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Podcast #3 Topic: What Does a Title Company Do

title insurance podcast

What Does a Title Company Do?

For this podcast I sat down with Chris Finney owner of Finney Law Firm and Ivy Pointe Title.  During our conversation we discussed what does a title company do, title work, covenants, title insurance, the real estate closing process and more.  This podcast is helpful for those about to purchase or sell real estate by showing you what to expect during closing, and how the title company helps you get your your home bought or sold!  I hope you enjoy the podcast and find it informative.  Please also consider sharing with those who may find it useful.

Watch (listen) on YouTube

Feel free to ask any questions via the comments section below or to email either Chris or myself.  Also if you have any ideas for future podcast topics you would like to see let me know!

You can connect with Chris on Facebook via Finney Law Firm, Facebook via Ivy Pointe Title, Twitter @FinneyLawFirm, Twitter @IvyPointeTitle, and Google+,

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About the author: The above Podcast “What Does A Title Company Do?” was provided by Paul Sian. Paul can be reached at paul.sian@herrealtors.com or by phone at 513-560-8002. With over 10+ years experience, if you’re thinking of selling or buying, I would love to share my marketing knowledge and expertise.

I service the following Greater Cincinnati, OH and Northern KY areas: Alexandria, Amberly, Amelia, Anderson Township, Cincinnati, Batavia, Blue Ash, Covington, Edgewood, Florence, Fort Mitchell, Fort Thomas, Hebron, Hyde Park, Indian Hill, Kenwood, Madeira, Mariemont, Milford, Montgomery, Mt. Washington, Newport, Newtown, Norwood, Taylor Mill, Terrace Park, Union Township, and Villa Hills.

Transcript

Paul Sian: Hello everybody. My name is Paul Sian, Realtor with United Real Estate Home Connections licensed in the state of Ohio and Kentucky. Today with me is Chris Finney of ‘Finney Law Firm’. Also, is it, are you the owner of Ivy Pointe Title apart from. 

Chris Finney: Ivy Pointe Title, 100% owner of that as well.

Paul Sian: Okay. Well thanks for being on my podcast today. Why don't we get started into the question and answer session? I was going to ask first question, can you explain to us what a title company does?

Chris Finney: Well, it's funny that you ask that because I've been doing this for 20 some years in addition to my law practice. The other day my wife said to me, what does a title company do because I've talked about my title company, and she knows a little bit about it but she really didn't know. So, in conjunction with every purchase of real estate, someone should check that the title is good down at the courthouse. 

Paul Sian: That means-.

Chris Finney: A lot of things. It means that the owner hasn't filed bankruptcy, it means that he doesn't have certain kinds of liens against him. It means that he's the peaceable owner of the property, meaning he's got the deed to the property. It means that we know what the mortgages are that are outstanding, it's a whole series of things, and in fact a good title examiner will check in five or six different places to confirm good title. But a title company in essence checks the title to real property, and then ensures that title to the lender, the purchaser, you can even ensure to a tenant unless the title is good or if it's not perfectly clean, which very few of them are. It explains to the owner in the title policy what the encumbrances against title are, okay?

Paul Sian: You've mentioned insurers is that the title company themselves writing the insurance policy or is that they write a statement and then somebody else is providing the insurance coverage?

Chris Finney: Most local title companies are agents for a national underwriter and then the underwriter actually issues the policy. So, it's just like buying homeowners insurance from your Allstate agent, and then the national whole state or whoever it is writes the policy.

Paul Sian: Okay. Then why don't you explain the what's the process of title search, what's done, how is that done, and where is it done?

Chris Finney: Well in Ohio, it's mostly done in the office of the Hamilton County Recorder. There you'll find recorded mortgages against the property, deeds of record, any easements, liens and then for residential subdivisions. For example, you'll have a series of covenants against the property and a plateau subdivision that set forth the promises that the owner has made to the other owners in the subdivision. They will check bankruptcy court, they have to check for unpaid taxes in the auditor's office, and there's a few other places that leans can kind of be hidden that they should check, various indexes to assure that every issue relating to the real property title to the real property is made clear.

Paul Sian: So, it's not an easy thing, not a one-stop shop. I mean, it seems like they have to go to a couple different steps.

