Buying a home for the first time can be tricky. In this episode, Jack will teach us about Title Insurance, Escrow, and how it works for you.
Jack is a business consultant for a title company in California. He has been in the real estate industry since 2010 by starting on the lending side of real estate and shifted his way into the title and escrow world.
Being a curious person, he was always fascinated by the title and escrow people. He credits it with his love of the history of the homes, title issues, claims, and how ownership changes from one person to the other. That’s how he landed in the company that he’s been working for, for the past four years.
The title is your legal right to own, use or dispose of land. It includes all forms of ownership, its uses as well as transfers.
Escrow is the facilitation side of the money and contract. They’re a neutral third party company and they will help you with the management of the money until all instructions in the contract are met.
They maintain the privacy of the client while safeguarding the funds and documents all at the same time. This is to ensure that once the deal has closed, the buyer is insured against any issues that may arise in the future.
According to Jack, a lot of times people don’t interact with an escrow company until they buy a home. Also, it takes more time for escrow to close on a deal because of the due diligence they put in to safeguard the buyer from any issues.
Title insurance protects the homeowner or the home buyer from any defects such as fraud, forgery, incapacity, and even impersonations. This is to make sure the home you’re buying is free and clear of any incumbencies from previous sellers or previous owners.
Every home is different even if they are in the same neighborhood. Older homes have more character in them, especially on the title side. For example, a home that is owned by one individual that has never been sold is easier to close than a home that has had five owners already.
Jack shared a story about a property that’s been in escrow for three years but still hasn’t closed because of litigation. Both parties have their attorneys so that property is technically stuck in escrow.
Cloud on the title is when an individual passed away, let’s say a husband or wife and the other remaining individual wants to sell the property.
Technically this is considered a cloud on a title and it needs some cleaning up. This could be done by presenting a death certificate, probate or a right of survivorship depending on their holding on the title.
In most cases wherein an owner died and he/she hasn’t left a will, a probate court will have to determine what happens to the property. Unless there is a trust or joint tenancy which is a right of survivorship, then the property automatically gets passed on to the other person.
A mechanic’s lien is a legal claim on a property for both labor and material improvements. They are often used by subcontractors and suppliers.
Title companies have their waiver to protect their company. Mechanic liens are some of the biggest claims title companies have so it’s important to have your waiver or indemnities signed by your contractor immediately after the work is done to protect your property against mechanic’s liens.
Jack advised that before you sell your house, it’s best if you already know an escrow company to work with.
Most investors know that when they buy a property they will have to rehab it or flip it to sell it. A binder’s policy is a discount policy given to flippers because they know they will sell their property in the near future and don’t want to pay for extra title fees.
A binder’s policy is good for 2-3 years and can be extended but you will have to pay an additional fee.
Direct underwriters are the title insurance company. They underwrite and issue the policy.
An agency, in the world of title insurance, means that they underwrite or they are the underwriter. They can write on multiple companies or to simply put it, they are the underwriter that can underwrite different company papers.
With regards to working with a title insurance company, Jack suggests you go after the one that you are already comfortable with. But you have to make sure they have the reserves to protect their insured properties and that everything is legitimate.
On average, a title policy can cost from $1,500 to $5,000. But if you’re ensuring a $20 million building, the title policy could range around tens of thousands to hundreds of thousands.
However, in Silicon Valley, the title policy is around $3,000 – $5,000.
The fees are filed and made available for the public in the Department of Insurance.
The final closing statement is the whole breakdown of different costs otherwise known as an estimated closing statement. This is prepared by the escrow company.
The title and escrow fees are respective to the value of the property. But sometimes on average, the combined title and escrow services in Santa Clara County are around $3,000 – $5,000.
Do you want to calculate your title and escrow costs? Here are Jack’s title and escrow calculator.
The recording fee is what the recording office charges while the city/county transfer taxes are determined by how much the county or city would collect once the property is transferred. This often accounts for 2% of the total sales price.
The county recorder’s office requires the original document with the wet-signature and wet stamp of a notarized affidavit.
If you know someone who’s traveling overseas and you need signed documents, you need to go to the embassy or consulate and get an appointment.
Jack reiterates the importance of communication because if you are representing a seller who travels out of town you need to inform the escrow officer in advance so that they can arrange a power of attorney. This will allow someone on the owner’s behalf to sign legal documents.
This is most important especially in the settlement process. He said the clearer the communication, the safer and smoother the transaction will be. This must be done before the owner goes out of the country.
In the title world, the power of attorney is handled a little bit differently. This must be prepared by the title company with a signed notary and approved by the title company. Again, this must be prepared before the seller goes out to travel.
The titleholder will sign the escrow and title paperwork. If the mom is sending money directly to escrow and she is not on the title, she would need a third party deposit instructions. This means that the funds are coming from her and she authorized it for the transaction.
And because she’s not on the title, the title company and escrow cannot disclose any information of the transaction to her. This type of transaction needs to be signed not notarized.
There is a term called Firpta Withholding. This stands for foreign investments in the real property tax act. This is an IRS tax requirement. Usually, it’s the CPA that determines if you’re a foreign seller and that will indicate if the title company will be required to withhold.
If they are required to withhold, then they will do it based on the actual sales price of the property.
(I really hate this matter on a personal level. This has happened to a lot of investors who don’t have a property in LC.)
Jack said, depending on how the investor or homeowner if they don’t qualify or get exempted from the withholding there would be no point withholding. This is entirely dependent on how their CPA fills up their form.
Usually, this accounts for 3.33% of the total sales price of a property.
In the Silicon Valley area, Jack told that there are more flippers, and not too many wholesalers or double escrows. Most of the time investors will purchase a property, acquire that property and sell it after one to three years.
Besides having a binder and California franchise tax, is there a policy you think investors should be aware of when dealing with title and escrow?
On the tax side, they have to work with their CPA to determine the best practices in that area. But on the title, the best advice I can give is to communicate. That’s number one.
Number two would be skilled and unskilled labor. As an investor, homebuyers or contractors, to make a really big profit they start cutting corners. But this is also where the whole mechanic lien blooms.
Make sure you’re only working with reputable contractors and subcontractors. Otherwise, there will be issues in the future. Never try cutting corners because the more corner you cut the bigger problems you’ll have later on.
Insurance is about risk. This is what makes the title insurance industry interesting. The more complex a home’s title is, the longer it will take for a title company to work on. You have to communicate early and get the necessary underwriting approvals.
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