If your buyer is financing the purchase of your home, a title company has to be involved. The reason is that mortgage lenders require title insurance, and only title companies provide it. If it’s a cash sale or no money is involved, you can probably opt out of using a title company’s services.
What Title Companies Do
Title companies provide several services to homebuyers, sellers and mortgage companies. They include:
- Conducting searches to uncover any claims or liens against the property being transferred (the more common liens are for income or property taxes).
- Holding on to the money from the mortgage company while the sale is pending and releasing it to the seller after everything is done.
- Providing title insurance that protects the new owner and the lender from any title issues that occurred before ownership was transferred.
- Closing the deal by getting signatures from all parties on closing day and making sure that all of the paperwork is in order.
What Is Title Insurance For?
Title insurance is required if your buyers are financing their purchase of your house. Title companies provide it after they’ve researched the property and have ensured that there are no claims or liens against it. If they uncover claims or liens, the sale cannot proceed until they’re resolved (read paid).
In theory at least, most of the other services that title companies provide can be handled by attorneys or experienced real estate professionals. However, they cannot provide title insurance. If you’re questioning how necessary title insurance is these days, when just about everything is stored electronically, you’re asking a good question.
Title Searches Past and Present
The deep dives that title officers used to make into paper files are now done electronically. Researching a property no longer requires that they even leave their desks. Practically speaking, you might say that using a title company has become more of a tradition than a necessity. But good luck convincing any mortgage lender of that.
Title insurance protects the buyer and the mortgage company from any defects in a property’s title. Tax liens are one of the most common defects. The property seller or a previous owner might have skipped out on an Internal Revenue Service bill, and the IRS slapped a lien on the property. Liens stay with the property, not the person.
What About a Cash Sale?
If you’re lucky enough to find a cash buyer, you may not need to use a title company. Title companies' fees are usually based in part on the sale price of the property. State governments also often have a say in what they can charge. Closing costs can easily run into many thousands of dollars.
The cost of transferring property is a lot less if you don’t use a title company. As an example, a title company might charge $150 or more to record the transfer of ownership. You can go down to your county recorder’s office and do it for around $20 in most states.
But before you get excited about saving a bunch of money by handling the sale yourself, know that, unless you have a lot of experience, you’re taking a big risk. If you're not going to use a title company, enlist the aid of a real estate attorney to make sure all of the paperwork is in order. Hiring a lawyer to handle a cash sale will often be less than using a title company.
Quickclaim and Warranty Deeds
Another scenario in which you don’t really need a title company is if you’re transferring ownership by using a quickclaim or warranty deed. Quickclaim deeds are more familiar to most of us. They’re the one-page form that says you’re transferring ownership of your property to someone else. They’re often used when no money is involved, like when you’re giving your property to your children or handing it over to a spouse as part of a divorce settlement.
Warranty deeds do the same thing, but they contain a clause that protects the person receiving the property from any previous claims or liens on it. It’s not the same as title insurance because if a claim or lien is later discovered, the new owner can’t automatically collect damages. They’ll have to take the matter to court.
Everything Is Negotiable
Remember, everything is negotiable. It’s not unheard of to negotiate closing costs as part of a sale. You can ask the buyer to split them with you or even pay all of them. If you’re giving them a great deal otherwise, and they really want your house, they might be willing to pick up the title company’s tab.