Chris Finney: 3:27 probably like anything else, there are people who take shortcuts and do it the simple way, and then there's the right way to do it. I would hope that all title examiners would do it the right way but not all of them do. But to do it correctly, you have to go to several various government offices to assure that you've got all the potential problems that can arise with title.

Paul Sian: Okay. You mentioned covenants along with that, covenants and deed restrictions. Can you explain that a little further?

Chris Finney: Yeah. So, what happens, let's say a residential developer, first of all many people don't know but the person who makes the subdivision. Who cuts up the land, they've one big piece of land and they cut it into subdivided parcels is frequently different than the Builder. So, the subdivision is the person who makes the subdivision, takes one big piece of land, he puts in roads, sewers, utilities like gas, electric, telephone, and then he breaks up that property into subdivisions and he makes money doing that. 

He then sells the property to one builder or to many builders who then build the houses and sell the end product to the buyers. Typically when that one owner owns the land, he places against the property what they call ‘Declaration of covenants’, and he places against the property a flap of subdivision. The plot of subdivision basically takes that property and cuts it up into individual Lots. But it also does many other things, and then the text on the face of that subdivision plat, there will be covenants and promises, and then the declaration of covenants might be a short of seven or eight pages and it might be as long as a hundred pages.

It contains all kinds of, you can't put RVs in the front yard or boats, you can't leave kids toys out, you can only park so many cars in your driveway and so on. Some say you can't displace signs in your own yard, and then beyond that, many times they have a homeowner's association that collects dues, enforces rules and then maintains the common areas, which might be an entrance monument, it might be a party hall, and tennis courts. It might just be a detention basin, and then finally in those covenants, they many times have design restrictions. So, your house has to be a minimum of 3000 square feet, it has to have brick exterior. It has to be set back 20 feet from the road, and those sorts of things.

Now the important part of that is think about this the subdivision plat and the subdivision covenant are just signed by one person, the developer. He places that of record.

Paul Sian: Okay.

Chris Finney: But the effect of that document, whether it's eight pages or a hundred pages along with the plateau subdivision is that it becomes a contract buying among the subdivision lot owners, when they buy a lot. So, if you think about it, very few of us in our lifetime have signed a hundred page contract.

Paul Sian: True.

Chris Finney: Normal homeowners don't just go around signing big fat contracts. But when you buy a house that's in a subdivision that has a hundred page declaration, you have effectively signed a 100-page contract because you're agreeing as an owner in that subdivision to all those promises whether you know about them or not. You're bound by those promises because they're a record in the County Recorder Office. Most homeowners don't really fundamentally understand that those documents bind them, just as if they had signed them themselves.

Paul Sian: Okay. That's an ongoing thing usually in essence forever.

Chris Finney: Most sub division covenants extend in perpetuity.

Paul Sian: Okay. What happens if somebody happens to break a covenant whether intentionally or unintentionally?

Chris Finney: Like everything in the law, that can be a complex question but as a simple answer that covenant theoretically can be enforced by every single homeowner in the subdivision individually, and by the homeowners association. I would say the vast majority of subdivision documents that I have seen in Ohio have a fee-shifting provision, which means that if the association is forced to sue the homeowner to enforce a covenant. It might just be to collect the monthly dues or it might be because you build a shed in your backyard that you're not allowed to build, they also can collect their attorneys fees for the enforcement of those covenants.

Paul Sian: Okay. So, it sounds like it's something that people need to pay attention to it. They do violate it if they might have some other issues to deal with.

Chris Finney: Well, you know they always say read the fine print. Well, when you buy a house in a subdivision or if you buy a condominium, you don't read the declaration, and you don't read the plateau subdivision to understand what the covenants are. You're buying into a contract without knowing the terms.

Paul Sian: Or if not readied at least, talk to your attorney and  get them to read it for you and give you an opinion, if you're going to do something.

Chris Finney: Correct. We’re hired from time to time just to read these long documents, and give people a one or two page summary of the highlights of the things that might be important. let me tell you a funny story of one that I had years ago, a client of mine was buying a condominium in a high-rise in Cincinnati. He was a corporate executive that traveled a lot, and really had a hard life, he pushed really hard. But he said, when I come home on the weekends, I just want to grill out a steak on the back patio and enjoy myself. 

