May 22, 2019
Our Cherry Hill real estate licensing class was in full swing when one of the students asked a question: “I was reading the chapter last night and I don’t understand the part about title. What in the world does a title company do?” Before I had chance to respond, three other students nodded as if to say that they, too, had the same question.
“We are getting our real estate license. Why do we need to know about title companies?” asked another. It was time for a quick lesson on what title companies do, and why Realtors® and title companies have such an important partnership role in getting our transactions to a successful conclusion.
“Title Company 101”
The simplest answer is that a title company conducts searches on a property that has been sold to ensure that the buyer will receive clear and marketable title—meaning that no other person could later make a claim that the buyer does not have a valid interest or ownership in the property.
Common examples of problems covered by Title Insurance include: Improper execution of documents; mistakes in recording or indexing; forgeries and fraud; undisclosed or missing heirs; unpaid taxes and liens; unreleased mortgages; mental incompetence of grantors; impersonation.
Most Importantly– Title Insurance protects against any number of problems or defects that remain undisclosed after even the most meticulous search and investigation of the public records.
What is “Title Insurance?”
At Garden State Real Estate Academy, our instructors believe people often learn a concept or definition better if they hear a story that explains it. So here is a story that helps explain the value of a title company and the importance of title insurance.
“Imagine Mr. and Mrs. Smith have a troubled marriage, so Mrs. Smith goes off to Brazil, where for five years she serves as a missionary in a remote Amazonian village with no communications with the outside world. While she is away, Mr. Smith sells the home, and shows up at the settlement table with his girlfriend, who signs all the sale documents in Mrs. Smith’s name.
“Some years later, Mrs. Smith returns home, only to find strangers living in her house. ‘Who are you?’ she asks. ‘And why are you in my home?’ You can imagine the conversation that followed!
But because the buyers had purchased title insurance when they bought the home, their interest in the property is protected and insured. And the title insurance company would likely have to pay Mrs. Smith for the legitimate interest she still had in the home”
Why that could probably never happen
At settlement, the title company’s closing officer requires each party to the transaction to provide government-issued photo identification, and a copy of these IDs is kept in the records. With the safeguards in place today by state and federal government, it is highly unlikely that a person could obtain a passport or driver’s license in another person’s name. And if “Mr. Smith” were to be able to get the fake ID issued to his partner-in-crime, this would be fraud, and the penalties against him and his accomplice would be severe—probably including jail time. Since Mr. Smith would have had to provide his Social Security number just to get to the settlement table, it should be relatively easy for authorities to track him down, even if the fraud was discovered years later.
The Process, from Start to Finish
As soon as our client—buyer or seller—has a fully-executed agreement of sale, a real estate professional will forward a copy of the contract to their title company. The company then begins a very detailed search of all public records for both the property itself and the named sellers and buyers.
They are looking for all liens on the property, such as outstanding mortgages and overdue taxes. The title company will review other encumbrances, such as easements, and if the buyer elects to order a survey, they will compare the property’s legal description with the survey to ensure they are consistent with one another.
But the title company will also research both buyers and sellers. Using their names, Social Security numbers, and even similar names (“John Smith, John T. Smith, Johnny Smith, John Smith, Jr., Jack Smith, etc.), the underwriter will check for outstanding financial claims against them individually. Court-issued child support orders, unpaid traffic fines, liens against their name by other lenders—all of these will show up.
When they do, the title company will contact the buyer or seller’s agent and ask them to question whether those liens or court orders are really theirs, or whether they belong to another “John Smith.” Again, to claim that a legitimate debt really belongs to another person is fraud.
One of the best title companies in Southern New Jersey is Your Home Town Title (YHT), and they discovered one of my sellers had an outstanding mortgage lien for a property my client had once owned in the Poconos. But the client had long-since paid off that loan. Unfortunately, it was satisfied so many years earlier that they no longer had any documentation, and the tiny bank had since been sold, and then the acquiring bank had itself been sold. Yet YHT was able to have the lien removed and we went to settlement on time.
The title company will then request an attorney to prepare a new deed to convey the property, and then verifies that it includes the correct legal description and the correct details of the sale and names of the buyers and sellers.
When the title company underwriter is satisfied that there are no “clouds on the title,” it will issue a title insurance policy. These protect the buyer and the mortgage company against any lawsuits or claims and disputes against the title that may arise in the future. The premium is a one-time charge paid by the buyer at the time of settlement, and it continues in force for the entire period that buyer owns the property. In New Jersey, all title insurance premiums are regulated by the state, and all charge the same premium fees.
A Valuable Partner We All Need
The practice of real estate is a team effort. To ensure our buyer and seller clients have a smooth and pleasant transition of ownership, the Realtor®, mortgage company and title company need to have a great working relationship.
Real estate professionals are wise to establish a great relationship with a title company. For decades, Debbie Cassenti, my processor at Surety Title and now YHT has been my go-to expert on any questions regarding transfer of ownership. She has helped my clients get over what seemed like insurmountable hurdles, helped make every transaction pleasant, and that resulted in our buyers getting their new home and our sellers—and me—get paid!
David C. Forward is a licensed real estate broker and instructor and was first licensed as a Realtor® 31 years ago. During his career, David and his business partner sold more than 450 homes in South Jersey. He is now School Director of Garden Real Estate Academy, has won numerous awards for real estate sales, is a much-requested public speaker who has addressed audiences on six continents and is the author of 14 books. David can be reached at David@GSREacademy.com