The Role of a Real Estate Title Company
As if real estate wasn’t confusing enough. Just when you think you have a handle on all the professionals and the organizations, along comes someone or something else to let you know there’s always more to learn.
One of these items is knowing what a title company is and what they do in a real estate transaction.
For example, yesterday, I was asked by a reader who felt they were reasonably well informed, what is a title company and what does a title company do?
A title company is a third party that is hired by a mortgage company to ensure that a home’s title is clean with no encumbrances. They provide research and insure the title to the home a buyer is purchasing, along with managing the closing.
A real estate title company conducts a title search. Title searches ensure that the seller has the legal right to sell the property without title issues.
The search also shows unpaid taxes, real estate liens, or other problems that the buyer should be aware of. A clear title is a requirement for a real estate transaction to go through properly.
Mortgage lenders require a title search to not only protect their interests but to give the new owner peace of mind there are no title defects.
On some occasions, the title company may also act as the closing agent and the escrow agent. Let’s take a deep dive into everything a title company does for both a buyer and seller.
The services of a title company provide comfort to all parties the closing process will go off without a hitch,
What is a Title to a Property?
Before we cover what a title company does it will be important for you to understand what a title is and is not. Your title is not your deed which people often confuse.
The title is a document that says you have ownership rights to the property. When you are part of the title you’ll also sign documentation related to the mortgage, whether you are on the loan or not.
In states where there are community property rights, you may have to sign the documents whether you’re on the title or not because there are ownership rights passed to a spouse.
Some states may allow you to waive your spousal rights if you want to keep your house separate during the time of marriage.
A deed on the other hand is a legally document signed at closing to transfer the property from one person to another. The title and the deed are two of the most important closing documents that will be signed for a home sale to occur.
First Steps in What a Title Company Does
When you begin looking for a new home, it’s reasonable to assume that they have the ownership rights to do so.
if someone is selling a propertyUnfortunately, before the use of title companies was standard, some people would sell homes that they either did not own at all or against which there were liens, additional mortgages, or other legal issues.
In addition, some owners may have sold their property without knowing there were issues. In every case, the buyer and the buyer’s lender ended up out of pocket.
Enter the title company.
A title company extensively searches public records related to the home you wish to buy. Doing so is referred to as a title search. You might look at this as a search on the history of a house. The title company does this to ensure the seller has the legal right to sell the property and that there are no full or partial claims which could affect your ownership.
Part of what a title company does is due diligence to provide the mortgage company and property owner a clear title. Just like a home buyer does real estate due diligence, so will the title company.
It is always possible the review of the history of the property could reveal untold problems. Without a detailed search of public records, issues are likely to go unnoticed. In today’s real estate world property titles are reviewed thoroughly.
Preliminary Title Report on a Property
When escrow is opened on a particular home there will be a preliminary title report generated. The title report will include the owner’s name, the legal description of the property, and any listed exceptions to the title policy. An escrow officer will be assigned to the file and will be able to answer any necessary questions.
Unpaid Property Taxes Can Be a Problem
Property taxes are not attached to the person living in a home; they are attached to the property itself. It is then the responsibility of the legal owner to pay the taxes. If you were to buy a home where the current owner had unpaid property taxes, once the house became yours, the debt would also become your responsibility.
This is one of the significant reasons why purchasing a home at auction can be troublesome. You essentially inherit all the warts associated with the property. A title company will inform the mortgage company if there are unpaid taxes related to the property.
Unpaid Homeowner Association fees
When you purchase a condo or a townhouse, it is almost a certainty there will be an HOA you’re buying into. Homeowners must pay fees for services such as landscaping, insurance, and other amenities such as swimming pools and tennis courts. The HOA fees cover the use and maintenance of such amenities.
Each homeowners association has different rules, so it is always essential to read through those rules and regulations before making a legally binding offer on the home. On occasion, it is possible a home seller has not paid their HOA dues.
There may not be an issue, in some cases but in others, you may find the debt falls to you, or the HOA holds up the sale until the current owner settles the debt.
Special Assessments Are Possible
When an HOA does not have enough money in its reserves to cover a significant expenditure, it will levy a special assessment. This is a one-off amount that each member of the HOA must pay. Although some special assessments may be small, even just a few hundred dollars, they have been known to run to $50,000 per person or even more.
If you purchase a home during the process when an HOA levies a special assessment, you could find yourself with an unpleasant surprise payment. Doing your due diligence as a home buyer is a critical exercise. It’s essential to ask a lot of questions when buying a condo with a homeowners association.