Well, I read the covenants and one of the things that said because it was a high-rise, it said you cannot have a charcoal grill out on your back patio because the smoke will washed up onto the other units. He wasn't allowed to do the one thing that he wanted to do with that condo, so it's important that you read those covenants, you never know what's going to be in them.

Paul Sian: Yeah, that's a good point. Talk about, we already talked a little bit about title insurance. Why don't you talk about what title insurance can do in protection wise? Somebody comes along and buys a house, they find out later there's a term they call ‘Clouded title’. What can you tell us about that and how does title insurance protect that?

Chris Finney: Yeah. First I mean, let’s give you a few examples of the kind of real problems that clients have had with title over the years. One, I had a client that bought a piece of property he didn't buy it through me, but he came to the problem later. It turned out he had a $20,000 lean that was owing to the IRS against the property that a good title examination would have caught, if they had searched. I have had another one, when a subdivision in which every single house was built onto the lot next to it, it screwed up the survey and every house was built ten feet off of where it should have been. So, it actually encroached on the property lines. Sometimes the issues are much more minor, like a six-inch setback violation.

But what I normally tell clients is that title problems are rare but when they occur, they typically are fairly expensive to fix. So, that's kind of the starting point, so that the question is what happens, I bought a house or I bought a commercial property. I've now learned that I have a title impairment. As a starting point, most buyers get from their Seller a general warranty deed, a general warranty deed is a promise from the seller to the buyer that you've got good title to the property. That's a great starting point, the problem is many sellers for lack of a better term, don't have a pot to pee in, they don't have any money.

So, when you go after them to pay for this or that title problem, there's nothing there, they might have died, they might have moved out of town, you can't find them, they might just be out of state. It's not economically efficient to sue them and collect against them. So, it is a great deal of comfort, I don't want to minimize it that you have a general warranty deed from a seller. But it's by no means and assurance that you've got title protection. Now that's where the title insurance companies come in. They say look, we're going to ensure the property subject to certain exceptions, and they're not going to ensure over known covenants. 

So, if there's a set of covenants against the property or an easement that's been a record for many years, they're not going to ensure over that. But for everything else that becomes a problem, they say we will provide you with protection. Now here's the important part, when you go to a closing, many people. Well first of all, when you go to a closing, the lender typically requires you to buy a lender's policy of title insurance that benefits the lender only. Many buyers go through this thought process in their mind, they say, well I'm paying for a title insurance policy for the lender. I've already paid somebody to search the title. They say things like oh the house has been here for 50 years or even better, it's funny or they say well this is a brand new subdivision. Therefore the title must be clear. So, they reason in their mind that they don't really need to buy an owner’s policy of title insurance for those reason, and all of those are false.

So, first of all on the first one, when you pay for a lender's policy, the only thing you get is coverage for the lender. The fact that the subdivision is new or old or the house has been there for five years or 50 is largely irrelevant to the title analysis; you can still have very expensive title problems in all of those circumstances. Also the fact that somebody has in fact search the title and you've paid for it, which should give you some comfort, doesn't. There's Ohio and Kentucky law on this very point, and this is the message of this. “If you don't buy an owners policy of title insurance, which is a one-time premium”. They credit against that whatever you pay for the lender's policy. So, it's sort of a bargain.

Paul Sian: Okay.

Chris Finney: But if you don't buy an owner’s policy of title insurance, you do not have that secondary protection, you still have the protection for the general warranty deed. But you are not insured if a title problem arises. People have tried every legal theory to get around that problem, and it doesn't work. A title company, because they're doing the closing, because you pay all these fees, doesn't provide you any assurance of title.

Paul Sian: All right, that's good information. You had mentioned a little bit but general warranty deed. I know there's other types of deeds, quick claims and few others. Why don't we talk about the deed types, and what are the pros and cons of each? With a quick claim, it's kind of like, it's worth the paper that it's written on.

Chris Finney: That's exactly right. So, there's four basic types of deeds in Ohio. The most common in residential and really in commercial transactions is ‘General Warrant Deed’. The way the language and a general warrant deed typically works is it says that the seller warrants the title to the buyer, except for easements covenants and restrictions that are of a record. So, first of all, as a starting point, there's something that's a record once again, you're bound by that. Nobody is giving you any assurance against things that are of record, so you need to check the title.

