When buying a property, a title company and title search are essential to protect your purchase. A title company will ensure that the property title is unencumbered. An unencumbered property means no one other than the seller has ownership rights to the property. It also assures the buyer that the property has no liens on it. Read on to understand what a title company is and why you need to work with one for real estate transactions.
What Is a Title Company in Real Estate Transactions?
A title company in real estate transactions verifies that the seller has the legal right to sell the property to a buyer. This company performs a title search, which confirms the title is free of liens or encumbrances and the seller is the rightful owner of the property. This company also issues title insurance, which protects homeowners and mortgage lenders from conflicts related to the previous owners. A title company ensures that the previous property owners can't make a title claim.
What Does a Title Company Do?
A title company researches and guarantees the title. The title company works on behalf of the lender and the buyer. When you purchase a real estate property, you need to hire a title company to research and insure the title of the property you’re planning to buy.
The role of a title company is essential in real estate transactions. For example, if you purchase a property without a title search, another owner could have a claim on the property. If the property has two owners and one tries to sell, the other could later make a claim on the property, which would be inconvenient and uncomfortable for everyone involved. That's why you need a title company. They will perform the title search and issue the title insurance. Here are the main steps a title company will perform.
1. Research and Verify Property Ownership
Title companies conduct thorough research to ensure that the seller has legitimate ownership of the property and that there are no outstanding liens or encumbrances on the title. This will also confirm the total number of owners and that there are no additional owners with a claim on the property.
2. Conduct a Title Search
Title companies search public records to review the property's ownership history, mortgages, legal judgments, tax records and other relevant documents. They can provide you with ownership records, tax records and other relevant details.
3. Issue Title Insurance
A title company also provides a title insurance policy that protects the buyer and lender against any potential defects in the title. This acts as a guarantee that the title company has prepared its search and confirms that the title is valid and ready for sale.
4. Prepare for the Closing
Title companies work closely with real estate agents, lenders, attorneys and other involved parties to ensure a smooth and timely closing process. This includes preparing the necessary legal documents required for the closing. The title company will help you prepare the deed, transfer documents and settlement statements.
5. Conduct the Closing Process
Title companies oversee the closing process, called settlement, where parties sign all necessary documents, funds are distributed and the transfer of ownership is recorded. They appoint a signing agent or real estate attorney based on state requirements to review all closing documents and finalize the deed and title transfer.
6. Record and Transfer Ownership
The title company handles the necessary paperwork and documentation to record the transfer of ownership with the appropriate government agency, usually the county recorder's office. This will save you time and ensure the sale is properly completed.
7. Provide Escrow Services
In some cases, the title company acts as an escrow agent. In that case, it will hold the good faith funds in an escrow account until the closing. As the escrow agent, the title company may hold documents and other relevant items until certain conditions are met.
How Much Do Title Company Services Cost and Who Pays for It?
Title company services costs vary by state and locality. In addition, whether the buyer or the seller pays the title company varies by state. As a general range, you can expect to pay 1% to 3% of the property value in closing costs. The average total costs range from $2,200 to $3,500 for sellers and $2,000 to $3,000 for buyers.
How to Choose a Title Company?
You can choose a local or national title company. It can help to get a recommendation. Your real estate agent, lender or lawyers could suggest a title company. Or, you can ask friends or colleagues which title company they worked with and how their experience was.
When to Contact a Title Company?
It's best to involve a title company as early as possible in the buying or selling process so it can identify and resolve any title issues before they potentially derail the transaction. At a minimum, once you sign a purchase contract, you'll need to employ a title company to perform a title search and issue title insurance. In some cases, you'll start working with the title company before signing the purchase contract if it will also act as the escrow company.
Working with a Title Company
Title companies offer diverse services throughout a real estate transaction, from acting as the escrow agent to conducting a title search and facilitating closing. Whether you're buying your first home or planning to invest in real estate, working with a title company to ensure the title is free and clear is essential. This will protect you down the line and ensure a smooth closing on your new property.
Frequently Asked Questions
How do title companies determine whether a title is clear?
To determine whether a title is clear, a title company will do a title search. This involves checking for claims or liens against a title before it can be deemed clear. The title company will check property history, public records, tax records and local registration. For example, the title company should be able to identify erroneous surveys or unresolved building code violations that could affect the title in a sale.
Is title insurance a one-time cost?
Yes, title insurance is a one-time upfront cost. The cost of title insurance is based on the home’s purchase price or the loan amount. Both the buyer and the lender may get title insurance.
How long does the title search and insurance process take?
A title search usually takes 10 to 14 days. Title insurance will cover the buyer and lender until the real estate transaction closes and guarantees the title is free and clear.
About Alison Plaut
Alison Plaut is a personal finance and investing writer with a sustainable MBA, passionate about helping people learn more about wealth building and responsible debt for financial freedom. She has more than 17 years of writing experience, focused on real estate and mortgages, business, personal finance, and investing. Her work has been published in The Motley Fool, MoneyLion, and she regularly contributes to Benzinga.