Title Companies and Title Insurance: You Need Both More Than You Might Think

If you’re like most buyers, you know you need to deal with a title company and get title insurance but you’re not sure why. In this blog entry, I will break down for you what a title company does as part of your home purchase transaction and walk-through the various items on the ALTA settlement statement that you’ll receive and sign at your closing.  I’m also going to give you an overview of title insurance and explain why it’s important and what it can protect you from.

What Does a Title Company Do?

A title company performs a number of important functions starting when a contract to purchase a property is ratified (i.e., signed by both parties). Once the title company receives the contract from your realtor, it will research title to the property by reviewing all documents related to the property in the public land records.  Their goal is to find any “clouds” or defects on title that could affect the purchasing party’s ownership of the property.  Defects might include that the legal owner and seller of the property are different, that there are liens on the property (e.g., a contractor placed a mechanic’s lien for unpaid work and it’s not been removed), or that there are unpaid taxes that will have to be cleared up before the property can be sold.  All defects the title company finds will be communicated to the seller and lender as soon as possible in order that steps can be taken to “cure” or correct the problems.  As a buyer, you want to receive clear and marketable title to your new property at the time of closing.  And, your lender is not going to give you a loan if there is an issue hanging over title to the property.

The next function a title company performs is to prepare the documents to be signed at settlement as well as the final ALTA settlement statement (which replaced in 2015 the HUD-1 which you may have dealt with before). The title company will prepare the deed transferring title to the property from the current owner to the new buyer.  Also, the lender and title company will work hand-in-glove with respect to the other documents that need to be signed at closing to effectuate the loan (e.g., the promissory note and purchase money deed of trust).  At closing, the title company acts as the settlement/escrow agent, overseeing the signature of documents by the buyer and seller and making sure that the lender has everything it needs to begin to lend to the buyer and to pay off the seller’s existing mortgage.  Right after the closing, the title company handles all the wiring of money among the parties so that the seller and existing mortgage holder get paid, the realtors involved in the transaction earn their commissions and the lender receives the down payment paid by the buyer.  Perhaps the most important function of the title company immediately post-closing is to record the legal documents (i.e., deed, mortgage, assignments, etc.) at the local courthouse. By recording the new deed, the title company ensures that the new buyer goes on record as being the owner of the property. Be sure that the title company sends you a copy of the recorded deed for your records.

What Are All These Title-Related Items and Costs on My Settlement Statement?

During the closing, the title company will use the ALTA settlement statement to guide each of the buyer and the seller through their respective sides of the transaction. The settlement statement is a critical document as it itemizes all the costs, fees and payments for each side of the transaction.  The big difference between the new format of settlement statement and the HUD-1 is that the new statement is different for each of the buyer side and seller side and doesn’t show a side by side comparison of credits and debits.  In a way, each party to the transaction is now looking at their side of the deal in isolation from the other.  Whether you think this is a positive change or not, the new format is here for now so you’ll need to work with it.  Key elements of the statement are:

  •  Mortgage lender’s charges;
  • Charges for preparing documents;
  • Title company’s fees;
  • Recording costs;
  • Amount of the payoffs to release any existing mortgages;
  • Pro-ration of city and county property taxes;
  • Pro-ration of homeowner’s insurance and condo fees (if applicable);
  • Real estate agent commission fees,
  • Survey fees, and
  • Any other costs associated with the transaction.

 When you review the settlement statement at closing, you’ll want to make sure it looks substantially similar to the Closing Disclosure that your lender will have asked you to approve a few days before closing. If there is any amount that is off on your settlement statement, seek clarification from the title company and get comfortable with the amounts.  Once you sign the statement, you’re accepting all fees, charges and payments and moving forward with the purchase so it’s important that the statement is 100% correct.

What Is Title Insurance and Why Do I Need It?

Like any insurance, the aim of title insurance is to protect you from the unforeseeable and make sure you do not lose money or your property as a result of something outside of your control and/or knowledge. Title insurance is an insurance policy that covers any problems (also known as “title defects”) that arise with respect to your title on the property after you buy or refinance a property.  Those problems can range from an undisclosed (but recorded) prior mortgage or lien that affects your title to the property to a fraudulent act (yes, sometimes people sell property they don’t actually own) to your deed being recorded incorrectly.

