The Real Estate Settlement Procedures Act (RESPA) allows homebuyers to choose their own title company, yet the title and closing process is bewildering to the average consumer. Even though homebuyers spend 2 to 7 percent of the cost of their home on closing costs, most are not clear about what closing costs include, who they are hiring, how much they are spending, or even why.
Brokers often try to help their clients by referring homebuyers to a title company, but, according to the Colorado Real Estate Commission (CREC), consumers are ultimately responsible for selecting a title insurance provider.
The CREC encourages consumers to contact the Division of Insurance to comparison shop and determine if the fees and services provided are of value. Keep in mind, also, that there is more to selecting a title insurance provider than price alone. The quality and type of services provided by the title and closing company can make the difference between a smooth transaction and one that never makes it to the closing table.
Homebuyers will want to ask the following questions of their title insurance company, and real estate agents who know the answers will be better able to assist their clients in making a selection.
Is my money safe?
Why you should ask: The way a title company handles its escrow funds is of utmost importance. The news stories you read are true: People do lose money as a result of incompetent, insolvent, or dishonest title and escrow companies. Reputable companies are trying to educate consumers about how important it is to carefully select their own title and escrow company.
What to ask: What internal controls, procedures, and segregation of duties do the title companies have in place to safeguard buyers’ and sellers’ funds? What procedures do they use to balance escrows? When was the last time they escheated funds to the state? Just because a title company is small or new does not mean they do not have the controls in place to protect funds. Make sure, however, that you are comfortable with the stability and reputation of the company you select. Ask others, especially those in the real estate industry, who they would recommend and trust with their own money. A reputable title company will be happy to talk about their controls for protecting clients’ funds—after all, it’s their business.
How is my investment protected?
Why you should ask: It is important not only to protect the clients’ funds, but also to protect their investment into the future. It is absolutely appropriate for Realtors and homebuyers to inquire about an underwriter’s financial rating—and a reputable title company will be glad you asked. Here is what the ratings mean: A+ or A’, A, or B+: Indicates that a title underwriter has a strong overall financial condition that will allow it to meet any future claims. As a rule, these companies have good operating earnings, are well capitalized, and have adequate reserves. B: The ability to meet future claims can vary widely in this category. For this reason, take extra care to compare individual companies in this category. C+: May have some financial ratios that are below average, but these companies are still considered “investment grade.”
C: May be financially weak in one or more areas of liquidity, asset quality, capital and reserves, and earnings.
Is my title company a neutral third party?
Why you should ask: Some title companies are now owned by lenders, real estate firms, and builders. These arrangements are legal if properly structured and disclosed. The consumer, however, is often best protected when there is no conflict of interest or financial incentive for the referral of title business. When considering an affiliated title company, a good question to ask is whether the buyer’s interests would be better served if the escrow money and closing were handled by a neutral third party.
Are your rates filed with the Division of Insurance? And, in addition to the premium you quoted me, what are your other fees and charges?
Why you should ask: Title insurance companies by law are required to file rates with the Division of Insurance and cannot discount or deviate from those rates. Buyers may be inclined to find and follow the lowest rate, but if a title insurance premium is notably lower than the market rate, this should be a red flag to look more closely at whether the company is providing core title and closing services in compliance with RESPA. Additionally, cut-rate premiums may indicate a lack of experience, a lack of financial and accounting controls, inferior title searches and examinations, or a substandard source for property data. Shopping for the lowest premium alone can also backfire, since many title companies more than make up the difference by charging additional fees. Electronic delivery fee, overnight courier fees, cashier’s check fees, release tracking fees, wire fees, and other title company charges often add up to more than the difference between the lower premium and the market rate charged by reputable title companies.
Do you conduct thorough title searches and disclose exceptions?
Why you should ask: As a Realtor looking out for your buyers’ best interests, would you advise them to accept a title commitment that lists “any and all documents of record” and “any and all easements of record” on the exceptions page, instead of informing your clients what those documents are? That is like asking clients to do their own search to find out what encumbrances affect the property! If you were about to purchase a property with a 30-foot public service easement along one side of your property, would you expect to know about it prior to closing? Some title companies are in fact providing commitments that do not specifically disclose encumbrances like these. The American Land Title Association (ALTA) met in November 2008 to identify best practices in the industry. They underlined the importance of an accurate search and solid title product (the commitment and policy). And they also spoke harshly about the growing practice by some title companies of providing “garbage exceptions,” overly broad exceptions without reference to the public records that are voiding coverage. National, state, and industry regulations have created certain standards title insurance providers are required to meet. Given that 1 out of 4 transactions has a cloud on title at the time of the commitment, it’s imperative that homebuyers work with title companies who take the necessary steps to identify, disclose, and resolve all issues prior to closing. A professional Realtor can make sure the title company does a “reasonable examination” for every transaction, which includes providing the buyer with actual recorded documents for each exception, as called for in the contract.
Are you locally owned and operated?
Why should you ask: There are several reputable national title insurance companies that offer adequate products and services. However, many title companies outsource the production of the title commitment overseas. A product prepared locally, by local employees, offers advantages that a product prepared abroad cannot. A local title insurance company knows the local real estate market, plus you’ll be supporting local employees who live and work in your communities. Local independent businesses return more money to the local economy, are more invested in its future, and give an average of 2 to 3 times greater support to local non-profit organizations compared to national firms. You’ll also find quicker response times to issues as they occur, because decision-making happens locally, and their local reputation depends on excellent customer service.