Homeownership is riddled with a lot of concepts and jargon that may end up sounding like gibberish to the average person. Titles & escrows are one of those concepts. If you’ve ever endeavoured to buy or sell property, chances are you’ve come across a title company. For the uninitiated, fret not, for this guide is for you. Title companies are one of the most important parties in a real estate transaction.
The Title Concept
Key to the whole real estate transaction is the concept of a ‘title’. Unlike in conversational English, real estate assigns a special meaning to the word title, using it to mean the ‘legal right to ownership of a piece of real estate’. It is what is exchanged whenever you buy or sell a property: a seller transfers the rights to ownership of a piece of property to a buyer through a title deed. Whoever holds the title is considered the property’s rightful owner.
Overseeing The Closing Process
For this exchange to happen, the new owner (the buyer) of the property must be assured that the property in question is free and clear of any title or ownership related issues. For starters, any other claims to ownership must be resolved. No one wants to buy a property that someone else could come to claim, right? A buyer will also want to be assured that the property is free of any claims such as a backlog of unpaid taxes or liens on the property. Can you imagine buying a property only to discover a backlog of property taxes on the property? If undetected, such issues can be catastrophic and even end in foreclosure before a buyer has the opportunity to enjoy their ownership rights.
This is where a title company comes in. These are companies who exist for the sole purpose of ensuring that the title to a property can be seamlessly transferred from the seller to the buyer without issue. Title companies are an extremely important third party of the real estate transaction who play the following roles and responsibilities:
Conducting a Title Search:
This is the crucial first step. After a seller and buyer reach an agreement to sell, they will submit a signed agreement of sale to a title company. The company will then begin a title search, whose main purpose is to answer one question exhaustively: is there any reason why this transfer of ownership cannot proceed?
The company’s responsibility at this stage is to confirm that the property in question has a transferable and marketable title and is suitable for sale. Specifically, there will be deep dives for any pending issues such as existing mortgages, liens, judgments, unpaid taxes, and restrictions on the property that could impact the transaction.
Similarly, a title company will run a property survey on the property in question. This survey is important as it defines the exact boundaries of the property, but more importantly, it establishes whether there are any easements or encroachments, either by the property itself on other properties, or vice versa. Encroachments and easements could be a huge red flag and should be addressed prior to closing.
Clearing Title
Following the title search and survey, a title company will present its findings in a report which spells out any issues that need resolving in order to proceed. In the event that any outstanding mortgages, encroachments, judgments, liens, code violations or the likes have been discovered, a title company will present this. In some cases, issues may be too complicated or too costly to resolve before closing, , but for the most part, title companies try to resolve issues by ordering payoffs and disbursing the funds at closing to be sure they are paid in full where applicable.
Disbursing Escrow Funds
At last, the money part. Once the documentation and paperwork has been ironed out, it is the responsibility of a title company to ensure that everyone gets paid: the seller (sale proceeds), the realtors (commissions), attorneys (conveyance fees), state and county (taxes) and all interested parties. To ensure this happens, title companies will often utilise escrow, which we cover in more detail below.
Managing Escrow Funds
Most title companies will double as escrow agents as the two services complement each other. Typically, an escrow agent will be in charge of holding the buyer’s deposit as well as any other funds that need to be exchanged in the transaction. Though necessary, this escrow process can be complicated as the title company juggles different duties on behalf of the parties involved in the real estate transaction. It’s important to note that the escrow agent remains neutral throughout the entire transaction. Duties include:
Hold and safeguard the buyers fund before closings
An escrow agent’s key role is to hold the money received by, or on behalf of, the buyer in a non-interest bearing account as the transactions proceed to closing.
Paying off any outstanding balances (title related)
Remember how we said that title companies usually try to resolve title issues? This is one of those ways. If there are any balances arising from the title report such as a backlog of taxes or liens, a title company will usually settle these through escrow., It is also the escrow agent’s responsibility to ensure that the seller has enough equity, and can actually cover all the agreed upon invoices, liens and any other costs that may arise through the process.
Balance closing figures with lenders
In accordance with the paperwork step outlined above, title companies must always go through the lenders requirements and run their numbers to ensure that the closing costs are in order
Disbursing the transaction including seller proceeds, payoffs, commissions, taxes etc.
Lastly, the escrow agent is tasked with distributing funds to the required parties. This includes settling the seller’s proceeds, paying the realtor commissions, attorney fees, paying any taxes due etc.
Issuing Title Insurance Policy
Perhaps one of the most important tasks title companies are handling is the matter of issuing the title insurance. Once any existing title issues have been resolved and the deal has been closed, a title company will issue a title insurance policy. In particular, a title insurance policy protects the buyer and the lender from financial ruin if any issues arise from the title. As mentioned, property litigation tends to be quite costly and so if you are sued because of a lien or because someone else claims title to the property, then the insurer will defend you in the lawsuit and pay out money to you up to the policy limit.
Lots and lots of Paperwork:
As you can imagine, there is a lot of legal paperwork involved in the sale process. Title companies do all the heavy lifting. As the real estate deal flows through the process, title companies are tasked with recording these procedures. They are also tasked with preparing closing statements and then scheduling the closing. No two real estate transactions are the same, as some lenders may have different requirements or instructions for different buyers. The title company is thus tasked with going through these requirements along with any additional documents required to clear title or as required by the new lender. Once the documents are in order, the title agent will make sure that all the paperwork has been signed by the necessary parties. The seller is required to sign the deed and closing affidavit, and the buyer the new deed and mortgage contract before the settlement can occur. In summary, any outstanding issues must be cleared before settlement can occur.
Final Word
As you have probably learned, a title & escrow agency is a crucial player in the real estate transaction, and provides value to all the parties involved. If you are considering engaging a title agency, one good place to start is by asking your family and friends for recommendations. Your local realtors would also probably have some input given that they have done this dance multiple times before. Ultimately though, you should always do your homework and ensure you pick the best partner.
