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”.