The Investor Friendly Title Company
By Jeffrey S. Watson
In my practice of helping real estate investors, particularly self-directed IRA investors, hardly a week goes by that I don’t hear or read the phrase “investor-friendly title company.” When I do, my head often cocks to one side, like a dog who hears or sees something he just doesn’t quite understand. Here are several thoughts I have for those who use that phrase.
Are you seeking an “investor-friendly title company” because you are attempting to do something outside the norms of commerce? The answer is probably not. Very little that an investor does is novel. It’s much more likely that you are seeking an investor-friendly title company because you have been told to do that or are looking for a title company that will help you understand how to close the deal you think you have.
Allow me to remind you that all title companies are not created equal. Please understand that for the sake of this article, when I use the term “title company”, I’m referring to title and escrow operations as well as law firms that perform the same functions. Title companies can be set up and operated in different ways. Some of them are insurance agencies actually representing multiple title insurance companies, such as Fidelity, Old Republic, First American, Stewart, etc. Some of them are direct insurer-owned companies.
My perception regarding title companies has been significantly influenced due to the long-term relationship I have with a local title company, of which I own a very small piece. Any title company can be investor friendly when you understand what they do and how they work.
Title companies do two different but important things. First, they provide real estate title examination services to gather enough information so that a large, multi-billion-dollar company will insure that the property ownership records are valid and that marketable, insurable title is being transferred from the seller to the buyer. That means a title search needs to be done to determine what, if any liens, encumbrances or clouds might be on title and would impair the ability of the buyer to receive what we would ideally call “fee simple absolute title” but is now usually referred to as “marketable, insurable title.” For title companies to do this, they need to engage in an extensive search of public records relative to that specific piece of property and relative to the transaction and financial history over the past 50 or so years on public record of the previous owners. Factors that can impact the title to a property would include things like unpaid taxes, marriages, deaths, divorces, unpaid water and sewer bills, pending lawsuits and civil judgments.
All this information is put together by the title company in something known as the “Title Commitment.” This document indicates that once the various listed requirements and stipulations are completed (like payoff of the lien and signing the deed), they would be able to insure the passage of title from the seller to the buyer. Those stipulations are often called “exceptions.”
When it comes to choosing a title company, it doesn’t matter how friendly or grouchy the title examiner or title clerk is. You need to look for a title company that has the necessary resources to do the job in a timely manner. The best way to do that is to find out for how many insurers this particular company can insure. I like to work with title companies that have the ability to write insurance with more than one of the major national title insurance providers. Ask your contact at the title company who their underwriters are, and which one they prefer working with and why. You also want to ask questions regarding time frames. Ask how long it takes for them to do the title exam and how quickly they can get the title commitment to you after it is prepared so you can review it. If you don’t understand what is in that commitment, you need to have an attorney on your side review it and help you understand it.
The second important thing a title company does involves the escrow portion of their work. In simple terms, the escrow portion is when they gather all the necessary documents and all money needed to complete a transaction. This requires working with the seller, buyer, and the buyer’s lenders. Many times, those transactions are driven and controlled by the lender(s) who are funding the buyer in the acquisition of the deal. Remember, the lender is not going to put their money into the deal using the property as collateral unless they are satisfied that the quality of the title to the property and other things are satisfactory. A good lender is going to make sure the property is in good condition, is properly described in all legal records, will be vested in the name of the borrower/buyer without any other liens, and that the borrower/buyer is able to make the payments on the property.
It’s my belief that most people get confused about what a title company can do because of the coordination of all the various loose ends that have to come together through the escrow process. This can also cause confusion for the title company as well because they might be getting contradictory information from the representatives for the parties involved. That never happens, right?!
Confusion can also occur over what the lender is willing to do and permit versus what the borrower/buyer wants to do. When this happens, the lender will win 99.9% of the time.
The bottom line is that all title companies are “investor-friendly” if you know what you are doing and can explain to the title company how you believe the deal should go forward. In the course of my transaction work for IRA account holders who are funding deals, I write closing instructions, a detailed 2-to-3-page letter to the title company explaining, from the lender’s perspective, how this deal is going to happen and what documents need to be signed in what order and by whom so that the identified buyer can buy from the identified seller.
Having a title company be investor-friendly is all about communication. You must take the time to put it all in writing that others will understand. All too often, however, we think someone else is going to do the communicating. You may have heard me say that to be unclear is to be unkind. On my laptop, I have a sticker that reminds me to “abundantly communicate” and make sure everybody has been informed of any changes and adjustments. I then “backbrief,” which lets me know that communication has actually occurred. I have lost track of how many times someone has admitted that they “forgot to tell the title company that.”
Clear communication with a title company begins with the most important, fundamental document: the purchase and sale agreement. That document will be used by the title company to open a file and ultimately open escrow. The purchase and sale agreement will lay out the terms of the deal including who the buyer and seller are, how much is being paid for the property, how the purchase is being funded, and, most importantly, when the sale is going to close. I honestly believe it is a coin toss as to whether real estate agents or investors do the worse job when it comes to filling out a purchase and sale agreement or contract. This is frustrating to a well-run title company because they have systems and processes in place for what they do when they receive a purchase and sale agreement. If you have incomplete information as to the identity of the parties and their contact information, it makes it hard for the title company to contact people to get the necessary details regarding that transaction.
To help your title company be investor-friendly, there are two things you can do. First, take your time and fill out the purchase and sale agreement from the perspective of someone who knows absolutely nothing about the deal. They should be able to read that document and have all the information necessary to understand exactly who is buying, who is selling, what is being transferred, and how and when that will happen. Secondly, write out your closing instructions. What are your expectations and understanding of the deal? Make that clear by overcommunicating in writing to the title company, remembering that when you overcommunicate everything you are thinking, you are being kind to them because your communication is clear.
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Jeffery S. Watson is an attorney who has had an active trial and hearing practice for more than 25 years. As a contingent fee trial lawyer, he has a unique perspective on investing and wealth protection. He has tried over 20 civil jury trials and has handled thousands of contested hearings. Jeff has changed the law in Ohio four times via litigation. Read more of his viewpoints at WatsonInvested.com.