The last thing you want to do is bear responsibility for any of these kinds of issues. While the probability of such defects arising may be relatively low, it happens enough that you probably shouldn’t take the risk. Plus, in many instances, your lender will require a lender’s policy of title insurance so that its interests are protected and it can more easily sell the mortgage to its investors.  If you’re interested in seeing an exhaustive list of the various title defects that can arise, check out  First American Title’s 70+ Ways to Lose your Property.  When you read all these, you’ll run, not walk, to purchase title insurance.

You can buy title insurance from a title insurance company or from a title agent who sells policies on behalf of a company. The cost for the insurance depends on the value of your property.  The good news about title insurance is that you buy it at the time of closing and never pay premiums again.  The coverage goes into effect from the time of closing for so long as you have an interest (i.e., own all or a portion of the property) in the property.  If you die, the coverage runs with the property for the benefit of your heirs.  If you sell the property, and give warranties of title, the coverage also continues.  The insurance itself covers the full value of your property as well as the cost of legal expenses necessary to investigate, litigate or settle an adverse claim against your property.

When considering buying title insurance, know that there are two types of policies: (1) an owner’s policy of title insurance which protects your interests as owner of the property and (2) a lender’s policy of title insurance which protects the lender from being responsible for any title defects. Owner’s policies come in two basic forms: (1) standard coverage and (2) extended or enhanced coverage.  Standard coverage is what most buyers purchase and covers you for the full value of your property plus legal expenses against the most common types of title defects (e.g., undisclosed (but recorded) prior mortgage, easement or lien).  Extended or enhanced coverage covers additional more atypical title defects (e.g., silent/off-record liens such as mechanics’ or estate tax liens) and tends to cost approximately 20% more than standard coverage.  As for the lender’s policy, while it only protects the interests of the lender, your lender will likely require you buy the lender’s policy for them at the time of closing.  Just another cost of getting the loan, unfortunately.  It will be issued for the amount of the mortgage and the coverage decreases as you pay down the loan.  When you pay off the mortgage, the policy ends.

*Please note that I write this blog in my capacity as a Virginia-licensed real estate salesperson and not in my capacity as a District of Columbia and New York-licensed attorney.

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Home Inspection Addendum – Timing is Everything!

In my last blog entry, I talked about 6 key things in any sales contract from the perspective of the buyer.  Here, I’m going to delve into the Home Inspection and Radon Testing Contingency Addendum but am only going to focus on the home inspection component from the buyer’s perspective.  In particular, I’d like to share some tips on how to approach the home inspection and related negotiation period.  I’ll also explore how timing is so critical.

To Inspect or Not To Inspect

When thinking about the Addendum, you need to first ask yourself whether you want to do an inspection.  If you don’t include the Addendum as part of your offer, then you’re telling the seller that you’re comfortable taking the property as-is, waiving your right of inspection.  To inspect or not to inspect is really a question of risk tolerance and how well you know the property and feel confident about what you know.

My advice – unless the market is sizzling hot with properties being snapped up and bid up in a matter of days (or even hours), you should inspect the property.  It’s just not worth the risk of taking on whatever the seller has failed to repair or has repaired poorly.  You need to “get under the hood” of the property before you take it on.  The home inspection contingency is your chance and you shouldn’t squander it, even in the face of marketplace pressures.  Yes, you might lose a property or two to competing offers that don’t opt for an inspection but, in the end, you’ll sleep better at night with the knowledge that you are buying a property that you really know.  There are always going to be surprises but the fewer the better.

Now, let’s talk about some important things to know and consider when completing the Addendum and performing your inspection.

Inspection Period

This is the number of “Days” (and remember to read in the contract how Days is defined) you enter in the Addendum that you have from the “Date of Ratification” (i.e., when both parties have signed the contract) in which to perform the inspection.  Remember, as the buyer, you’re the one to arrange and pay for the inspection.  You have control over this part of the process.  So, you want to be sure to pick the right inspector(s) who can do his/her work in the time you have given yourself under the contract.

Before you decide on the number of days to include for the Inspection Period, you’ll want to pick the inspector you’re going to work with and confirm their schedule and average report turnaround time.  When scheduling, make sure you take into account holidays, weekends and any possible schedule conflicts/delays with the inspector(s).  Also, remember that you’re not obligated to hire a generalist inspector even though that may be easier from a logistical standpoint.  Some actually think it’s advisable to hire separate licensed contractors to perform inspections of specific parts of the house – for example, an electrician for the electrical and mechanical systems, a plumber for all plumbing and water-related systems and a roofer for all gutter, roof and drainage elements of the property.  It’s up to you which approach you want to follow.  Either way, make sure you’ve got the inspector(s) lined up and ready to go in advance of signing the Addendum.

