Monday, August 2, 2010
IS TITLE INSURANCE REALLY BORING?
IS TITLE INSURANCE REALLY BORING?
Stroudsburg--When we first talked about this blog, I was warned by Lorie Lehman who is an Account Manager at Pennsylvania First Settlement Services located here in the Pocono Mts that it would be very hard to write a blog about title insurance because… there's just not a lot to say! I thought about that long and hard and you know what, maybe she has a good point, but since title insurance is required on every real estate transaction, it's got to be something that's worthwhile talking about. So, I'm giving it a try.
I elected to talk about title insurance from three viewpoints; (1) the buyer; (2) the Realtors--primary contact of a transaction and (3) an owners of the title company. Each of these people make up a title insurance transaction and each of them are important in the actual transaction itself.
The Buyer's Role
The buyer is actually the purchaser of the title insurance policy. All transactions (that are mortgaged) require that the property be insured at minimum in the amount that it is mortgaged. In my professional opinion, title insurance should be in the amount of the value of the property as opposed to the value of the mortgage, but 9 times out of 10, it's for the mortgage amount.
What is title insurance?..."Title" is the foundation of ownership of a property. Title to a property collectively makes up the terms that are your legal rights to own, possess, use, control and dispose of property. Title insurance is an insurance policy that protects against future loss should a title condition be any different than when the policy was written.
A title deficiency is something that's missing from the title; for example, an undisclosed error from a previous owner who could make a claim on the property. It includes anything that could happen with the entire ownership of the piece of real estate that may encumber or jeopardize the owner's rights to a "peaceful enjoyment" of the property or cause the owner to lose any portion of the parcel.
An encumbrance is a claim made upon the land. For instance, your local power company may have an easement for a power line that will serve your home. If you are borrowing money to purchase land, your lender will require your title to be cleared of any outstanding deficiencies or encumbrances before the land transferred or, at minimum, clearly identified.
The biggest question is…why do I need title insurance? You as the land owner are protected against any title loss. Title insurance insures the value of the property. Having clear title is something that will be required when you go to sell the property, because the buyer is going to want title insurance and if you don't have it, you have risk in reselling of your investment.
Title insurance comes after a title search. A title search is a detailed examination of the historic and public records concerning the property. Those records, including the deeds, court records, property name and indexes and many other public documents are reviewed by the Title Searcher. The purpose of the search is to verify the seller's right to the transfer of ownership and to discover any deficiencies or encumbrances on the title that have not been disclosed to you the buyer.
You may ask, is title insurance as important as other types of insurances such as fire, and homeowners? The answer to that is, yes. Because your losses without title insurance can even be greater than that of a fire or homeowner loss, title insurance is just as important, if not more important than those other types of insurances. For example, imagine if a house burns down, the land is still there on which to rebuild, but if there are title problems, then not even the land has a value.
Last but not least, does title insurance protect both me and my heirs? Yes, the title insurance policy covers from the time of its effective date back to the origin of title. If the property passes to your heirs or devisees the title insurance policy would defend the title for your heirs and devisees just as if it were for you when you were alive.
Title insurance is ordered after the Agreement of Sale is executed by all parties. It is typically handled by the Realtor who suggests the title company and forwards a copy of the Agreement of Sale including the terms and conditions thereof to the title company. The title company then represents the buyer in the transaction and provides for title insurance and settlement services to transfer the property from the seller to the buyer. It's called a closing.
The Realtor's Role
The Realtor's role in a property transaction is that of a conduit to get the fully executed Agreement of Sale to the title company. The Realtor also will help the title insurance company get to know who the buyer is, all their contact information, provide the Agreement of Sale (and any contingencies thereof) and give the title company the proposed settlement date.
Realtors look for customer services such as timeliness, accuracy, courtesies and doing all that above being done with a smile!
Until the time the property deed is searched, the Realtor doesn't have a lot to do with the transaction. The Realtor is typically involved in the property inspections, mortgage contingencies and other contingencies that may be required for the sale.
