Buying or selling a home isn’t as simple as exchanging money and signing a few documents. There are also property rights that need to be transferred between the seller and the buyer. That’s where a title company comes in.
What does a title company do? Plenty. In addition to conducting a title search and offering settlement services to help close the transaction, a title company also provides title insurance to the home’s new owner and the mortgage lender. Here’s what you need to know.
What is a title company?
A title company (aka a title search or a title insurance company, depending on the extent of their services) is a third party involved in a real estate transaction. It’s independent from the lender, the buyer and the seller.
During home sales, a title company is primarily responsible for transferring the property rights from one owner to the next, explains Justin Nepola, a real estate attorney in Hollywood, Fla. — and clearing the path for the process to proceed. “They make sure there are no encumbrances on the home’s title and that the seller is the legal owner of the property,” Nepola says.
|TYPICAL TITLE COMPANY SERVICES|
|Title search: identifying the true owner of the property|
|Holding escrow funds|
|Doing property surveys|
|Issuing title insurance|
|Preparing closing statements/overseeing the closing|
First and foremost, as its name implies, a title company ensures that the home’s title — a legal term that includes all of the rights, uses and privileges associated with ownership of the property — is clear of defects, or things that could impact the buyer’s use of the home.
According to Patti DeGennaro, chief implementation officer for Title Alliance, Ltd., a Media, Penn.-based title company, common title defects that a title company can root out and help you fix include:
- Fraudulent transfers
- Unknown heirs
- Prior unpaid taxes
- Wake-up court judgments
- Prior mortgages
- Restrictions such as rights of ways and easements
What does a title company do?
To check for these and other issues, the title company performs a search of public records or transaction history for the property and its title. The company also verifies who has the title to the property, as well as the “quality” of that title (meaning if it’s “cloudy,” as opposed to being owned free and clear).
“This is important to ensure that the buyer is taking actual title to the property from an actual property owner or someone who is authorized to convey title on behalf of a property owner, such as through power of attorney or an estate,” notes Rajeh Saadeh, a real estate attorney in Somerville, New Jersey.
Saadeh adds that these services are often ordered by an experienced real estate attorney on behalf of a buyer instead of by the buyer directly.
Title companies also assist during the closing process by providing settlement services, such as facilitating escrow or document notarization or recording the deed with the county, says Ben Heller, a real estate attorney with Zweibeck, Fiset, and Coleman, a Los Angeles-based law firm.
“Settlement services commonly involve the title company acting as a neutral third party to assist buyers and sellers in closing the transaction, or the title company can be enlisted by the buyer and seller to help conclude a loan transaction,” Heller says.
Lastly, title companies offer title insurance that protects the mortgage lender if title issues surface, and also potentially the buyer, depending on the policy. Imagine, for instance, if you bought a home but later learned that someone had a legal claim to the property due to a court settlement that was undisclosed before you closed on the home. Scenarios like this can come back to haunt you if you lack title insurance, especially if your purchase agreement didn’t include a warranty deed protecting you.
What is title insurance?
Issuing title insurance is one of the most important functions a title company serves.
“Title insurance is the only form of insurance that insures the past up to the present day,” Nepola says, “and it’s a one-time fee that protects the owner for as long as they own the property.”
There are two kinds of title insurance policies:
- Lender’s policy – A lender’s title insurance policy “protects the lender against any title defects that may affect the security of the mortgage loan,” DeGennaro says. “This policy is based on the amount of the mortgage, and it decreases as the mortgage is paid off.” Virtually all mortgage lenders require this type of policy.
- Owner’s policy – An owner’s title insurance policy is not always required, but it’s strongly recommended to homeowners as a way to safeguard against future claims to the property. “Even if the lender has a title policy, the buyer still needs an owner’s title policy to protect his or her interests,” DeGennaro says. “Coverage lasts as long as the buyer or the buyer’s heirs have an interest in the property.”
How much do title company services cost?
Title services usually start around $1,000, but can exceed $1,500. The cost often depends on the extent of the services required, such as if probate or foreclosure searches are needed, according to Saadeh.
The cost of title insurance is usually regulated by your state’s Department of Insurance, which ensures that the cost is the same no matter which title insurance company you choose — although what you pay depends on the coverage amount you select.
In general, costs come to $1,000 for an owner’s policy and $1,000 for a lender’s policy. “In most states, the buyer pays for title services and title insurance,” Saadeh says. However, the buyer and seller can choose to negotiate who will pay for these services before the sales contract is signed.
How to choose a title company
Title companies are often recommended by the buyer’s real estate agent, lender or real estate attorney involved in a particular home sale. But you are not required to select the title company referred to you.
“Ask around for multiple recommendations, and spend time researching and speaking with each company,” advises Nepola. “Find out their rates and all the fees charged, and check online reviews carefully.”
In addition, prepare to ask the title company:
- How long have you been in business?
- Who is your underwriter?
- How much liability insurance do you have?
- What is your ratio of title claims to customers?
- Have you had any claims?
- How do you protect against ecrow fraud?
- What are some challenges you’ve encountered during title searches, and how did you resolve them?
- How long will the title search process take, and who will be conducting the title search?
- How much title insurance coverage do I need and why?
“Try to choose a title company based on the answers to these questions, as well as its customer service, reputation and familiarity with other professionals involved in the transaction — including and especially your real estate attorney,” recommends Saadeh.