When buyers take out a mortgage, one of the closing costs they pay is title insurance.
Before a real estate transaction is completed, a title company does a title search on the property to ensure there are no defects in the title that would jeopardize a buyer’s ownership of the property after the sale. However, even if the title search comes up clean, there are no guarantees against defects coming to light in the future. Such issues could not only cost homeowners money, but they could lead to loss of ownership of the property.
Title insurance prevents this by protecting policyholders from future claims made against the legal ownership of the property. It typically covers a wide array of defects, including but not limited to filing errors, liens, conflicting wills, encroachments, boundary disputes, and unknown heirs who claim ownership.
There are two different types of title insurance – lender’s and owner’s – and they essentially provide the same coverage.
- Lender’s title insurance protects the financial institution. Nearly all lenders require homeowners to purchase it at closing.
- Owner’s title insurance protects the homeowner and is optional, but recommended.
Many buyers question the necessity of purchasing owner’s title insurance because it seems like just another in a long list of fees. But it’s really a small price to pay to protect one of the biggest investments people make. On average, both insurances together will cost about 0.5 percent to 1 percent of the purchase price of a home.
But does a new homeowner really need title insurance?
While the case can be made for not purchasing it, industry experts and real estate agents tend to agree that all buyers should purchase owner’s title insurance. Think about it. If any financial issues should arise at any point while they own the property, like unpaid property taxes or outstanding liens, they are responsible for paying those costs, even if they didn’t own the home at the time such violations occurred.
And, if they can’t make those payments, their home could be forfeit to the debtor. Title insurance protects homeowners from such a scenario.
While it may seem unnecessary to home buyers to spend extra to protect against something that may never happen, it’s better for them to be safe than sorry when it comes to protecting their investment. Owner’s title insurance provides that extra safety net against unforeseen claims on a property.
eal estate closings are very different from residential real estate closings.
In general, they are more complicated because they have more extensive procedures. Negotiations also tend to last much longer (up to a year or more) than residential real estate negotiations because commercial real estate contracts don’t have as many buyer protections that inhibit negotiations.
They are also more risky than residential closings. Some of the biggest risks include:
- No RESPA regulations. The Real Estate Settlement Procedures Act (RESPA) does not cover commercial transactions, only residential, which means there are no guarantees or warranties about the condition of a commercial property.
- Multiple and/or unknown owners. Often, a commercial property is owned by a company or multiple owners instead of an individual. If owned by a corporation, it can be much more difficult to determine ownership because of limited access to public records for LLC.
- UCC liens. If a business has to borrow money to purchase a commercial property and uses collateral to secure the loan, the lender will place a public notice about the loan and the creditor’s security interest in the property (known as a UCC lien).
All parties need to understand these risks before entering into a commercial contract.
The 4 Key Steps in Commercial Closings
The process for closing on a commercial property is also different from the residential closing process. Here’s a brief overview of the four main steps involved in commercial real estate closings.
Step 1: Escrow
Escrow in commercial closings is tightly controlled. All parties decide on the terms and conditions of the escrow ahead of time and the money is held by an impartial third party until those conditions are met. This helps establish trust between all sides and better manage the money that usually comes from multiple sources to purchase the property.
Step 2: Legal Entities and Authorities
Since these transactions are usually between multiple parties and involve more money than residential transactions, all parties usually create legal entities for the sole purpose of closing the commercial property transaction. This helps limit the personal liabilities to both buyers and sellers. Because a person must sign on behalf of the entity, the entity must provide documentation that proves the signing authority of the individual who signs the paperwork.
Step 3: Due Diligence
Due diligence is more extensive in commercial real estate transactions. Buyers need to be aware of items such as updated survey reports, proper contract execution, confirmation of zoning compliance, and a search for outstanding taxes and liens. Sellers need to ensure the down payment is delivered on time, the contract is properly executed, and they respond to any objections to title and survey reports.
Step 4: Title and Closing
The buyer must review the title report provided by the title company and file any objections within a specified time frame. The seller then must respond to those objections quickly to move forward with the sale. When all issues are resolved, both parties examine the final report for final approval. Once done, both sides will complete closing documents.
Experienced real estate and title agents can help buyers and sellers navigate these steps and the complexities of a commercial closing.
