Here in San Antonio (and Texas in general), we use title companies to close our transactions when selling and purchasing homes. The purpose of the title company is two-fold; firstly, to manage all the incoming funds and make sure all the appropriate parties receive the correct funds (and there’s a lot of parties – lenders, sellers, agents, insurance companies, surveyors, the tax man…the list can be quite overwhelming), secondly, the title company issues title insurance. Title insurance insures the property is being passed from one party to another without any encumberance. By issuing title insurance on the property, the title company is ensuring that if someone indeed does have a claim to the ownership of the property, they will cover the owners’ loss.
Buyers and sellers can negotiate who will pay for title insurance and also who will be chosen as the title company. There are actually two components to title insurance; the owners’ policy and the lender policy (each one protecting that party from possible claims of ownership of the home). If the seller pays for both portions of title insurance, they may pick the title company without fear of violating RESPA (the Real Estate Settlement and Procedures Act). However, if the seller is not willing to pay for title insurance, the buyer may negotiate to choose a title company and pay for the title policy.
There have been courts that have argued that when the policy is split into its two components (lender and owner) and the seller pays for the owner policy and the buyer pays for the lender policy, that the seller may still choose the title company. However, RESPA does not officially cover this position and the waters remain murky. It is best if the seller avoids any conflicts and a) chooses and pays for the title policy (both owner and lender sides) or b) let’s the buyer choose the title company and pay for their title policy. Often in the MLS a title company is written in as a preferred title company, but although the sellers and their agent might prefer it, as a buyer, you do not have to use their title company if you are paying for your title insurance (no matter what some agents might try and tell you).
In Texas, the cost of title insurance is regulated, so all title companies charge the same fees for the policy. Because of this, it really comes down to service and ability to perform the required tasks with efficiency and flexibility. Most agents work with several different title companies and closers and know who can best fit your personal situation and transaction, so ask your agent when buying or selling your next home who they know can get the job done and make your decision with that in mind.
image courtesy of kozumel
I had no idea that title companies could be so useful and versatile. There are many things that a small business can do better than a person, and visa versa. I’m glad that anyone can get a company, and that there’s a way for an average civilian to take advantages of the benefits offered by both private citizenship and small-business ownership. [Self Promoting Link Removed]
Title Companies are way too expensive! A policy should only be updated from the last sale…. having to search each sale to when God was a boy serves no purpose, particularly if you use the same title company.
Caroline – title insurance prices in Texas are regulated by the Texas Department of Insurance, every title company charges the same for title insurance. There are fees they can charge that can differ from company to company and levels of service can vary, but the actual cost of title insurance will be the same across the board. I spoke with one of my contacts at Chicago Title for some clarity on the issue of title searches (and will be writing a post about it later) and proposed a scenario: “If a title policy has been issued on a home when transferred from Owner A to Owner B and a title search is done going back all the way to when the earth was created, when Owner B goes to sell to Buyer C, why does the title search have to occur again? If I used Chicago Title in both instances, wouldn’t they only have to search the time period between Owner B and the date of the new purchase (because they already know the history of the property up until Owner B acquired it)? ” Here, in part, was their reply:
“Yes in a perfect world, a world without forgery, fraud, incorrect or false powers of attorney, incorrect legal descriptions, misfiled documents by the courthouse, divorces, deaths, wills not probated, missing heirs, and errors. (just to name a few) Although the recording date would be more recent, fraudsters could back date an instrument that would place it “in the past” during the time since we last researched the property, or an heir to a prior owner (Owner A) could have surfaced producing legitimate ownership documents. In fact, many prior issues can and do come up between the time we first issue a policy and a subsequent sale.”
The title search is not an actual charge made by the title company, but rather a condition of their title policy. Much like underwriters on a loan don’t charge the borrower directly for their work in ensuring the safety of the risk involved in making the loan, this cost is considered a “cost of doing business” – yes, if it didn’t exist, title policy prices could be lower, but it is not the actual item you are paying for in that sense. The title premium and escrow fee are the means by which the company covers their costs of daily operations, which does include the title plant, which is where and how the title searches are conducted. The title companies do run the searches back as far as they deem it necessary to satisfy that there are no underlying issues that could affect title, which is typically 30-40 years, but they will go back further if they feel something needs clarification. It’s all about their confidence that they have researched far back enough that there will be no issues and that they can issue a title policy that will not cause them to lose money to future claims. It’s all about mitigating risk for them and they will go back as far as necessary to satisfy their company that this is an insurance risk they are willing to take.