The Title Company Could Find Legal Judgments
When the title company is looking over the property’s title, they could certainly discover outstanding issues such as an unpaid debt.
In some situations, when a homeowner has a judgment made against them in court, and they do not make their required payments, a lien will be placed against the property.
This means that if the home is sold, the current owner must pay off the money owed via a judgment, either before, the sale can be completed or at closing. This creates complications that can delay or even entirely scupper the deal.
The Title Company Could Discover Other legal issues
It is not unknown for a title search to turn up; a forgotten will that changes the legal ownership of the property, previously unknown mineral rights, unknown or undisclosed heirs, deed with mistakes that affect the property, and many, many more issues.
What Does The Real Estate Title Company Do Next?
Once the initial search is complete, the real estate title company may ask for a survey of the property to be carried out. The land survey will be done to ensure the boundaries of the property are where you believe them to be and that the structures on the land are entirely within those boundaries.
As part of this property survey process, the company will also check to see if any neighboring properties are encroaching on the property you wish to buy. They will also check to ensure that no part of “your” new property encroaches on that of the neighbor’s.
If any encroachments exist, the real estate title company will look to see if the infringement has been previously identified, whether any easements have been agreed upon between the existing owners, and what impact this may or may not have on your ownership and enjoyment of the property.
Not all properties require this step, and not all real estate title companies commission a survey. If a survey of your property does not take place, your title company will go straight to the next step.
Obtains The Abstract Of Title
Once all of the research information has been obtained, and the real estate title company is happy they have discovered everything there is to know, the company will go ahead and issue what is known as an Abstract of Title.
The title abstract is a summary of everything they have found during their title search. It contains the basic history of ownership and any issues that may have been discovered.
This abstract is a “first draft” of the official title information, and it is issued so that the sale of the home can move forward.
Why?
Most lenders will not move forward until they are re-assured that there is a free and clear title on the home in question.
Not only that, but no potential buyer wants to pay for house appraisals, home inspections, and all of the other home-buying costs, only to find out at the end of the process that they will not be able to close because of a title issue.
The Abstract of Title ensures the sale to move forward before the full Title Opinion Letter is issued.
Formulates The Title Opinion Letter
Once the real estate title company has issued the Abstract of Title, they will do some final double-checking, wait for confirmations or copies of documents, etc. and then issue a Title Opinion Letter.
This letter is legally binding and confirms, for all parties, the information found in the title search. It usually contains the same information as the Abstract.
Title Insurance Is Vital in Real Estate Transactions
Once the Title Opinion Letter is issued, the real estate title company will also issue title insurance. This policy protects the buyer, and the lender should any legal proceedings arise around the ownership of the property in the future as a result of something missed by the title company.
There are two types of title insurance policies. They are a lender’s policy and an owner’s policy. The lender’s title insurance policy is a requirement and must be paid for whenever a home loan is being granted.
Owner’s title insurance is optional but highly advisable. If you speak with any real estate attorney or real estate agent they will tell you how valuable an owner’s title insurance policy can be.
The owner’s title policy is a one-time fee that covers you for as long as you own the property.
When you think about the potential problems that can be avoided in the future, the cost of title insurance is relatively cheap in the grand scheme of things. If you opt for the owner’s title insurance it will be rolled into your closing costs.
I would highly advise any buyer always to purchase title insurance. Not having title insurance could result is serious financial losses.
The Title Company Will Underwrite and Issue Title Insurance
The title company will assign the title insurance company. There are four major title insurance companies including:
- First American Corporation
- Fidelity National Mortgage
- Old Republic National Title Insurance Company
- Stewart Title Guarantee Company
There are also several smaller regional companies that write title insurance policies. The above companies are the largest and trade on the NY stock exchange. It goes without saying that having a reputable title company in charge of your transaction is vital.
How Much Will Title Insurance Cost?
The cost of a lender’s policy averages around $550 nationally. If you choose to get an owner’s title insurance policy the average cost for that is $850. Putting these two title insurance premiums together and you are looking at spending on average of $1400 to have title insurance.
There are several factors that can influence the title insurance costs including the loan amount and purchase price of the house. A larger mortgage would would mean a more substantial insurance claim in the event there is a title problem.
Title insurance premiums can also be affected by your location, whether you have a good credit score or not among other factors. The cost of the title insurance will appear on the closing disclosure along with other legal fees, loan terms, monthly payments, etc.
You should also see it on previous loan documents given by your lender.
What is a Title Insurance Committment?