The general rule of thumb is to include somewhere between 7 and 14 days as the Inspection Period.  I actually suggest as few days as possible, within reason, on the Inspection Period so that you can include a greater number of days under the Negotiation Period, as that’s really the period where a lot of the time consuming back and forth occurs between the buyer and seller.  Remember that you want to coordinate well the timing between the Inspection Addendum, the appraisal and any financing contingency; typically, the inspection contingency will have expired before the financing contingency so financing is the last condition before a contract “goes hard” (i.e., no other contractual basis on which to exit the contract).

Once you have the inspection report, you then need to decide what you want to do.  The first question to ask yourself – do you want to proceed with the purchase of the property?  If the answer is no, you can then provide a notice to void the contract so long as it is within the Inspection Period deadline.   If the answer is yes, you have a choice – either accept the property with the deficiencies or provide a copy of the report to the seller with a request that the seller address the issues found in the report.  If you opt for this latter course of action, you enter the zone of the “Negotiation Period.”

Negotiation Period

This is the period during which the buyer and seller engage in discussion about the items on the inspection report that the seller is concerned about.  The Northern Virginia Association of Realtors (NVAR) recommends a Negotiation Period of no less than 7 days. During this period, the buyer and seller will discuss what items on the inspection report the seller is willing or unwilling to fix.  There is no limit on how many offers and counteroffers the two parties can issue during the timeframe allotted but be careful here. You’ll want to make sure to have a “mutually acceptable” written addendum completed by the time stated (9 p.m. on the NVAR form) on the day specified under the Negotiation Period of the Addendum.  You can figure it’s going to take at least 2-3 days per round of discussion to reach some agreement so take that into account when including the total number of days for the Negotiation Period.

Another important consideration during this part of the process is whether you want to allow the seller to opt out of repairing anything in exchange for giving you a credit at closing. In some cases, this may be the preferred path as it gives you control over the repair(s) – you can select the contractor, negotiate the price of the repair(s) and get the direct benefit of any warranties.  The trade-off for this control is that you have to oversee the repairs after closing, just when you may want to move into a house that is move-in ready.  Also, remember that a credit on the closing statement is not the same thing as cash in hand.  Rather, the credit will offset some of your closing costs.

Purchaser’s Election

If the parties cannot reach an agreement at or before the end of the Negotiation Period, the buyer has the option of either (i)voiding the contract by giving written notice to the seller or (ii)going forward with the purchase and agreeing to accept the property in its as-is condition, without any repairs by or credits from the seller.

Again, be careful of timing. If you don’t give your notice to void the contract in the time specified, the contract will remain in “full force and effect” and you’ll have lost your out from the contract.  When putting in the number of days after the Negotiation Period in which you’ll either give notice or the contract will continue on, think about how quickly you’ll be able to give that written notice.  You might want to give yourself a cushion – things can come up to cause a delay – and include 2-3 days (rather than just 1 day after the end of the Negotiation Period).

 

 

Getting “Real” on Real Estate – 6 Key Things in a Contract

Welcome to my blog “Getting ‘Real’ on Real Estate”!  I’m a Virginia-licensed salesperson with Keller Williams Realty McLean/Great Falls.  My goal in writing this blog is to offer a useful resource to buyers and sellers in the Arlington/McLean/Great Falls area.  If you’d like more advice or need help finding or selling a home, get in touch!  There’s more about me as well as my contact information on the About page.

This blog entry is about 6 key things you need to focus on in your contract to buy a home. So, you’ve found the house you want to buy and your realtor tells you he/she is going to put together the contract.  All you have to do is sign it they say and they’ll present it to the seller.  It’s just a matter of the realtor filling in a few blanks.  Sounds simple enough, right?  But, it’s not.  The residential sales contract – though usually on a standard state board-approved form – is a complex legal document laced with obligations, conditions and important timing elements for both sides of the transaction.  As a legal document, it is binding once signed.  You might feel you don’t have the time to read all that fine print.  You might feel you can trust your realtor to fill in the form with exactly the terms you’ve discussed.  My advice – find the time to read it!

