Understanding Preliminary Reports

March 24, 2017 By

Preliminary Reports

After months of searching, you’ve finally found it – your perfect dream house.  But is it perfect? Will you be purchasing more than just a beautiful home?  Will you also be acquiring liens placed on the property by prior owners?  Have documents been recorded that will restrict your use of the property?

The preliminary report will provide you with the opportunity, prior to purchase, to review matters affecting your property which will be excluded from coverage under your title insurance policy unless removed or eliminated before your purchase.  To help you better understand this often bewildering subject, here are some of the most asked questions about preliminary reports.

What is a Preliminary Report?

A preliminary report is a report prepared prior to issuing a policy of title insurance that shows the ownership of a specific parcel of land, together with the liens and encumbrances thereon which will not be covered under a subsequent title insurance policy.

What Role Does a Preliminary Report Play in the Real Estate Process?

A preliminary report contains the conditions under which the title company will issue a particular type of title insurance policy.  The preliminary report lists title defects and liens and encumbrances which would be excluded from coverage if the requested title insurance policy were to be issued as of the date of the preliminary report.  The report may then be reviewed and discussed by the parties to a real estate transaction and their agents.  Thus, a preliminary report provides the opportunity to seek the removal of items referenced in the report which are objectionable to the buyer prior to purchase.

When and How is the Preliminary Report Produced?

Shortly after escrow is opened, an order will be placed and Title will begin the process  involved in production of  the report.  This process calls for the assembly and review of certain recorded matters relative to both the property and the parties in the transaction.  Examples of recorded matters include a deed of trust recorded against the property or a lien recorded against the buyer or seller for an unpaid court award or unpaid taxes.  These recorded matters are listed numerically as “exceptions” in the preliminary report.  They will remain exceptions from title insurance coverage unless eliminated or released prior to the transfer of title.

What Should I Look For When Reading my Preliminary Report? 

You will be interested, primarily, in the extent of your ownership rights.  This means you will want to review the ownership interest in the property you will be buying as well as any claims, restrictions or interests of other people involving the property.  The report will note in a statement of vesting the degree, quantity, nature and extent of the owner’s interest whether it be “fee simple” or “fee” which is the highest type of interest and owner can have in land.  Liens, restrictions and interests of others which are being excluded from coverage will be listed numerically as “exceptions” in the preliminary report.  These may be claims by creditors who have liens or liens for payment of taxes or assessments.  There may also be recorded restrictions which have been placed in a prior deed or contained in what are termed CC&R’s – covenants, conditions and restrictions.  Finally, interests of third parties are not uncommon and may include easements give by a prior owner which limit your use of the property.  When you buy property you may not wish to have these claims or restrictions on your property.  Instead, you may want to clear the unwanted items prior to purchase.

In addition to the limitations noted above, a printed list of standard exceptions and exclusions listing items not covered by your title insurance policy may be attached as an exhibit item to your report.  Unlike the numbered exclusions, which are specific to the property you are buying, these are standard exceptions and exclusions appearing in most title insurance policies.  The review of this section is important, as it sets forth matters which will not be covered under your title insurance policy, but which you may wish to investigate, such as governmental laws or regulations governing building and zoning.

Can I be Protected Against Title Risks Prior to the Close of the Real Estate Transaction?

Yes, you can.  Title companies can protect your interest through the issuance of “binders” and “commitments.”  A binder is an agreement to issue insurance giving temporary coverage until such time as a formal policy is issued.  A commitment is a title insurer’s contractual obligation to insure title to real property.  Discuss with your title insure the best means to protect your interest.

How Do I Go About Clearing Unwanted Liens and Encumbrances?

You will wish to carefully review the preliminary report.  Should the title to the property be clouded, you and your agents will work with the seller and the seller’s agents to clear the unwanted liens and encumbrances prior to taking title.

A preliminary report will usually contain the following elements:

  1. The name of the person or firm that requested the preliminary report.
  2. The address of the subject property.
  3. Title’s file number.
  4. The applicant’s file number or reference name.
  5. A paragraph stating that no liability is ever intended under a preliminary report and indicating what should be requested if the customer desires assumption of liability prior to policy issuance,
  6. The most recent date and time that the public records have been researched. In other words, a lien or deed of trust recorded after the date shown should not be disclosed on the preliminary report.
  7. The name of the title officer who produced the preliminary report and who may answer questions about the report. (Requests for information about the status of the escrow should be directed to the escrow officer.)
  8. The office address and telephone number of Title.
  9. A paragraph telling you that in addition to the standard printed exceptions, there will appear in the title policy exceptions which pertain specifically to the estate in question.
  10. A paragraph telling the interest in the land that is covered by the report. For example: A fee.  A condominium.  A leasehold.
  11. A legal description of the property, which should be used for preparing any document that will be recorded.
  12. A note providing information regarding transfers of title recorded within the last six months. Any deed or other instruments that transfer title would be reflected here.
  13. A site or plat map of the property described in the report.

The exceptions to each parcel of land are different due to the unique nature of real property.  Below is a discussion of some of the more common exceptions that you may see during your review of a preliminary report.

  1. Property Taxes – Each year on January 1 the lien of the following year’s property tax attaches to the land, pursuant to Arizona Law.  However this is a lien that is not yet payable and it becomes due October 1. The amounts are shown on the preliminary report for proration purposes.
  2. Easements – Easements are rights to use the land of another for specific purposes.  Easements can be created in a number of ways, included in a dedication on a subdivision map or a grant of easement to another party.
  3. CC&R’s –  Covenants, conditions and restrictions are limitations on the uses that may be made of a parcel of land.  For example, any CC&R’s contain restrictions stating that a property may only be used as a single family dwelling and may allow neighbors to take action against persons running a hotel out of their home.  Some restrictions contain a reversionary clause, which states that violation of the restrictions will cause the title to the property to revert to the person imposing the restrictions.  Most contain a clause assuring a lender that a violation will not act to impair the lien of the lender.
  4. Deed of Trust – The deed of trust is a security device for a lender.  Under Arizona law, the deed of trust allows a relatively quick and easy way for a lender to obtain real property with which to satisfy a delinquent loan.  The preliminary report shows the recorded information about the deed of trust.
  5. Mechanic’s Lien – Under Arizona law, workmen who provide materials and/or labor to a property owner are entitled to use the real property to satisfy the debt.  This type of lien also alerts the title company to the possibility of ongoing construction work which may affect the priority of a new deed of trust.
  6. Abstract of Judgment – This type of lien is issued pursuant to a court order for the payment of a debt.