Real-estate is having a moment.
In December, the Case-Shiller U.S. National Home Price Index, which tracks the value of single-family homes located in 20 U.S. metropolitan areas, recorded its highest calendar year increase since 1988. The last time that this much money was being made buying and selling homes, Ronald Reagan was president.
Contingencies are disappearing, homes are being bought unseen, and no one seems to be paying much attention to the humongous 6% commission that realtors take off the top of a sale. Not surprising, then, that smaller transaction fees are passed over with nary a glance, among these the ubiquitous but mysterious title charges.
Even some seasoned real-estate investors have no idea what title companies do, exactly. Their primary products–title search and title insurance–are listed as line items on settlement statements, without clarification. And given that these costs are a relatively small part of the total closing costs, and that they’re required by law, why would consumers bother asking any questions?
Yatin Karnik, founder of Confer, Inc., a blockchain-based mortgage customization firm, thinks they should. Karnik is building a marketplace where borrowers can compare different mortgage service providers, including title companies. By providing an open platform for borrowers to compare not only prices but the level of service and the services that are mandatory versus optional, his company aims to provide transparency–and democratize the real-estate investing process.
So what do title companies actually do? A lot, as it turns out. They pull public records on a property to ensure that there are no issues, such as a mechanic’s lien, deed covenants, clouds on title, gaps on ownership, debt and easements. They also establish the buyer as the new owner of record, hold earnest monies and oversee closing. Most importantly, title companies provide insurance for what may very well be the biggest investment in a person’s life.
But Karnik says that the cost of title insurance is rarely challenged because title insurers tend to have little wiggle room on rates. As a result, many investors don’t understand what they’re getting for their money.
There are actually two types of title insurance: lender’s title insurance and owner’s title insurance. Lender’s title insurance is mandatory for most mortgages, while owner’s title insurance is not. Title insurance is regulated at the state level, so rates can vary greatly between states but should not, in theory, vary within them. But you will surprised to know that rates do vary greatly within some states as well.
As third-party facilitators, title companies are prohibited by law from earning commissions from lenders. However, they can charge a raft of extra fees. These add-on expenses include mail and courier charges, copy fees, and fees for searches and certificates—and they can add up quickly. What most homebuyers don’t know is that the fees are negotiable, even if the insurance premiums are not.
“Most people assume they have no control over the services involved in providing the title insurance,” Karnik says. “So borrowers are charged exorbitant fees for items that are questionable, like $250 courier fees–just to get the documents to you within 3 business days.” Karnik has seen copying fees as high as $150 and jokes that the next step may be a $125 fee for coffee. “The name of the fee and the reason to charge that fee is so loosely regulated that essentially there is no monitoring or reprimanding bad behavior,” he observes. “That’s why servicing the title is amongst the most profitable businesses in real estate.”
This is not to suggest that title insurance is unimportant or unnecessary, Karnik says. Title companies do most of the back-office work in a real estate transaction. They protect borrowers from financial loss if the lender discovers a defect in the title to the property and demands that borrowers pay back the loan. Title insurance also guards against loss should someone make a valid claim to take possession of your home—not because you don’t own it but because they have an earlier legal right to do so.
Still, Karnik says that investors should not offer title companies a blank check. Rather, they should be asking some tough questions.
For example, how do larger lenders/banks end up selecting the title company to use on all of their mortgage transactions? Also, do these lenders allow you to select any other title company you prefer? Do you know where to find other competing offers for title insurance? Is there a “marketplace” or “exchange” to shop for title insurance? Are premiums standard across the board?
Karnik says these questions are important because the Real Estate Settlement Procedures Act prohibits a bank or lender from mandating a particular insurer. Investors therefore have more options than they think, but until recently they haven’t had the ability to easily compare policies. Karnik’s company aims to change that.
Saving money on title costs may not be top of mind for investors in today’s bonanza-like real-estate market but they may be soon. Consider that within a few years of the 1988 real estate boom, war had broken out in the Middle East and the country was in a serious recession. Investors, as usual, have been content to roll in the dough while the good times roll, but Karnik expects demand for his fee-saving product will boom as investors become more cautious.