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How to Successfully Close on Real Estate Deals

November 25, 2022
How to Successfully Close on Real Estate Deals

When you’re talking about real estate, there are a lot of terms that get tossed around and many different facets in play. Whether you’re working in commercial or residential real estate, there are numerous steps involved in successfully closing a deal. One of the key components to being effective in real estate is developing a thorough understanding of what all these terms mean, how they play into and off of each other, and what kinds of responsibilities fall under their umbrellas.

If you’re serious about closing deals, then you need some knowledge to back up the goal. Escrow and title companies are key players in the game, so they’re the perfect place to begin.

Understanding Escrow

Let’s start off with escrow and define some simple terms. After the stage is set, we can get deeper. What is an escrow when we’re talking about real estate transactions?

An escrow company is an independent third party where the buyer and seller can come to that party to facilitate the exchange of documents and funds for closing a transaction. Someone is signing away a deed. They want to give that deed or legal document away when they know the funds are available and vice versa. People only want to put their funds up if they know the legal documents are signed. An escrow company then acts to facilitate that process as an independent third party, a fiduciary, or by taking the documents and funds and helping people feel comfortable. It will send the money as soon as it’s received, record that document, and everything’s good. That’s what the escrow services do.

Escrow attorneys are neutral, independent third parties. They won’t release anything until everyone has signed off on it.

Understanding Title Companies

Title companies are the ones that search and do the background searches on the title property title. From that, they determine what documents affect the property and what doesn’t affect the property, then commit to ensuring that transaction. Hence, they’re the company that does the issuance of the title policies.

The title and escrow companies are combined in Texas, so the title companies and escrow companies do both services. In other states, and on a national scope, others bifurcate that. There are separate escrow companies from title companies. You’ll see that more on the west coast, along California and Washington.

When you’re talking about insurance and title companies, it’s indemnity insurance, predominantly found in the US, which insures against financial loss from defects, title to real estate, and from invalidity or unenforceability of mortgage liens or ownership interests. It covers both defects when examining the title, in the event that a document is missed or if something comes up in a document that might present an issue you’re concerned about.

Imagine asking, “Hey, if I own this property, is this easement going to be an issue? Is this encroachment going to be an issue? Is this restrictive covenant going to be an issue?” It insures against those things. It also insures the closing process, so if a mistake is made and taxes are not paid, they’re collected in the escrow process. It also covers the types of issues that come with missing something in the closing statement or process.

An Illustrative Example of Title Issues and Title Insurance 

To best show the necessity of title insurance, take into account the following story:

A house flipper buys a single-family, residential home from a wholesaler, who purchased it (supposedly) from the homeowner, who had lived there. While improving the backyard, the house flipper found a deceased body in cement in the fountain in the yard.

As it turned out, the body belonged to the homeowner who (supposedly) sold the house to the wholesaler, who in turn sold it to the house flipper. The homeowner had a habit of taking people into his home, and one of the runaways who had been staying in the home “disposed” of the homeowner in the cement fountain. So how did the sale even happen?

The title company got word from the homeowner saying, “Hey, you know what? I can’t come. I’m traveling abroad. Let me send you my ID. Let me send you all of these notarized documents, Everything is good, but I just can’t be there. If you don’t mind, could you wire the funds to this wire instruction?” That title company closed the deal. The wholesaler, who had the recorded deed, wasn’t on the property. He sells it to the flipper, who has no idea what’s going on and isn’t sure if he owns the home.

The house flipper has a valid claim against the title company, as they’re there to insure against fraud and forgery. As an independent third party, it is part of closing a transaction to verify the authority of the people signing the documents. In this case, that person was insured on their title policy and had a valid title, even from a wholesaler, who hopefully got a title policy against the homeowner. Even with fraud and fraud theory, the house flipper would be covered.

Lessons from the House Flipper

Mostly, that example is a rather wild illustration of why you should make sure you get title insurance. In that particular case, you had multiple transactions stemming from the fraudulent transaction that got recorded. There was also the transaction between the wholesaler and the flipper, which was recorded as well.

In this case, it’s also important to note whether all of the title companies and the insurance were responsible, or if it was just the one that made a mistake. The truth is that it depends on who claims the process.

Ultimately, the person who purchases from the flipper claims his title policy. That title company is going to have a choice. They can go correct the title and find the person who truly would have had the title. In this case, that would be the homeowner’s heirs. They can offer to pay them to give the deed to the correct person and clear the chain. That’s one option, instead of just paying out with an apology for a loss or failure of title. At that point, they’d subrogate the rights to them, meaning that the heir would give them the right to go out, take their place and sue whoever they need to sue to recoup what they can.

The takeaway here is that whoever makes that claim gets paid by that title company or cleared by that title company. The title company can then go and work its way down the line of people who might be responsible or sharing the responsibility of whatever expense they had to pay for that claim.

Disclosure Issues

In keeping with this example, it should be noted that there are disclosure issues in scenarios like a body being found on a property. However, that is more of a disclosure issue under property law for closing or entering into a contract for a residential transaction. It is not necessarily a title issue. That also applies to anything like lead paints or other things required under the law disclosure issues. It’s important to understand that it’s not a title or an escrow issue.

Probate Involvement

When you’re dealing with heirs, there may be a question of whether or not you need to go through probate to handle things. Going through probate involves filing and a subsequent notice sent to relevant parties that lets them know something along the lines of, “Hey, this person died. They’re claiming that they have this property. If you have any claims against this person, come now or forever hold your peace.” You have a set amount of time for those claims to come in if no one claims that the person who’s given the executor ship over the state can disperse the property accordingly.

In this particular situation, the business aspect meets the title insurance aspect. Sometimes business decisions are made in assuming a risk as a title company and saying, “Okay, if you do XY and Z, we can go ahead and insure it this way.”

One of the things used, especially with death, is called an airship affidavit. An airship affidavit is usually signed by someone with expertise and attested to by someone who has the ability but is a disinterested party. It essentially says, “Hey, this person owned this property. I know them. They have three children, and here are their names.” That’s laid out and recorded in the airship affidavit. Those people sign a deed to the new buyer, and then the title company is allowed to insure the transaction for the new buyer.

If one were to go through probate, that tends to be easier. There’s usually an executor or one person who has the right to convey the property. It’s a lot cleaner. Even in doing that, you must depend on where they probate the will and where the property is located. You might have to duplicate that probate record wherever you’re selling the property.

Conclusion

Now that you have more of an understanding of the complexities sometimes involved with the escrow and title companies, you’ll be more equipped to move forward in your real estate endeavors. The example used to make these points likely won’t be one that most people will ever encounter, but it makes it clear that there can sometimes be many layers to a problem. Understanding which companies hold different responsibilities, what they are, and who they’re beholden to, is a vital part of the process. With that out of the way, you’re ready to move on to the next step of closing the deal.

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