- Title companies affiliated with large real estate companies often charge higher fees.
- While there are cut-rate fee title companies, the most important thing to look for is quality of work in creating a sound closing for you.
- Title insurance is recommended (and it is recommended over an attorney's opinion -- if that attorney goes out of business, there is no enforcement on that opinion).
- Don't lose your owner's title insurance policy!
- Keep your abstract in a safe place -- it has historical value even if no longer updated.
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What does a title policy do and what is a title company (closing company)?
The purpose of a title insurance policy is to insure that the title to the property being purchased is clear, and there will be no surprises that would challenge the new buyer’s ownership. A closing company makes the bulk of its money from the title insurance policies it sells, although there are other fees it charges. The title to a property is researched, such that the title insurance it sells is a hedged bet that there will be no problems with the title it insures.
A closing agent I know estimates that about 1 in 10 or 20 title policies end up being used. She says that about half of the properties that come across her desk have a minor title defects, and about 1 in 10 have significant issues (some of this she says is due to the increased number of foreclosures recently). After a policy is out the door, it often ends up being used in new construction, where the construction liens were recorded late or not cleared. In 2012, according to ALTA, the industry paid out about 8.1% percent of the money taken in as premiums (information from Wikipedia, http://www.alta.org/industry/financial.cfm).
Title insurance ends up being used for reasons such as:
- an old mortgage that was not recorded as satisfied (paid in full);
- divorces affecting the ability to render clear title (one spouse may not have signed off on the deed);
- tax or mechanic’s (laborer’s) or materials liens that are still tied the home;
- outstanding judgements tied to former owners, etc.
How does Title Insurance Work?
The deed is the written document used to transfer the title from seller to buyer. As soon as possible after the closing, someone from the title company takes the deed and other documents to be recorded to the county office. The county recorder assigns each document a number and records the time. A copy is made for the county file. The real estate transaction is now part of the public record. If a buyer loses their deed, a copy can be obtained with the county.
Your title insurance, on the other hand, is a different issue. DON’T lose your owner's title insurance policy! If you need to use it, it may be hard to track it down the policy number and company after several years, as many companies merge or split or go out of business, and real estate companies in Minnesota are only required to retain records for 6 years.
But here are few suggestions: Call the title company if you remember who they are; look on your HUD-1 for the name of the company; call your lender for the name of the company (the lender will only have a copy of the lender’s policy); call the real estate company; or look up your deed at the courthouse to find the name of the title company there.
After the closing the buyer will receive a copy of their deed and title insurance policy (this can take 3-6 months, see photo to right for a copy of a cover letter I received with my deed and title insurance policy). If you have a copy of your owner’s policy, most purchase agreements state that you will give a copy to your buyer's title company, along with the abstract. But apparently the copy of your title policy won’t create any reduction in fees for them.
If a buyer purchases an owner’s policy, it will insure the buyer up to the amount of money they have paid for the property. Title companies do not sell policies for more than the amount paid for the property; but there are title companies (such as Old Republic Title) which do issue policies that increase 5% over the next 5-10 years.
Example: If you buy a property for $100,000, and a title defect arises, such that a court finds that someone else legitimately has title to the property, then that person would be given ownership of the property, and you would receive $100,000 in compensation. If the market value of the home at the time you lost possession of the property was $300,000, (and you had a policy which did not offer an increase in face value) you would still only receive $100,000 in compensation.
Typical Title Insurance Fees
Settlement or Closing Fee
This is the fee for coordinating everything required to close, and for doing the actual closing. This fee is charged both to the buyer and to the seller.
Licensed Closing Agent (Required to have a real estate closer license, insurance producers license, and notary license.)
Abstract or Title Search
The abstracting process is the researching of all recorded information about the subject property.
Licensed Abstractor or Attorney
This is a review of all information produced in the abstracting process and the preparation of the title commitment
Licensed Title Examiner
Document Prep Fee
This may be charged for such things as pre-signing or temporary power-of-attorney, but you may want to qualify this charge if it appears.
The Role Played by Attorneys
Underwriting companies, such as Old Republic Title, are the companies that insure the policies being offered. Underwriters work in conjunction with attorneys as needed to assure that policies being offered are reasonably free and clear of defects and potential future issues.