After all of the inspections are done, then the Realtor becomes involved in the title insurance part because the transaction is now getting ready to close. The Realtor will find out on behalf of the buyer, whether the title search has been done--we talked about a title searcher earlier. Everyone begins to zero in on the date and time that the settlement will occur.
A few days before closing, a draft HUD is forwarded between the seller's Realtor, the buyer's Realtor and the buyers themselves. Each party will review the HUD to ensure that the correct pro-rates are taken care of and displayed properly on the HUD. Usually that takes a few times going back and forth to make sure all the numbers are properly recorded in the right places. After that, a final HUD is issued and the buyer's told exactly how much money they need to bring to closing.
At settlement, it's usually a pretty good time! The buyer is excited to buy and the seller is excited to sell. The Realtors are…excited to get paid their commissions for a successful transaction.
The settlement process will usually take about 45 minutes to 1 hour maximum. It's the time where the keys are exchanged, the mortgage documents are reviewed by either the mortgage broker or the settlement officer and checks are traded between all of the parties. At that point, the buyer owns a new home and gets the keys to the property.
Title Company Owners' Role
A person or persons own(s) a title company because the premium that is charged on the title policy is split between the owner and the insuring agent. It's primarily a commission based business. The owners become an agent for a specific title insurance company. As an agent for that company, they share in the profits of what the title insurance sells for.
Title insurance is regulated by the Commonwealth of Pennsylvania, so therefore, regardless of what title insurance company you work with, the price of the policy remains the same. There are what's called a basic policy and an enhanced policy. At Pennsylvania First Settlement Services we sell on enhanced policy.
It's our opinion that an enhanced policy is much better than a basic policy and covers more as well as taking into account property appreciation, market value and the increased value the property has year to year.
The title company finds Realtors that want to work with them primarily because of their customer service. Customer service is something a Realtor looks for. A title company that provides good customer service to all of the people in the transaction typically is used more and more; thus more profits. It's called the book of business and you want your book of business to expand to as many Realtors as you can handle.
The title company owner employs an Escrow Officer(s), maybe a secretary or Receptionist that receives and opens the order and then they have a settlement agent or closer. Together, those people work as a team to move the transaction from opening to closing at the settlement table. Typically, Title Searchers are third party vendors and not employees of the title company. At least that's true in today's title company model.
Your Title Agent or Escrow Officer is the point of contact for all the parties in the transaction. The Title Agent or Escrow Officer is responsible for filing documents, verifying the legal description, collecting and disbursing all funds through the Settlement Agent, clearing all outstanding debts against the property and verifying all the pro-rates on the HUD. The Escrow Officer, at least at PA1st, will also coordinate property owners' insurance for the buyer.
Sometimes Realtors have an ownership interest in the title company and that's called an afBa. They own shares or membership interests in the title company. While that used to be a popular Pocono commodity in the past, it's not used that much in today's business. The Realtors simply want to be recognized for their loyalty through recognition at a party or things such as this. Realtors are not paid on a referral basis for each transaction that they bring to the title company. That is a violation of HUD.
Refinancing, or "Customer for Life" as they are called at Pennsylvania First Settlement Services are those customers that have closed their property with Pennsylvania First Settlement Services sometime in the past and now for some reason need additional title insurance because something has changed, either they have refinanced the property or they are making some small change in ownership which requires a re-issue rate. A re-issue rate is typically an insurance rate that's less than the sale price of an insurance policy because the work has primarily already been done.
Well, that's a little something about the title insurance business from all three angles. In the end, I think it's very exciting and hopefully you thought the same as well!
Thomas R. Wilkins is General Partner in Pennsylvania First Settlement Services. He is the founder of Pennsylvania First Settlement Services which was formed in 2007. Their corporate offices are located at 304 Park Avenue, 2nd Floor, Suite 2, Stroudsburg. In addition to Pennsylvania First Settlement Services, Wilkins is CEO of NEPA Management Associates, Inc. and Broker of Record for Better Homes and Gardens Real Estate Wilkins & Associates, one of the largest real estate companies in the Poconos.