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 all of the organizations, along comes someone or something else to let you know there’s always more to learn.
For example, yesterday I was asked by a client who felt they were fairly well informed, what does a real estate title company do?
A real estate title company conducts a title search. This makes sure that the seller has the legal right to sell the property. The search also shows if there are unpaid taxes, real estate liens, or other issues that the buyer should be aware of. A clear title is a requirement for a real estate transaction to go through properly.
On some occasions, the title company may also act as the closing agent and the escrow agent.
First Steps in What a Title Company Does
When you begin looking for a new home, it’s reasonable to assume that if someone is selling a property, they have the right to do so. Unfortunately, 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, it was the buyer and the buyer’s lender that ended up out of pocket.
Enter the title company.
A title company carries out an extensive search of property records related to the home you wish to buy. The 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.
Unpaid property taxes
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 yours.
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.
Unpaid Homeowner Association fees
Each homeowners association has different rules, so it is always essential to read through those rules and regulations before you make a legally binding offer on the home.
In some cases, there may not be an issue, 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.
When an HOA does not have enough money in its reserves to cover a significant expenditure, they will levy a special assessment. This is a one-off amount that each member of the HOA pays.
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.
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 owing via a judgment, either before, the sale can be completed or at closing. This creates complications that can delay or even entirely scupper the sale.
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. This 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 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 is encroaching 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 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.
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 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.
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 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.
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.
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.
All lenders require the buyer to pay for their lender’s title insurance, and this cost is included in the fees you pay at closing. A buyer’s policy is not usually mandatory, but it is highly advisable.
When you think about the potential problems that can be avoided in the future, title insurance is relatively cheap in the grand scheme of things.
I would highly advise any buyer always to purchase title insurance.
Other Real Estate Title Company Services
While all real estate title businesses will carry out title searches, some companies will take on additional roles during the purchase process.
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.
This 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
Real estate title companies are frequently engaged to also act as the closing 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 to evaluate whether a title is clean or not. Instead, the buyer’s lender assigns the title to be checked by an assigned 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.
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.