But other than that, the general warranty covenants is a pretty broad assurance from the seller to the buyer that you have good clear and marketable title. Interestingly, let's say since 1920, the house or the commercial property in question has been conveyed by general warranty deed from buyer to seller for years. 

You actually have the right to go all the way down through the chain of title and sue every one of the predecessor owners on that general warranty covenant. Or saying it differently a seller when they give a general warranty covenant. It's a perpetual promise to people all the way down the chain of title that they're going to have good title.

Paul Sian: Okay

Chris Finney: The second kind of deed is called a limited warranty, sometimes called a special warranty deed. A special warranty deed says simply that the seller promises that he has not screwed up the title, he has not impaired the title. But he makes no promise as to the quality of title before he bought the property. just he didn't do anything to harm the title. So, it's a much more limited form of deed and you'll see that many times specified in a commercial contract. Now let me just say on a limited warranty deed and on a quitclaim deed and on a fiduciary deed, which is the fourth kind of deed. It really enhances the need for title insurance.

Because if you're not getting any broad and general assurance of title from the seller and you're not buying title insurance. You're buying the biggest investment of your life in many cases with no promise that you're getting good title. That's to me just foolhardy.

Paul Sian: Yeah, ever you are goanna losing everything then don't have anybody out to look to him.

Chris Finney: And that's happened. So, in Cincinnati people who've been around 15 years or more remember Bill urban Beck and the Urban Beck home scandal he's now in prison. He stole the payoff monies for mortgages when people were buying new homes from him. What did that mean? If they didn't buy title insurance, it meant when they went after him under the general warranty covenants, he was insolvent. There was nobody to go after.

Paul Sian: Okay.

Chris Finney: It meant that if they didn't buy an owner’s policy and there was a $200,000 mortgage that preceded their interest in the property. They had to pay that $200,00. So, it's dangerous. So, if you're getting a lesser quality deed and even if you're getting a good quality deed, it marked your title insurance. The third kind of deed is called a ‘Fiduciary deed’. When you have an executive and a state a trustee of a trust or some other fiduciary, they give a fiduciary deed. The fiduciary covenants in Ohio and again depends on the forms and other states.

Basically, say that, the fiduciary promises he has authority to sign the deed, but otherwise he does not assure the title to the quality of title to the property. So again, you're getting no assurance that you're that there aren't liens covenants easements and restrictions against the property of record, or otherwise and it calls for prudence on the part of the buyer perhaps to get title insurance. 

Then the fourth kind and final candidate is what's called a ‘Quitclaim deed’. As you pointed out this is most the weakest deed or the most dangerous deed. The seller says, ‘I don't know or represent to you if I own anything at all. I may own the whole title; I may own nothing. But whatever I have I convey and Quitclaim to you and good luck. I'm not even sure it comes with the problems of good luck’.

Paul Sian: Yeah, sometimes we see that in divorce cases too. I mean that their advisory house.

Chris Finney: Yeah, if you're going to take a Quitclaim deed, that should be a warning sign that the seller thinks there's a title problem. You're really on the title checked and by an owner’s policy of title insurance.

Paul Sian: Okay, that's great advice actually. Let's talk about how does the title company prepare for closing in what you know we're getting close to the date. So, what is the title company doing as they come to that date?

Chris Finney: Well, again the most important function of the title company is to assure to the buyer assured to the lender, the title to the property's free clear and unencumbered. If the title companies asked to prepare the deed for the seller to make sure it's prepared correctly and the proper sellers are named and all owner sign and spouses. So, you get release at our that all mortgage payoffs are obtained. So, that the mortgage interests are released that the title policy is written correctly. So, everybody knows about the covenants if they're buying a policy. Then anybody who's been to a closing recently commercial or residential knows that there's just a plethora of paper.

Paul Sian: Yes, there is.

Chris Finney: A lots and lots of statutory and regulatory forms that have to be filled out. Depending on when you're reading, listening to this podcast is of October the first 2015. A whole new set of documents is going to be required compared to what's required today. But the title company prepares all of those. Then there's two ways to do closings. In Ohio and particularly southwest Ohio, the custom is a round table closing which means you get the buyer and the seller in a room. They sign all of these documents you exchange the deed for the checks.

