What is a Hold Open?
A Hold Open is a title insurance term used for real estate transactions where the title company that insures the initial sale agrees to insure another sale of the same property within 24 months of the original sale. These transactions are sometimes referred to as flips.
There are three parties involved in a completed Hold Open transaction: the original seller, the original purchaser (the person requesting the Hold Open), and the final purchaser.
Hold Opens are most often associated with fixer-upper properties, but this is not a requirement for a buyer to request a Hold Open. Investment properties can be held open from one sale to the next, and Hold Opens are also available for short-term owners who simply know they will be selling the property within two years. Hold Opens only apply to the Owner’s Policy and not the Lender’s Policy and therefore are not applicable for refinance transactions.
Benefits of a Hold Open
A Hold Open ultimately saves money for the original purchaser. If the buyer knows that the purchased property will be resold within two years, Land Title can hold open the file for the resale at a fraction of the cost the buyer would have paid- even with a discounted reissue rate - in title insurance premiums.
The process works like this: The original seller pays the applicable title insurance premium for the initial sale to insure the original purchaser. The original purchaser then pays only a small percentage (depending on the underwriter) of the full basic premium charge in order for the title company to keep the file open, and no Owner’s Policy is issued at this time.
When the original purchaser sells the property, he pays the difference in premiums between his purchase price and the selling price on the second half of the Hold Open, and an Owner’s Policy is issued only to the final purchaser. Buyer or seller pays for the Owner’s Policy depending on the contract agreement. During the second half of the Hold Open, the original purchaser cannot transfer the property to someone else in the interim and allow them to use the Hold Open.
Conditions for a Hold Open
A property is eligible for Hold Open status only if the following conditions are met:
- A commitment to insure the final purchaser is issued after recording the initial conveyance to the original purchaser. This is in lieu of a policy of title insurance of the original purchaser. Any adverse matters that are recorded or become known to the title company must be satisfied before the policy is issued.
- There must be a single resale transaction of the exact property as reflected on both the original commitment to the original purchaser and the final policy to the final purchaser. For example, the purchase of a duplex must be sold as a duplex, not sold as two separate units in the final conveyance.
- The original purchaser must sign an affidavit acknowledging that he is aware the property must be sold within two years or the Hold Open charge will be forfeited and the policy issued to the original purchaser.
- Both transactions must be insured through the same title company. The final purchase for the transaction initially held at one title company cannot be insured by another title company.
Property Value Increases
The Hold Open charge is based upon full value of the real estate or interest at time of the initial conveyance, with an additional charge of 10-25% plus other additional fees (depending on the underwriter) of the basic premium based on the full value of the real estate or interest. Charges and timelines can vary depending on the underwriter. Contact your closer or sales representative for more information on the fees and timing.
Upon closing of the resale within two years, the Owner’s Policy will be issued to the final purchaser without additional cost. If there is an increase in the liability between the initial conveyance and the ultimate sale, a charge will be made based on the difference between the two liabilities calculated at the applicable schedule of rates.
The Hold Open is available only one time per transaction.
If the resale to the final purchase is not recorded within 24 months of the date of the original sale, the Owner’s Policy will be issued insuring the purchaser in the initial sale in the amount originally committed, and the Hold Open charge will be forfeited.
A potential drawback of the Hold Open procedure is that the original purchaser is not insured for any warranties of title that may be given in the deed to the final purchaser, since no Owner’s policy is issued to the original purchaser.