How a Closer Gets Paid
A title company typically charges a closing fee, abstracting fee, and title exam fee. They also sell title insurance policies to the lender and buyer, and keep a percentage of the policies they sell as a form of commission. Your closing agent does the paperwork and coordinates all processes for the title to your property to be clear. Then once the closing happens the title company receives the fees and commission. If you do not intend to buy a title insurance policy, they may charge you a flat fee or refer you to an attorney for the closing.
There are a variety of pay structures for closing agents. Some larger title companies, such as those that work with large real estate companies, typically offer salaried positions. Some companies offer closers a flat fee for each closing, such as $200, and the company keeps their percentage of the title insurance policy for themselves (this can be as much as 85% of your title insurance policy). Some companies offer a more generous commission structure, such as the title company keeps the closing fee, but gives as much as 85% of the title insurance premium to the closing agent.
If we add the amounts of commission and settlement charges that are paid to the closing company, it adds up to perhaps 0.25% of the sale price of your home.
As an example, for a $275,000 property:Your actual closer receives perhaps ¼% to ⅛% of the sale price of your home. Depending on the pay structure, they may receive as 10-50% of your closing costs as a paycheck.
Total amount of the insurance premium to title company
(In this example, there was $963.80 total paid for title insurance policies. This means 85% of the premium goes to the the title company, 15% goes to the underwriting company)
Gross Total Paid to Closing company
Sale price of property
Percentage of sale price paid to closing company
How to Select a Good Closing Company?
Just because a company is cheaper does it mean it is better?
Not necessarily. As a buyer or seller, the most important thing to you is typically:
- Having clear title,
- Having all documents properly recorded,
- Receiving your title insurance in a timely fashion,
- Being able to close when you want,
- Having your phone calls returned. etc.
The title insurance industry can be a stressful business, because the closing agent has to pull together clear and marketable title by the day of closing. The closer may not be able to locate an ex-spouse in another state who is needed to sign off on a deed, so the closing won’t be able to happen until they get that signature. The lender may not provide the information until the last minute; checks may arrive late, etc. There is much riding on the line, and a good closer will work with all parties -- your agent, your lender, etc -- to ensure that everything comes together and you close the day you want.
“Controlled Business Arrangements”
These are businesses that are owned by a common corporate parent, such as a real estate company owning a lending company or title company. Studies show that most people feel that there is a conflict of interest in these type of controlled business arrangements, and that when they are made fully aware of controlled arrangements, they prefer a title company to be a third party (i.e., independent) to the transaction. Most people are unaware that they may select their own title company. (Information from a survey from the Ohio Association of Independent Title Agents (OAITA), conducted from 2009 through 2010. There were other studies that showed otherwise, but I was unable to determine who paid for the studies),
What do you look for in a good title company?
The most important thing a title company can deliver is called marketable title -- they are insuring that the title you receive is clear and free of defects. And they deliver this the day you want to close.
A title company that is poorly run can mis-deliver in several areas, such as:
A title company that is poorly run can mis-deliver in several areas, such as:
- Failure to deliver clear title
- Failure to record documents
- Failure to issue title insurance policies in a timely fashion
Your Rights as a Buyer or Seller
You have the right to choose your own title company. It is not necessary and it may not be in your best interest to use the title company of the other party, or even one selected by your agent. A third party title company is independent to the transaction, and is therefore better able to look out for your interests.
If you do go with the other party’s closing company, you may wish to ask: “What’s in it for me? If I go with you, what can you offer me as an inducement to close with you? How about you pay for my owner’s title insurance policy?”
As an example, I bought a foreclosure from Fannie Mae. At the time I didn’t know much about how closing companies worked, and I used the title company who was chosen by Fannie Mae. The closer never returned my calls. The house didn’t close the day it was supposed to, and when it did, someone else closed (this made me ask: What happened to the original closer?) This company overcharged me in the Abstract Fee:
Settlement or Closing Fee $250 Abstract or Title Search $375 (typical cost $150-210) Title Examination $150
At a closing of another house I bought, the seller’s closer charged the seller a $200 Doc Prep Fee. This was a bogus fee, as there was no pre-signing or power-of-attorney or other element occurring. The seller was someone unable to discern and question fees, and my closer could see this was a bogus fee.
The Role of a Real Estate Agent
A good real estate agent will know a good closing agent to refer you to, one who has done many sound closings before, and will get your home closed ethically and successfully. I have great closing agents I work with, and can offer referrals if necessary.