Everybody shakes hands, exchanges keys and phone numbers for the utility companies and you have what's called a closing. In other jurisdictions, they have what's called ‘A escrow closing’. Where the documents like the deed and the other documents are signed and submitted to the escrow agent the money is submitted to the escrow agent. The escrow agent then records the deed once he's sure that title is clear and everything's fine. 

He disperses all the documents and money to the appropriate parties and nobody actually has to show up for the closing. But the title company prepares all those documents handles the recording of the instruments issues the title insurance policies. Then sends copies of the documents to everyone.

Paul Sian: Okay. Now what should sit a buyer and the seller, they're getting ready to come to closing. What do they need to do preparation wise?

Chris Finney: Under a typical purchase contract, the seller really has two obligations. They're a typical purchase contract the seller typically has two obligations. One is to transmit his mortgage payoff statements to the title company. So, we know how to get those mortgages paid off and to prepare and bring to the closing and sign a deed.

Paul Sian: Okay those are the only two things the seller is really obligated to do with it closed. Now we asked him to do other things sign the title an affidavit. Which promises there's no mechanic's liens and property disputes with neighbors and so on. But those are the two basic seller responsibilities. The buyer on the other hand usually has to do jump to a lot of Hoops to arrange for the financing he has to come up with his down payment. He has to do all the things necessary to get the bank loan in place. Essentially, the buyer’s obligation of closing is to show up with a check.

He's got the cash in the bank, it's basically an exchange of a deed for a check. Now there's other documents but that's the essential transaction. If he's borrowing the money, the bank has all kinds of requirements. These get a survey that he paid for title insurance, that he some commercial deals that he buys an environmental report. Sometimes that he gets a zoning certification and a traffic study all kinds of stuff to make the lender happy. Which is usually the hard as part of any transaction.

Paul Sian: Okay, that's good information. Let's talk about just the differences in title work for commercial property versus residential property. I mean, is there major differences, a similar process? How about the closing as well? Is that same different?

Chris Finney: In reality, it's exactly the same. I mean the places we check title are the same. The encumbrances are essentially the same. What happens in a commercial transaction is, sometimes there's two or three or four zeros at the end of the transaction that didn't exist in the residential. But candidly, the same level of care and attention should be paid in both sets of transactions regardless of the size. On a more practical level, first on the fundamental level again we're exchanging a deed for money that's the essential transaction that's going on and that's not complicated.

Where it gets complicated either requirements of the lender and the lenders usually multiply their requirements. They want to see leases from tenants, they want to verify profit and loss statements. They need environmental reports traffic studies, they want to confirm utilities, they want to see rent rolls and on and on. They have all kinds of requirements for commercial transactions that may not exist for a residential transaction.

Paul Sian: Okay. One question to, I mean you you're an attorney and talking my closings, in all the closings I've been do I've never seen the buyer or seller bring an attorney with them. I mean, how common is that, how helpful is that or how not helpful is that?

Chris Finney: First of all, if you go to Chicago, Cleveland, New York, Los Angeles everybody has an attorney with the net closing. Nobody would even think about going to a closing without an attorney. In southwest Ohio on the other hand, it is more the custom that people come without an attorney and they saved that money. There used to be a guy on the radio, Bruce something or another, can't remember his name. But he always said you know you have to have an attorney at the closing. I'm not sure exactly how to answer that question with it, since my self-interest is at stake. But it's just kind of like here's what I tell people.

Both with respect to having an attorney at the closing and with respect to Title Insurance. I say do you own home now? Yes, I do. Do you have casualty insurance on your house in case it burns down? Yes, I do. Did your house burn down last year? No, it didn't. Well then, you wasted that money? Didn't you? 

The problem with not buying title insurance and not having an attorney representing with the closing is, you don't know until after the closing. In some cases, well after the closing that you really needed one. I'm not pushing it I certainly respect the vast majority of people who don't do it. But things can arise that could create problems if you're not careful.

Paul Sian: Okay, that's also good to know. That's my last question. Did you have any final thoughts or any final comments you wanted to share?

Chris Finney: No, I just love what you're doing getting the message out Paul to everybody on these real estate topics and legal topics. It's very helpful and very progressive of you to do that. So, I appreciate the opportunity to speak.

Paul Sian: Well, thank you as well for coming on my podcast. Spend a great session, very informative. Thank you.

Chris Finney: Thanks Paul.

 

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