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Until they are part of buying or selling a home, most people are not aware of the important role that title companies play in the real estate industry. Once you have an accepted offer, you start to have regular interactions with the title company handling the transaction, and you may start to wonder: “Who ARE these people, anyway?!” Well today’s article aims to give you clarity on this and other questions you may have about title companies, title insurance, gap coverage, and all that fun stuff! Here we go!
Title vs Deed
First of all, let’s clarify a very common matter of confusion. What is a title and what is a deed? A title gives the holder legal rights, ownership control, and responsibility over a piece of property. A title can be held by an individual, or two or more people. Corporations, partnerships, organizations, trusts, and other similar parties may also hold a title. A deed is simply an instrument which transfers a title from one party to another. A deed is a legal document which re-assigns legal ownership, and is signed by the person transferring the property rights (the GRANTOR). The person receiving the property rights is called the GRANTEE. When a home is sold to a new owner, the seller is the grantor and the buyer is the grantee.
Another significant difference between a title and a deed is that one is merely a concept, while the other is a physical document. “Title” is really just another way to say “ownership”. In real estate, there isn’t an actual title document, like a car title. Title is really a position which holds rights and responsibilities. On the other hand, a deed is actually a physical paper document which is signed by the grantor relinquishing the rights of ownership to the grantee. If you imagine the life of a home that has been sold 2 times, the trail of ownership looks something like this:
Owner 1 holds title —>Owner 1 signs a deed to transfer title to owner 2—>Owner 2 holds title-–>Owner 2 signs a deed to transfer title to owner 3—>Owner 3 holds title
Title Search
During the closing process, a “title search” will be ordered. One of the responsibilities of a title company is to examine all the public records which affect the ownership of the property. Examples of these documents are: mortgages, special tax assessments, liens, wills, divorce settlements, and, yes, deeds. After examining all these documents, the title examiner will generate a “title extract”, which is used to determine if the grantor has “clear title”, or the right to transfer the property.
It’s easy to understand why it’s important to be sure the seller of a property has clear title. If some other party can claim partial ownership of the property, through a lien, divorce settlement, or any other means, it could be disastrous to allow a transaction to move forward until these “clouds on title” are resolved. In fact, it’s illegal to transfer title for a property without permission from all parties holding a share in in the property’s ownership. Despite their best efforts, even the best title company may not be able to find all ownership problems associated with the property. Some things are very hard to identify, like fraud, forgery, undisclosed heirs, etc. What happens if one of these issues emerges after you have already closed on your new house? Who will protect your ownership rights? If you financed your purchase, your lender will be wondering the same thing! Here’s where title insurance comes in:
At the time of closing there are generally two policies: an owner’s policy and a lender’s policy.
The owner’s policy protects the owner against future liability in the event of title problems arising after the closing of the transaction. In Wisconsin, this policy is typically paid for by the seller.
A lender’s policy which protects the lender in the event that title issues arise causing material injury to the lending institution. In Wisconsin, this is generally paid for by the buyer.
If a claim on title arises after closing, the new homeowner can file a title insurance claim. They insurer may pay off the claimant or negotiate some other terms to fix the problem.
Property boundary issues are a common problem that arises with regards to title policies. For example, if you purchase a property, only to find out a year later that your fence is located over the lot line and your neighbor is insisting that you move it. You may be able to file a title insurance claim with your title company. The title company would then pay for you to hire a fencing company to move the fence with no money out of your pocket.
Because a new title policy is issued each time a home is purchased, a title company may only need to conduct their own title research covering documents back to the time of the last purchase. For this reason, if the homeowner can provide a copy of their current title policy, most title companies will provide a discounted rate for the new policy. If you’re selling your house, one of the first things your Realtor may remind you to do is look for your prior title policy, which may entitle you to a few hundred dollars off your title costs at closing. If you can’t find the actual paperwork for your title policy, but you know which title company handled the transaction when you purchased the home, your Realtor may be able to help you procure a fresh copy.
Gap Insurance
Many title companies specifically exclude coverage for the period of time between when they conduct the title search and the date the deed is recorded, officially transferring ownership to the buyer. Sometimes the deed is recorded very quickly (a matter of hours) but other times it can take up to a week for the deed to be recorded. If any adverse claims against the property’s title were to arise during this time, the buyer’s title policy may not protect the buyer or the lender. In these instances, a separate, and relatively inexpensive insurance policy which only covers this short period of time (the gap) can be purchased. Of course, this is referred to as Gap Coverage, or Gap Insurance.
One Title Company or Two?
The owner’s policy will be issued by a company of the owner’s (grantor’s) choosing. Many times, the seller’s Realtor (listing agent) or brokerage will recommend a title company that they are familiar with, since most homeowners do not have much experience in selecting a title company. It’s also common for larger real estate brokerages to have an affiliated title company owned by their same parent company. Those Realtor’s transactions may be handled by the sister company by default, but it’s always the seller’s option to request a different title company if preferred.
When a lender is involved, the lender’s title policy will often be handled by a second title company, usually of the lender’s choosing. Some lenders will choose to have the lender’s policy handled by the same company as the owner’s policy, and transactions without a lender are often handled this way as well. At times, this can make a transaction run more smoothly, since there are less moving parts, and therefore less opportunity for error or conflict. On the other hand, with two companies conducting title research, the chances may be increased that hard-to-find problems with title may be uncovered, preventing issues down the road.
Other Responsibilities of the Title Company
The title company (or companies) are responsible for creating the closing disclosures and final closing paperwork. At the closing of a real estate transaction, a document that looks like a balance sheet is presented to both parties to review, agree upon, and sign. This document shows everything that buyers owe and are owed when the property changes hands. We’ll cover closing documents in another article.
The title companies will also organize the actual closing, explaining all the paperwork to buyers and sellers to ensure that they understand what they are signing, and then finally filing the deed and other forms and paperwork to complete the deal.
Now you know more than most!
Even a lot of real estate agents don’t fully understand the title process, and the role title companies play in the course of a real estate transaction! This may mean that the title companies are doing such a good job in the background that others can focus on their own jobs without too much focus on issues of title! That being said, it’s always a good policy to understand what you’re paying for, and for both buyers and sellers, title insurance is an important (and required) investment made for the financial security and safety of all parties.
We hope you learned a lot here and that many of your questions were answered! Still have more questions? Let us know! We’d love to hear from you!
