In this post I will address the topic from a practical standpoint, in chronological order, based on “Common Practice”. This post is written from the standpoint of “common practice” in the Seattle area, where Title and Escrow are two separate functions, and not combined as they are in “settlement” vs. “escrow” areas. Areas that have “a settlement or ‘event’ closing”, operate differently. After reading this, you will likely feel that something should change. So posting on this topic is a great way to influence change, a side benefit to blogging in “transparent” fashion.
Nothing changes until its weaknesses are illuminated by discussion…so here goes.
1) The first thing an owner does (or the listing agent does on behalf of the owner) is contact a Title Company. Most often, this is done BEFORE the property is listed for sale.
Most Title companies offer three levels of information/service:
a ) a “listing packet”
b) “Preliminary Title”
c) A full Title Insurance Policy
Often an agent will order a “listing packet” upon first getting a request to visit an owner at their home to discuss the property being listed for sale. This level of information provides a basic legal description, a plat map, and some basic and general info regarding the property. Some companies provide sale comps, but most experienced agents don’t rely on the Title Company for “comps” and do their own. Personally I tell a Title Company not to waste their time or the paper producing comps for me. I never find them to be useful, or as useful as the ones I do myself.
While in theory “the seller” orders Title as “common practice”, and By Law the Buyer is supposed to choose the Title Company (see RESPA below), most often the agent has already been in contact with a Title Company before they even meet the seller.
2) “Preliminary Title” is usually ordered by the agent as soon as they know that “they have the listing”. Sometimes I do this as a first step, if I know the owners well enough to know that I will be listing the property before I go to the first meeting to discuss getting the property ready for market. That gives me more info up front than the “listing packet” and saves the Title Company some time, and possibly a few trees, if we get “hard copies” or print out the info.
When an agent lists a property, part of the intitial input into the mls system is a field question that asks “Has Preliminary Title been ordered?” Then there is a drop down box where you enter “Yes” or “No”. The presumption is that the answer should be “YES” and often the Title Order # is included in the Agent Remarks section “Title Company is X order #X”. To comply with RESPA, the buyer is supposed to choose the Title company. So possibly this provision in the mls listing input should be eliminated. You be the judge. For now, that’s how it is.
In order to write an offer on a property, the agent for the buyer needs to access the legal description. As soon as there is “mutual acceptance” of the contract, the lender needs to access the Title Order by company and Title Order #. So without regard to the Insurance aspects of Title Insurance, the process of involving a specific Title Company happens long before there is a need to actually insure the property with regard to Title Issues. At time of offer, the buyer has the option to choose Title and Escrow as part of the offer and is NOT obligated by law or contract to use the one who provided the owner and listing agent with services to date. Still common practice does not follow that thinking…or at least hasn’t do date. Maybe the people reading ths post will change that in the future.
3) Title Insurance Policy – Now we get into who pays and who chooses. Up to this point, no one pays. If the property never gets “signed around” and escrow is never opened, the Title Company has provided all of the services for free. The title Company up to this point, provided these FREE services to the listing agent. The balance is that the agent most often uses the same Title Company all of the time or most of the time, and so there is an offset of paid for services against the free services. If owners ordered and paid for the services up to this point (vs. the agent), there would likely be a cost for the first stages that are currently offered free of charge if the house never sells.
Here in the Seattle Area we have OWNER’S Title and LENDER’S Title. Owner’s Title Insurance is the manner in which an owner conveys “clear title” to the buyer. The cost is based on the Sale Price and is paid for by the seller. Lender’s Title is all about the buyer. If it is a cash buyer, there is no Lender’s Title. If the purchase is financed, then the buyer pays for that portion of the Title Insurance that insures the Lender and is based on the loan amount vs. the Sale Price.
