The title company is the unsung hero of any real estate transaction. This third party protects the buyer, seller, and lender by verifying that the Title of the house in question (the title being the legal mark of ownership) is actually held by the seller, and there is no confusion about who held the title in the past. Though the title company plays many roles in the home buying process, verifying legitimate ownership on the seller’s part is its most important function.
Why Do Title Companies Need to Verify The Legitimacy of a Property
To answer this, let’s explore a hypothetical. Let’s say you just bought a home for sale in Charlotte, NC. You’ve closed, moved in, and are comfortable with the place. Then one day, randomly, you get a letter from someone saying that the previous owners transferred the title to them ten years ago, and they are the legal holders of the title, not you.
A title company’s main job is to make sure that can’t happen. They go through the records detailing ownership of the property the buyer is looking to purchase and make sure it’s crystal clear who has held the title of the house and that the transfer of the title from one owner to another was properly recorded. Nine times out of ten, the title company catches any issues with legitimacy in the past or finds no problems at all. But in the event they miss something, they offer the buyer and lender something called title insurance.
What is Title Insurance?
Like all forms of insurance, title insurance pays out in the unlikely event that something goes wrong. In this case, that would be you getting the letter from someone asserting that they hold the title to your property, not you. If that happens, your title insurance will cover all the fees and costs that would go into contesting such a claim. You can consider title insurance as a kind of closing cost to be paid with money in escrow, typically between .5% and 1% of the sale price of the home in question.
Title Companies as Escrow Agents
Speaking of escrow, in some states like in Florida Real Estate, title companies also function as third parties that ‘hold’ the money paid out by the buyer, seller, and lender over the long course of a real estate transaction. All the myriad fees that all buyers have to pay can be given to the escrow company, which is usually part of the title company and be held in safekeeping until the end of the home buying process.
For example, earnest money fronted by the buyer, which is money put up by the buyer as proof of good faith in the transaction, can be given to the title company in escrow. The purpose is that the title company is an impartial third party in the process that keeps everyone’s money safe in case the deal goes sour.
The title company not only keeps everyone’s money safe, but also organize and keep track of the payments that go back and forth between buyer, sender, and lender. Though it might seem more complicated than it needs to be, by keeping an impartial record of payments, the title company both prevents complications from arising and mitigates them effectively if they do.
Who Chooses the Title Company?
It varies from state to state. A good rule of thumb is whoever has to pay for the title company gets to choose the title company, but there are also cases of split closings in which both the buyer and the seller choose their own title company. In this case, typically one title company does most of the heavy lifting with the other company as a kind of auxiliary.
By and large, the buyer typically chooses the title company. If the seller doesn’t like the choice of title company on the part of the buyer, they can contest it, and the buyer, seller, and lender can all negotiate to find a better title company.
How to Choose a Title Company
The same qualities you look for in a good real estate agent are the same qualities you should look for in a good title company. You want a company with longevity and a good reputation. If you’ve chosen a good agent, they should be able to help you parse through the title companies in your area or state to find the best one for the job. You want a title company that is well connected with local businesses and professionals and one that is well versed in the local/state laws applicable to real estate.
What does a Title Company do?
A title company covers everyone involved in a real estate transaction by making sure the whole focus of the home buying process, the house, can legally be transferred from seller to buyer. Going through the home buying process without a title company is like walking a tightrope without a safety net. The title company keeps you safe and helps everything run smoothly in the home buying process. There’s no question that the title company is your friend, regardless if you’re a buyer, seller, or lender.
Before you buy your dream home, it’s important to learn about the purchase agreement so you can go into your transaction feeling informed and avoid mistakes. One of the common contingencies included in the purchase agreement is the title contingency. It allows the buyer to request a title search and raise any concerns with the property’s title status, which the seller must validate before closing on the transfer of ownership.
