In a real estate transaction, the seller’s biggest single expense after brokers’ commissions is typically the title insurance policy — a little understood cost of selling real estate. What does it cover, and why is it required?
While most insurance protects you from future risks, title insurance protects you from past risks. Title insurance guarantees that you get title to property free and clear of any liens or claims of ownership. Since we consider this the responsibility of the seller, that is who pays for the title insurance, although I understand that in some states it is common for buyers to pay for it.
Another difference between title insurance and other types of insurance is that the premium is paid only once for lifetime coverage.
Although it’s unusual for a claim to be made on a title policy, it does happen. For example, I once had to file a claim regarding a building I purchased in 1991. A year after closing, I received a “lis pendens” (suit pending) notice from a Texas lawyer. I simply forwarded it to Land Title, which had issued the title insurance policy, and they settled the matter at no expense or inconvenience to me.
Unless it’s a cash transaction, there is a “piggy-back” policy issued to protect the mortgage lender. This policy is for the amount of the loan, versus the owner’s policy that protects the buyer up to the full purchase price. Such policies cost less because they require no additional work by the title company, and are typically issued at the buyer’s expense.
There are two kinds of title companies. There are direct underwriters, such as Fidelity National Title or Stewart Title, while other title companies serve as agents for those larger companies. Since the policies are underwritten by those big national companies, you’re not really at risk by using an agent company. However, you could have a problem if the agent company holding part or all of your down payment goes out of business prior to closing. Those funds are supposed to be segregated in escrow accounts, but when commingling or misuse of funds occurs — as it has in the past — it can be a big deal.
Since Colorado has a somewhat antiquated regulatory environment in this arena; it is recommended that buyers and sellers obtain a “Closing Protection Letter” (which typically costs $25) to better protect their monies throughout a real estate closing.
All title insurance rates and closing settlement fees are regulated by the Division of Insurance. However, these filed rates and fees can still vary substantially, because of various discount programs offered by each company. The cost of title policies can vary by $100 to over $1,500, depending on the transaction; and the fee for conducting a closing can range from $100 to $750. Because of these variations, I recommend that sellers visit www.CompareTitleCompanies.com before selecting their title company.