A title commitment is the title companies blessing that they will issue a title insurance policy on the subject property being purchased. The title process will be complete at this point. Your new home’s title should be clean.
Other Things a Title Company Does
While all real estate title businesses will carry out title searches, some companies will take on additional roles during the purchase process. The other things a title company does include the following:
The Title Company Can Be The Escrow Agent
Your title company may also act as the escrow agent for the sale. In this role, the company will open, monitor, and maintain the escrow account into which the earnest money will be deposited.
The earnest money deposit will ensure the buyer cannot withdraw from the sale, without proper reason, and take their earnest money, leaving the seller high and dry. Typically, if there is a dispute between the parties, an escrow agent is required to hold the funds until a mutual resolution is reached.
Deposit disputes are normally resolved either through an arbitration process or through the courts. In some states, the real estate broker representing the home seller will hold the deposits and not the title company. The seller’s real estate attorney in some circumstances holds the escrow deposit as well.
In these circumstances having escrow companies involved is avoided. The funds are duly accounted for at the real estate closing as part of the HUD settlement statement.
Title Companies Might Be The Closing Agent
Real estate title companies are frequently engaged to also act as the closing agent or settlement agent for a sale. In this role, the real estate title closing company will appoint one person from the company to serve as the closing agent.
This person is a neutral party and is responsible for:
- Organizing the closing meeting(s) at the appropriate time in the sales process.
- Compiling all of the relevant sale documentation and distributing copies to all parties before the closing meeting.
- Confirming the financing details of the sale with the lender.
- Receiving all payments and documents involved in the sale.
- Making sure all non-financial agreements made between a particular buyer and seller are adhered to.
- Ensuring payments are distributed in the correct amounts to the right people at the correct time.
- Obtaining all of the signatures on the sale documentation and distributing copies to all parties.
- Registering the new deeds and other applicable items at the land registry office.
It makes sense for many real estate title companies to provide these services. They are already involved in the sales process, they will have become familiar with the details of the sale and the people involved, and they will have already produced much of the paperwork.
If the title company you choose does not act in any other capacity, they are still responsible for registering the new title deed at the land office.
To do this, they will liaise closely with your escrow and closing agents to ensure documents are available before closing and that the new deed is registered at the correct time.
Some States Use Attorney’s For Title Searches
It is essential to note that some states do not use title companies the evaluate whether a title is clean or not. Instead, the buyer’s lender assigns the title to be checked by an assigned real estate attorney. The attorney does the title “run down,” just like a title company would.
Quite often, the buyer’s attorney and mortgage companies attorneys are one and the same. The legal firm assigned to the file is there to protect the buyer’s interest in the property. Typically, a title search will go back fifty to sixty years to make sure there are no defects.
Final Thoughts
As you can see, there is much more to a real estate title company than carrying out a quick search. They are a critical piece of the property sales puzzle, protecting the interests of both buyers and sellers during one of the most stressful and financially significant times of their lives.
Hopefully, the information shared on what the title company does will be helpful in your home buying journey.
Other Helpful Real Estate Resources
- What’s the difference between contingent and pending – in real estate sales, several terms can be confusing to buyers and sellers. Two such terms are “pending sale” and “contingent sale.” See the factors that distinguish these two real estate statuses.
- How to avoid walk-through issues – when buying or selling a home, one of the most essential aspects to complete the transaction is the final walk-through. Take a look at the excellent information on how to avoid issues before you make your way to the closing table.
- Small improvements equal significant returns – when you are selling a home investing a little bit of money into your property can translate into big returns. Not only that by investing a bit of money, your property will sell a whole lot quicker.
- Why is selling for sale by owner so difficult – there are many folks who try to sell their property without a real estate agent. Doing so is certainly not easy. The success rate is meager. Find out why in this informative article.
- What to know about real estate appraisals – when buying and selling real estate, the appraisal is an integral facet. See some helpful advice on what you need to know about the appraisal process.
These resources offer excellent advice when you will be buying or selling your next home.
About The Author: The above article on what a title company does was written by Geoff Southworth. Geoff is the creator of RealEstateInfoGuide.com, the site that helps new homeowners, investors, and homeowners-to-be successfully navigate the complex world of property ownership.
Geoff is also a real estate investor of 8 years and has had experience as a manager of a debt-free, private real estate equity fund, as well as a Registered Nurse in Emergency Trauma and Cardiac Cath Lab Care. As a result, he has developed a unique “people first, business second” approach to real estate.
Good stuff, Bill!
Thanks Judy. I find lots of folks have no idea what a real estate title company does.