I’ve provided an overview of the three functions of a title company over on my blog. https://propertyatty.wordpress.com/2019/05/29/whats-a-title-company-realestate-law-insurance-escrow/
Some people aren’t aware of what a title company is, but they’re quite important to the purchase and refinance of real estate. A title company has three functions, all of which are heavily regulated by state and federal law. In Virginia, state regulation springs primarily from Chapters 27.2 and 27.3, though other laws certainly have an impact. Title companies (a.k.a., settlement companies, closing companies, title insurance agents) are, for the most part, independent of the Realtor and lender. It’s possible that a Realtor or lender could form an “affiliated business arrangement” with a title company, but that’s a topic for another day. For now, understand that a title company has three functions, which are independent of the functions of Realtors and lenders.
Title Insurance Agent
As I’ve previously discussed, “title” is legalese for ownership. Title insurance, therefore, insures that a home purchaser actually owns the home once the transaction is complete. If it turns out that First American Title, the oldest company in the United States, provides a document called 70 Something Ways You Could Lose Your Home. This document lists the title issues that are covered. If any of these issues arise after closing, the owner who purchased an owner’s title insurance policy can file a title insurance claim. If covered, then in the (rare) worst case scenario in which the owner loses the home, the owner is compensated for that loss. In the much more likely scenario where the owner gets to keep the home, title insurance still carries with it a major benefit: The title insurance company litigates that matter, absorbing for the cost and headache of such a lawsuit.
Despite what title insurance covers, no one wants a title insurance claim. Accordingly, title insurance agents will perform a thorough examination of land records to minimize the potential for a title insurance claim, cleaning up any problems that they find. Obviously, it would be nearly impossible for a title insurance agent to detect a forgery in those records, but if, for example, there’s a judgment against the current owner that “attaches” as a lien to the real property, the title insurance agent will make sure that the judgment creditor (i.e., the person who obtained the judgment and is owed money) is paid in full at or before “closing” (i.e., also known as “settlement,” the event where everyone involved signs all of their documentation to sell and buy the property).
Note also that the title insurance premium is generally the largest fee that a buyer will pay in purchase or refinance transaction, but it’s a one-time fee payable only during that transaction. Moreover, the insurance rates are heavily regulated by the state, so there isn’t much of a difference between what title companies charge for these policies. There are two policies, one for the lender and one for the owner. Lender’s always require that an owner purchase a lender’s policy, which covers only the lender’s loss due to a title issue. The owner decides whether they want to purchase an owner’s policy. An owner never needs to purchase another owner’s policy on a particular property; as long as the owner owns that property, the owner’s policy covers it. If the buyer refinances their home later, then that’s a separate transaction with a new loan, and thus a new loan policy would need to be purchased.
A title company holds everyone’s money in escrow. That is, as escrow agent, the company acts as a neutral third-party, holding money in an escrow (bank) account. In addition, the escrow agent makes sure to identify who will actually be owed money from the proceeds of the transaction, such as a judgment creditor (as mentioned above), the taxing authority (i.e., county, state), and the seller itself. Once the closing is complete, the escrow agent is tasked with making sure everyone gets paid from the proceeds of the transaction.
As a settlement agent, the title company conducts the closing itself, gathering the parties around a table, and making sure that all of the proper documents are signed and, where necessary, notarized. Settlement need not be so formal, however. The buyer and seller may not actually sit at the same table. The seller may sign before the actual closing date. Sometimes a notary will be sent to either the buyer or the seller so that they don’t have to make a trip to the title company’s office. The fees associated with the settlement agent can vary widely from title company to title company, so shopping around getting the best price isn’t a bad idea.
These are the three functions of a title company. Their role is to keep costs down, which means it’s worth one’s while to shop around for the best price. Most of the time, a Realtor and lender will select the title company because the average consumer isn’t even aware that title companies are separate entities, and even when they are aware, they don’t want the hassle. This is fine, of course, as quality service is also an important factor in selecting a title company, and the Realtor’s and lenders don’t want headaches any more than the buyers and sellers do. That said, a buyer should always keep in mind that the law demands that a party to a real estate transaction always have the ultimate choice of which title company to use.
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Rob Bodine is a Virginia attorney focusing his practice on real estate and intellectual property law. He’s currently Virginia counsel with First Class Title, Inc., a Maryland title insurance and settlement company. Rob is also a licensed title insurance agent in Maryland and Virginia.