RESPA – Basically RESPA provides that “the owner” gets to choose Title. In this post I refer to “the owner” as the person who owns the property prior to closing. Common pactice here is that the owner at time of listing the property “orders title”, at least Preliminary Title. RESPA (Real Estate Settlement and Procedures Act) “entitles the homeowner to choose a title insurance company when purchasing or refinancing…” and gives that right to the BUYER as “owner” and not the seller as owner. In fact any seller who mandates the Title Company to the buyer is subject to a penalty of 3 times the cost of the Title Insurance. This makes perfect sense in settlement States, but is a bit odd in in escrow States. But it is what it is. Back to common practice.
It would seem that the seller should CHOOSE and pay for Owner’s Title and the Buyer should CHOOSE and pay for Lender’s Title, simply due to the fact that the owner and listing agent need to review title information long before the buyer is a known entity. Practical application and the law do not seem to be in sync here. Most often the ACTUAL title policy is an automatic via the company that offered Preliminary Title. To “perfect” the system, there should be a separate administrative charge for the Listing Packet and Preliminary Title that is paid by the seller, and a Buyer Election to choose the Title Insuror, without regard to who provided the a) and b) services. My opinion, of course.
Up to this point, the agent needs to find the things the owner doesn’t often know about the property. Or the agent needs to prove that what the owner BELIEVES is so, is accurate, which is not often the case. We as listing agents are using Title Companies to ascertain liens, easements, encroachments, etc.. We don’t want to find out that the owner is incorrect AFTER the property is in escrow. Often the owner thinks they own the driveway, when they do not. By being in contact with the Title Company in advance of listing the property, we often find out that both owners own the driveway. Sometimes and often four feet each. In my most recent study of a soon to be listed property, the ownership of the driveway is 4 1/2 feet vs. 3 1/2 feet…odd but true. Most owners do not know these things, or worse yet are WRONG about these things. So in my book, misrepresenting the property (IMNSHO) is worse than worrying about waiting for the buyer to be a known factor, before consulting with a Title company.
Still it is the buyer’s right, under RESPA to choose a different Title Company later in the process, so the common practice of Preliminary Title moving straight to an ACTUAL POLICY, should not happen as it does, without the buyer’s direct election of Title Company. From my standpoint this is MORE important in areas where the Title Company is also the Closing Agent…so let’s move on to “choosing escrow”, so you can see why I feel this way.
4) CHOOSING AN ESCROW COMPANY/CLOSING AGENT. While the Listing Agent may have in the agent remarks field “Title Company X Order # X and Escrow TO BE X or Y”, the escrow company is not utilized or chosen (most times) in advance of the buyer’s offer. Only Title services are needed prior to offer (with some exceptions).
Most reasonable people agree with me 🙂 that Title should be ordered by the Seller and Escrow should be chosen by the Buyer.
This post is probably going to open a big can of worms, but in the interest of Transparency, the resultant fallout is of value. Most buyers and sellers get “whooshed” through the whole and very important process of Title and Escrow services. So talking about it is important, even if we all don’t agree.
It is important to note that NEVER in the 18 years I’ve been in this business have I seen anyone choosing title and escrow services based on cost (or home inspection, or anything important to the process). Given the relatively minor differences in cost, the small amount you save is not worth the anguish you might later face by having chosen based on cost vs. competency.
When there are five offers on a property, well making a big deal of buyer choosing escrow may not be appropriate. No one wants to lose the house fighting over who is handling the escrow. But often, even in multiple offer situations, the listing agent will understand that the buyr should chooses escrow, and Title Company too if they want to. The problem with the RESPA rule is that if the buyer makes a big stink over who chooses the Title Company in a multiple offer situation at time of offer, they may not get the house. No one can prove that they didn’t get the house because of the battle over Title Company. So for all practical purposes, seller chooses “all services” when there are multiple offers often wins, because of market conditions.
But with the market changing, it is important to highlight that common practice over who chooses should CHANGE when there is only one buyer in the room, and the “common practice” of a strong Seller’s Market should not continue into a balanced or buyer’s market. That is one of the reasons I am writing this post at this time. My biggest criticism of “common practice” is that agents do not make enough effort to swing it back and forth to match “market conditions”.
Common Practice should reflect the actual needs of the buyer and the seller and change as market conditions dictate, and not simply be “the way we have always done it”.