The Nest

NestApple's Real Estate Blog

Featuring real estate articles and information to help real estate buyers and sellers. The Nest features writings from Georges Benoliel and other real estate professionals. Georges is the Co-Founder of NestApple and has been working as an active real estate investor for over a decade.

Is Title Insurance policy Required for Coops in NYC?

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New York co-op apartment purchasers generally do not pay for co-op title insurance. Usually, it’s not a required closing cost. Besides, a co-op lien search already grants buyers $50,000 in coverage against any liens missed during the due diligence. So why do buyers sometimes ask their attorneys if title insurance is required for New York Coops?

Attorneys only recommend Coop buyers get title insurance for a coop purchase in the case of an estate sale or foreclosure.

Co-op title insurance: what does it mean

When a buyer pays for title insurance, this protects him from any liens generated by previous property owners. This insurance protects the buyer from potential claims against their purchase or ownershiptitle insurance required for Coops and covers the risk of someone claiming they had rightful ownership in the past. In short, title insurance protects buyers from events that happened in the past before they purchased the apartment.

In contrast, a home insurance policy protects the buyer from events that occur in the future.

The precise technical term to name co-op title insurance is “co-op leasehold insurance.” Remember, a coop is not a real property like a condo or house. Instead of a deed for real property, co-op apartment purchasers receive a proprietary lease.

The stock certificate describes the number of shares they own in the coop. Therefore, the proprietary lease allows the buyer to occupy their apartment. As we already explained, co-op owners are somehow tenants.

Technically, owners are shareholders of the co-op that is the landlord of the entire apartment building.

Is Co-op title insurance even worth it?

Yes and no. Technically, Co-op shareholders do not own their homes.As a result, title insurance would not be legally valid. The co-op may have a standard title policy on the building, but it would not cover shareholder interest.In the 1990s, the Title Insurance Rate Service Association (TIRSA) created various rules to protect co-op shareholders. Those rules were called “leasehold title insurance.” The purpose was to ensure the shareholder’s interest in the proprietary lease.At the time, those TIRSA policies were not widely applied. That changed in 2006 when First American Title Company created a title policy for co-op shareholders.

Title insurance: what does it cover for coops?

Co-op title insurance protects purchasers from liens on the property missed by the title search. It also protects the lender and the buyer against loss and legal title insurance required for Coopsexpenses from any claims on the ownership interest. This insurance guarantees that the seller transfers the title to the buyer “free and clear.”

Furthermore, co-op leasehold insurance ensures that the coop was duly formed and holds title to the building. This insurance also protects against any missed liens imposed by the co-op (delinquent HOA assessment).

Finally, the co-op title insurance covers the legal for which there is no limit. No maximum limit exists on how much a title insurance company may spend to defend the purchaser & policyholder.

As a rule of thumb, title insurance companies spend as much on legal defense costs as on claim payments.

How much does coop title insurance cost?

A co-op leasehold insurance policy typically costs about 0.30% of the purchase price, and this premium includes a sliding percentage and a fixed fee. This is cheaper for a coop than a condo or house (generally between 0.40% and 0.50%).

There are cheaper alternatives for buyers concerned about liens than claims, such as the UCC insurance policy. This costs 0.10%, includes the co-op lien search fee, and provides coverage up to the purchase price.

Title insurance is not required for co-ops as the co-op lien search provides some protection.

A buyer’s attorney typically orders a lien search for any transaction, even if the buyer does not intend to purchase co-op title insurance. Attorneys are looking for open liens against the seller, the shares and lease, and the coop itself.The title company is likely to discover all open liens. However, if the due diligence missed an open lien, the co-op lien search fee covers the buyer with a cap of $50,000. However, that does not cover anything above $50,000.

The market value rider

Co-op title insurance only protects the buyer against the property’s purchase price. The market value rider is a feature that co-op apartment buyers can purchase, and this additional insurance protects buyers up to the property’s total market value.Buyers pay for that extra insurance if they expect the home’s value to increase. Market value rider typically adds 10% to the bill of the title insurance premium. An appraisal is completed to certify the home’s market value in the case of a claim.

Regulating Title Insurance Rates

There is a commonly-held belief that the state sets title insurance rates. This is not entirely true. New York permits insurance companies to set their rates as a cartel, and regulators allow the industry to submit those rates for approval to the State Department of Insurance.In the past, the New York State Insurance Commissioner has not accepted the rates set by the industry cartel and forced them to lower the rates.Additionally, the law permits any title insurance company unhappy with the rate schedule to set its rates.

When is title insurance required for Coops, or necessary

  • Co-op title insurance remains rare in NYC.

Title insurance is required by lenders when buying a condo or a house with financing, and it is widespread, even for all-cash deals. However, we do not see it too often in co-op apartment transactions, and mortgage lenders don’t require borrowers to utilize a mortgage to get a leasehold insurance policy.

However, real estate attorneys don’t push buyers to get them either. Therefore, we recommend buyers pay for co-op title insurance in a few unique, risky cases.

  • When it’s an estate sale

An estate sale is messy, and having a clear title may not be as simple as a regular deal. For example, the trustee may not have identified all beneficiaries. Another example: a brother has taken over the sale process but did not get written consent from his sister. The sale may go through without the sister’s permission, which is a significant risk.

  • If the seller has lost the shares stock and lease

For Coops, the seller must physically give the original stock certificate and proprietary lease to the managing agent. The latter will cancel them at closing, reissue a new stock, and lease to the buyer. However, this can be an issue if a seller loses their stock and lease.

The managing agent sometimes asks the seller to cover the cost of co-op title insurance to protect the management company in case of any potential future disputes.

In this case, the seller will pay for the insurance covering the managing agent’s risk. In parallel, if the purchasers want to protect themselves, they must pay for the insurance.

  • When it’s a foreclosure

This situation entails higher and more specific risks. Previous owners could complain that the co-op foreclosure process was improper. This increases the risk since the co-op foreclosure process is non-judicial, and co-ops do not need to go through a court process to foreclose.

  • When the buyer’s attorney is from out of town

The third situation where we recommend buyers to get co-op title insurance is if the buyer has an attorney from out of town. We saw closings where a seller’s attorney had no idea what a co-op is. This situation is not entirely surprising, considering co-ops are a very NYC concept.

Written By: Georges Benoliel

Georges has been working in Wall Street for the last 16 years trading derivatives with hedge funds. He has been an active real estate investor for over a decade. Georges graduated from HEC Business School in Paris and holds a master in Finance from ESADE Barcelona.

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