop because it was basically a scam.

Now they try to push their preferred title company by saying that if you use our title insurance company you will get a "discount." But that discount was really the 30% off title premium for the bulk rate discount. However, it doesn't matter who you use, you can still be eligible for the bulk rate discount!

Anyway, now that bulk rate discount is gone anyway for new construction. Important to note is that the rate you get for new construction is the rate available at the time of close, not contract signing or some rate locked beforehand.

Just be careful, I would generally prefer my buyer's attorney to pick a separate, preferred title insurance company. Zero conflicts of interest ideally.

[Benny]

For title insurance it's also important to understand what's informational vs coverage. For example, there will be a title report in the offering plan. Anything this company will insure is usually okay, meaning you have clear title as well. However, keep an eye on permitted exceptions in the purchase contract for new construction. Some are okay like subject to NYC zoning laws which you can't do anything about. But others are a bit more sketchy.

How reliable is the title company's opinion if they are hired by the sponsor?