A title company wears a lot of hats over the course of a home sale.
Allied Title and Escrow reports that in more than one-third of real estate deals, the title company involved has to undertake “extraordinary work” to address title issues that often go back 50 years or more.
Depending on the state, title companies also issue insurance, hold onto funds and paperwork in escrow, and serve as closing agents.
Wow, that’s a lot!
It’s tough to remember who does what, or keep all the terminology straight. So, let’s break down each responsibility in plain terms, including how title companies will:
- Search the title for any defects or “clouds”
- Provide the buyer with title insurance to protect against fraud and forgeries
- Safeguard money and documents in escrow
- Oversee the final phase of closing and fund distributions
What does a title company do?
1. Perform the title search on your house
Before you can sell your house, you have to “clear title.” Title issues account for 11% of closing delays and may come to the seller as a surprise.
The “title” is a collective term for all of your legal rights to own, use, and dispose of any real estate property.
Having a clear title before the sale complete guarantees that your ownership is valid—that is, that no one else can stake a claim to the property you’re trying to sell.
The title company will perform a title search, which involves pulling public records and details about a property’s history to dig up documentation, liens, or encumbrances tied to a house. The title search will turn up any defects or “clouds,” a jargony term for any discoveries that cast doubt on the title’s legitimacy.
Title companies leave no stone unturned. “[One] seller had an $80,000 lien against their house from some casino in Las Vegas,” shared Anna Terry, a Durham, North Carolina, real estate agent with 24 years of experience.
“It had actually been paid off, and it was cancelled in Vegas, but they had neglected to cancel it in records in our county. It all worked out because the debt had been paid, but there are a lot of things that pop up.”
Aside from old relics from your past gambling days, other common title problems that can arise include:
- Contractor liens
Money owed to general or subcontractors for a home’s renovations, repair work, or remodeling projects.
- Divorce decrees
Such as a lien placed for past-due child support or spousal support.
- Personal bankruptcies
Bankruptcy cases against the owner must be discharged to clear title.
- Outstanding taxes
County, school, and property taxes all must be up to date.
A seller must clear up any such issues before he or she can convey the property.
Often, resolving such issues simply means verifying that a debt has been satisfied and then recorded properly, similar to when consumers clear up errors on a credit report.
“It’s just a matter of recording the proper documents, and a lot of times, to be honest, it’s just laziness on the part of the person who was holding the lien,” says Erica MacLean, senior escrow officer at New Venture Escrow, which has offices in California in San Diego, Carlsbad, and Chula Vista. “After they get paid up, they don’t properly record the documents to release that person from any balance owed or any future payoff.”
In states such as North Carolina, a seller also has to sign a lien waiver that says any debt on the property will be paid at closing.
“Let’s just say you had to do $10,000 of foundation work. It’ll be required that that company is paid at closing; you couldn’t finance that,” Terry said.
The same goes for if you had a new heat pump installed 5 years ago and were doing a payment plan with Lowe’s—you couldn’t carry that after you sold the house.
“The attorney has to make sure there are no liens that would affect the quality of the title for the new owner,” Terry explains.
Sometimes you can speed up the title search process by providing a copy of your title insurance policy from when you bought the house to the title company.
In some circumstances, if your policy was purchased within the past 15 years, the search can be limited to the duration during which you’ve owned the house instead of doing a full search on the title back to when the house was built.
2. Issue title insurance to the buyers of your property
A title company not only performs a title search but also issues title insurance to the buyer of your home, guaranteeing that the new owner is protected against any future claims of property ownership.
As explained by First American Financial Corporation: “Even the most skilled title professionals may not find all problems associated with a property… Some risks, such as title issues due to filing errors, forgeries, or undisclosed heirs, are difficult to identify.”
A title insurance policy does not negate the need for a title search, but is issued regardless of the title search outcome.
In a standard transaction, the seller will pay for the buyer’s title insurance policy, while the buyer pays for the lender’s title insurance.
3. Maintain escrow accounts and act as escrow officer
In addition to performing the title search and issuing insurance, a title company also often manages the escrow account for a home sale.
The duty here is to safeguard money and documents related to the transaction for the parties involved, such as the deed to the house, closing costs, the earnest money deposit, and eventually the down payment and money to purchase the house from the buyer.
The title company only disburses payment and releases documentation with the written permission of the buyer and seller.
4. Oversee the final steps of the closing process
Depending on your state, the final phase of your home sale will be handled by a real estate attorney, escrow officer, or title company. See who’s likely to manage closing in your state in the color-coded map below.
This process involves:
- Drafting up final paperwork and documentation
- Overseeing signatures on all of the closing documents
- Making sure the property title passes from seller to buyer
- Overseeing disbursement of funds from escrow, including closing costs and fees
What should you look for in a title company?
How involved the title company will be depends on the customs and regulations of your state, but regardless, experts recommend using a company that is transparent about its processes, responsive and communicative, and has good customer service to help make each step go smoothly.
“A lot of times because principals are not familiar with title companies or escrow companies, they will refer to the guidance of their agent,” MacLean said.
If you’re working with a real estate attorney, they’d also be a good person to ask for a title company referral.
“Attorneys just gravitate toward the companies that give them good service,” Terry said. “You want to know (any issue) can be turned around in a matter of hours instead of a matter of days.”