What Is a Title Company?
The Importance of a Title Company
A title company plays an important role in holding the buyer’s earnest money deposit (EMD), assisting each party in completing the necessary closing paperwork and transferring the funds between the buyer, seller, and lender.
As part of closing a real estate transaction, a title company will review various deeds and public records to ensure that the property is free of any title defects or “clouds on title” before the transaction closes.
One common cloud on title is a lien, which is attached to the property, and if the lien is not released or discharged by the lienholder, it can stay attached to the property after the deed is transferred to the new owner. Other things that can cloud a title include loan instruments, judgments, and claims from other owners that prohibit title transfer.
Before the title company closes the transaction and the legal ownership is transferred to the new owner—the title company will thoroughly review the property’s title history to verify there are no outstanding clouds or breaks in the chain of title. If any title defects are found, the title company will identify what they are and assist in getting the proper documents signed to resolve these title issues when possible.
A title company is not technically required to close a real estate transaction, but because of their expertise, attention to detail, and the specialized assistance they provide in a process that is often confusing for the average property buyer, the vast majority of real estate transactions are closed with a title company or real estate attorney.
It is possible to buy or sell a property without clearing all the clouds on its title, but it involves more voluntary liability on behalf of the buyer, as they will have to either accept the title defects as they are or come up with their own way of legally resolving the title defects.
When a title company conducts its title search, there is always the chance of human error and overlooking important information that can cause a cloud on the title. One way to ensure these issues don’t adversely affect the seller, the buyer, or the lender is to pay for title insurance. Title insurance is designed to protect both the lender and the owner (or the seller) of the property from title disputes that may arise in the future.
There are two types of title insurance: a lender’s title policy, which protects the lender, and an owner’s title policy, which protects the owner. A lender requires title insurance because the property is their collateral, and if any dispute challenges the title, the title company can cover the loan amount.
However, a lender’s title policy does not protect the owner from losing a property. This is why some owners will use the second option, where if a dispute succeeds in challenging the title, the title company can insure the owner an amount based on the owner’s equity.
Other Benefits of Hiring a Title Company
Buyers can also take advantage of the additional information title companies may acquire during the title search from the county records. These documents may contain the property’s structure, construction type, building restrictions, foundation, the location’s flood plains, and any other information that may have been recorded in connection with the property in the past. This information can be valuable for those who plan to renovate the property or convert it into a mixed-use property, depending on its structure and location.
What Is a Property Title?
When the title to a property is transferred from a seller to a buyer, a deed is written, signed, and recorded by the county recorder (also known as the register of deeds in some states). This recorded deed serves as evidence of who currently owns the property.
A property’s “title” is not a physical object, but refers to the ownership of that property. of property ownership, whereas the deed is a physical document that is a legal document that describes the owner’s rights over the property, such as the right to modify the property, use it for commercial purposes, or sell it. It also expresses the property’s limits (such as its physical boundaries) and what it is permitted to be used for.
Title vs. Deed
A deed is not the same as a title.
The word “title” is a conceptual term used to describe the official record of who owns a property, including the property’s ownership history, which lenders have mortgages or other liens attached to the property, and other documents that may be used to “cloud” a property’s title. In the United States, property titles are a matter of public record.
A deed, meanwhile, is an actual legal document that transfers or assigns ownership of the property from one person or entity to another. An owner of a house, for example, owns both the title and the deed to that house—the title signifies ownership, while the deed is a legal document that shows exactly who owned the house previously, what date the ownership was transferred, what date the deed was recorded, what ownership rights were transferred, and any guarantees that were made with the transfer, among other things.
How Does a Title Company Work?
When a title company reviews a property’s title history (often referred to as “title work”) to ensure a clear title, the process starts with a title search, then a title examination, then a preliminary title commitment.
A title search is ordered to determine if any outstanding liens, judgments, or other legal claims may affect property ownership. The title company starts by obtaining the historical records connected with the subject property. Oftentimes, they will start by collecting all the records dating back 40 years, but they can look further if necessary. By reviewing these documents, they can identify all the deeds to verify that the property was transferred properly between all the previous owners of record. They can also determine if there are any liens, mortgages, divorce settlements, judgments, unpaid taxes, leases, easements, or other restrictions that may be actively clouding the title. The scope of a title search is broad because a property’s title can be affected by a wide range of discrepancies.
During the title examination, the title company examines all relevant documents and records found to determine the legal owner of the property. They also compute existing debts, if any.
When all the historical title documents have been reviewed and any/all title defects have been clearly documented, the title insurance underwriter will issue a title insurance commitment (also known as a preliminary title report).
Sections of a Preliminary Title Report
A title insurance commitment includes a few key sections:
- Schedule A: This provides an overview of the property address, the current owner, the amount to be insured (whether it’s an owner policy or a lender’s policy), the legal description of the property, and the date at which all the information is relevant.