Read the contract with a fine tooth comb.  If you do this at least once, you’ll never have to do it again.  But, in so doing, you’ll have developed a basic understanding  of the contractual obligations to which you’re agreeing and the terms and conditions that dictate how the parties on either side should (and must) behave.  You’ll feel comfortable enough with the major sections of the contract that when it comes to you filled in for you by your realtor, you’ll then be able to focus on and know the deal-specific terms, like purchase price, financing and all the various contingencies and associated timeframes.  For example, when it comes to the contract form, you should know the definition of business day.  This matters if you’re trying to exercise a contingency and either ratify a condition or get out of the contract.  If business day is defined as 9 a.m. to 9 p.m. and you respond on a given contingency at 9:15 p.m., you’ve missed your window and the contract will bind you one way or another.

Too often – and I know they will hate to hear me say this – realtors make mistakes when filling out form contracts.  It happens all too frequently.  And, when it does, it can have dire financial and legal consequences to you, the buyer.  Spend the time to review the blanks that have been filled in by your realtor.

In particular, pay attention to these 6 key things in the contract:

1. Property Description – yes, this is the street address but it’s also the legal description of the property. That is, the description that is used by the local tax assessor to uniquely identify the property. You want to make sure you include the right information so that you’re buying the property you actually want. This means including the correct lot reference and map book/page in which the deed to the property is recorded in the applicable land records. Believe it or not, this is an area where mistakes can be and are made. Avoid the issue by reading carefully the information in this section.

2. Purchase Price – this sounds like a no-brainer but I’ve seen plenty of times where it is somehow incorrectly listed.  Double-check it and make sure the correct amount is listed, with the decimal point in the right place!

3. Earnest Money Deposit – the general “rule of thumb” is somewhere between 1-3% of the purchase price.  In reality, you should only commit what you feel comfortable with.  Realtors will tell you that sellers won’t consider your offer as serious unless the earnest money deposit is on the higher end of that spectrum, or even more than that.  My view – don’t concern yourself with the seller’s perception (unless you’re desperate to get the property or the market unquestionably favors the seller).  Rather, only put down an amount that you could live losing with if something went wrong.  Yes, that’s the worst case scenario and presumably won’t happen if you’ve done your contract diligence.  But, you never know…

4. Financing – you’ll have told your realtor up front what kind of financing you expect to get (e.g., Conventional, VA, FHA) and that will need to be indicated in the contract.  Remember, your buyer will want to hold you to this so try to be as sure as possible when you sign the contract that you’ll be seeking the type of financing you list.  What’s more tricky is what interest rate you want to include.  At the time you write the contract, there’s no guarantee you’ll get financing and at the interest rate you’d like/expect.  To protect yourself, I suggest putting in as low an interest rate as possible.  In this way, if you end up not getting approved for financing or cannot get the low rate you require, you can turn back to this provision and make the argument that you never intended to get a loan at an interest rate higher than the low rate included in the contract.  Hence, you need to back out of the contract.  Remember, your goal is to be as protective of your own interests as possible.

5. Settlement – your lender will tell you that he can get financing and button up the deal 30 days after contract ratification.  Unless you’re really in a hurry or are uber-confident in your lender, I suggest a more conservative approach.  Build in some cushion.  If a lender says 30 days, put in 45 days.  If they say 45 days, put in a date that is 60 days from contract ratification.  With ever-changing and more stringent lending rules, it’s likely, if not guaranteed, that requirements will come up and you’ll need to satisfy them.  That takes time.  Don’t risk breaching the contract and losing your earnest money deposit because of a lender’s unrealistic promises.

6. Title Company – as the buyer, you get to pick which title company to use. Often, your lender will recommend its preferred title company. It’s up to you whether you want to go with that recommendation or find your own. Sometimes, it can be to your benefit to review several companies and have them compete with one another on fees (many of which are junk) like “processing” and “seller release” fees and “mailing costs.” This is an area where you can save yourself money. It’s worth the time to investigate the best deal.

That about covers the landscape of major areas of the sales contract you should focus on.  Next time, I’ll explore some of the things to think about when reviewing the financing addendum and inspection addendum that both usually accompany the sales contract as part of your offer.  The addenda are a whole other world of complexity.  One that if brushed over, can lead to serious headaches for a buyer.

In the meantime, here are some good resources on contracts:

7 Must-Have Real Estate Contract Conditions

What to Look for in a Real Estate Contract

You Just Signed a Real Estate Contract. Now What?