- Schedule B – Section I: This is a list of all the requirements that must be met before the title insurance company can issue its policy. This section is the title insurance company’s way of saying,
“If you want us to issue your title insurance policy, these are the things we need to receive.”
- Schedule B – Section II Exceptions: This is a list of all the things that are NOT covered by the title insurance policy. This is the title insurance company’s way of saying,
“If you encounter any issues as a result of these things, you’re on your own.”
To see what an actual title insurance commitment looks like and what it says, see this detailed video overview…
When all the requirements from a preliminary title report are satisfied and provided to the title company, the title insurance underwriter will issue a title insurance policy that protects the lender and/or owner from damages arising from a clouded title. A buyer may choose to purchase an optional owner’s title policy separately.
Who Pays for Title Insurance?
It’s also worth noting, in most transactions that involve an Owner’s Policy, the seller of the property is typically the party paying for the title insurance policy. This is customary because if any title defects do exist, they were most likely caused by the seller and not the buyer. Since the seller is usually signing a warranty deed over to the buyer at the time of closing (and thereby guaranteeing that the title is clear of any defects), the owner’s policy will effectively protect the seller from any title disputes in the future.
Factors Examined During Title Examination
The typical documents that a title company will examine are as follows:
- Deeds – Deeds are the key document in every real estate transaction that transfers title from the seller to the buyer.
- Liens – Liens are a form of legal claim that may arise from a loan, like a home equity line of credit or a home equity loan. Liens may also occur from unpaid taxes or unpaid bills to contractors who have performed work on the property.
- Mortgages – If there is an outstanding mortgage balance, the current owner will settle the balance before proceeding with the closing. The mortgage is attached to the property, making it one of the first factors title companies look for.
- Judgments – Judgments are court decisions that award the complainant with the defendant’s property if the defendant fails to pay indemnity or other civil liabilities. Judgments directly affect the ownership of the property.
- Easement – An easement is a permission or authorization given by the owner to another party to use a portion of the land for a specific purpose. Some common examples of easements are for road access or utility lines that need to travel through a property in order to reach the other side.
- Leases – If a property is leased to another party and that lease is recorded, problems may arise due to the tenants existing rights to the property for the remainder of the period stated in the lease.
- Restrictions – Certain communities and homeowners associations will prohibit certain property uses and set requirements on what is and isn’t an acceptable use of a property within their community.
Title companies may also use a title plant to conduct their title searches. A title plant is a database, or a fully indexed collection of records, containing the types of documents that may affect real estate property title. The title plant includes various information like court decisions, maps, topography, land history, and geodemography. A title plant allows title companies to complete the title search more quickly and have a systematic and structured title examination.
How Do You Hire a Title Company?
For many home buyers and sellers, their real estate agents will offer guidance on which title company should be used for closing a real estate transaction. It is natural that in the course of a real estate agent’s job, they have built and cultivated relationships with title companies they trust.
However, for a more astute real estate investor who closes several transactions per year and doesn’t rely on the guidance of an agent, they can choose whichever title company or closing agent they prefer.
When looking for a new title company, it’s helpful to check reviews online and get recommendations from other agents and investors in the market. Just as in any profession, it is possible to hire the wrong person, but in general, if the buyer or the seller trusts their real estate agent, most will also likely trust their agent’s recommendation for a title company.
When looking in a new market, title companies can be found with a simple online search using terms like,
Title Company in <<County>>, <<State>>
Real Estate Closing Office in <<City>>, <<State>>
Real Estate Escrow Company near me
The rates of title insurance that title companies issue vary state by state, as the state’s regulatory body is responsible for determining the rates.
A title company examines the property title to see if there are any outstanding claims or clouds on the title. It will also facilitate the transfer of funds and execution of closing documents until the transaction is complete and a clear title has been transferred.
Clouds on title may delay or hinder the transfer of the title or else encumber the new owner of the property. Because property titles are a matter of public record, title companies can research all relevant documents regarding the property’s history and report any outstanding problems that need to be resolved prior to closing.
Real estate agents often recommend a title company for either the buyer or the seller in a real estate transaction. The title company is also responsible for collecting all the necessary documents needed for the issuance of the lender’s and/or owner’s title policy.
- Suh, E. (2020.) Selling or buying a home with a cloud on title. Policygenius. Retrieved from https://www.policygenius.com/mortgages/cloud-on-title/
- Kielar, H. (2019.) What Does A Title Company Do? QuickenLoans®. Retrieved from https://www.quickenloans.com/learn/what-does-a-title-insurance-company-do
- AM Best Rating Services. (n.d.) Industry fundamentals. Retrieved from http://www.ambest.com/title/fundamentals.html
- Gadow, S. (2017.) Thinking about Starting a Title Company? 6 Simple Steps to Do it Right & Fast. Qualia. Retrieved from https://blog.qualia.com/thinking-about-starting-a-title-company-6-simple-steps-to-do-it-right-fast/