Title Traps Can Bite
Foreclosure Buyers
The potential traps that lurk for Buyers procuring title work, especially for foreclosures, reminds me of a favorite attorney joke (I'm allowed to tell them because I am one, albeit non-practicing).
When a neighbor charges that the attorney's dog bit him, the attorney first denies it. When he's shown photos of the bite and the emergency room bill for the neighbor's stitches, the attorney then argues that the dog attacked in self-defense. When numerous witnesses come forward to testify that the attack was unprovoked, the attorney says . . . it's not his dog.
Similarly, Buyers paying good money for title exam and insurance need to be mindful of numerous pitfalls, especially when foreclosures are involved. Herewith is a partial list:
--Who is the title company working for? If they're hired by the bank that owns and is selling the property -- as some banks require -- their motivation to uncover all potential liens and claims against the property may be compromised.
--What's in the fine print of the owner's title insurance policy? Specifically, what's included -- and more importantly, what's excluded? Many municipalities are now imposing hefty abandoned building fees (Minneapolis' is $6,000). Is the title examiner checking to see if such a fee has been imposed? How recently did they look? Ditto for property taxes, unpaid utility bills, contractor liens, etc.
--Even if the owner's title policy covers a potential claim, it may be subject to a significant deductible. Or, to collect, the owner may have to incur significant legal fees that the title policy won't reimburse.
--Is the company issuing the owner's title policy financially sound? Even an airtight claim is worthless if the company standing behind the policy is bankrupt or otherwise out of business.
When it comes to title work, inattentiveness or unwise penny-pinching can cost Buyers A LOT down the road.
Wednesday, January 28, 2009
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9 comments:
Good points. The same is true when selecting a title company when you are buying new construction or even a listed property.
Why would you want to rely upon the builder's title company to uncover title defects on their own property? Are they likely to raise attention to a title defect that might cost them tens of thousands of dollars in profit or look the other way?
Same is true of the Realtor's title company. There too is an inherent conflict of interest. Why would you want to use your Realtor's title company when tens of thousands of commission may be riding on the deal.
Conflicts of interest should be avoided in residential real estate. Consumers are not prepared to handle these transactions on their own and they need the impartial advice of an advocate.
Thanks. Good blog!
Doug
I take your point about realtor conflicts of interest, especially with respect to title companies.
I do recommend Edina Title to my clients, because I have a good working relationship with them, and trust them to do a good job. The few times there have been mistakes, they are also more accountable to me (and my clients) because of the relationship.
Where it gets tricky is fees. I don't get a referral fee or any other compensation for recommending them. Certainly, where that's the case, the Realtor is compromised.
Sad to say, the commission on a lot of foreclosure deals is puny, especially considering the assorted boobytraps, delays, etc. involved.
Ultimately, the reason to pull in Edina Title isn't to line my pocket, it's to make sure I don't have to return what little I've gotten because a client got stung and thinks I should make it right.
(Even if it's not your fault, if a deal you handle turns into a nightmare for your client, they're not going to be eager to recommend you!).
Wait a minute. In your original post one of your main reasons for not using the foreclosure firm's title company was because of how you answer the question, "who does the title company work for?" Well if a large real estate commission is riding on a deal I can guarantee you that Edina Title isn't representing the buyers.
As an attorney and as an agent you understand conflicts of interest. And whether or not your pockets get lined is irrelevant. The person who signs your paycheck and determines your commission split is your broker. And it is your broker that has the cozy relationship with the title firm. The appearance of impropriety is that you will do anything to please your broker.
Worse however is the fact that the contract with your client is with your broker, not you. So it really doesn't matter if there are hidden or indirect benefits to you to using Edina Title. Is there a direct benefit to Edina Realty or Edina's parent. You bet.
You are in a position of trust and your clients rely on you for your advice. However, if your advice is to use your own title company, that's also called self dealing (because you are in the shoes of your broker when you give that advice). Can you really take off your advisor hat and put your sales person hat on when it comes to picking a title company? I don't think so.
Have you based your advice on a diligent (due diligence is one of the requirements) search of title companies and somehow landed on Edina Title? If so, then why is the same true with Burnet agents and Burnet Title. You can't both be right.
When is the last time you conducted a real search of title companies, their products, services and fees? I would think that you would have to do that in order to be able to give competent advice to your clients.
These days most title companies should be issuing the Home Owner's Policy or the enhanced 2006 policy. Why do some underwriters charge more for the same policy? Is it possible that there was some sort of preferential payment made by Edina Title's underwriter in order to secure their business and charge whatever they wanted for a premium. Is it possible that your manager at Edina Realty is getting a huge bonus based upon how much business he gets his agents to refer to Edina Title?
There is a big difference in title premiums in Minnesota and well worth shopping. There are a lot of title companies that have attorneys on staff and a lot that don't. There are some fly by night operations and some that have been around in excess of 15 years. I would suggest a comparison of them and then pick three that are not related to Edina Realty.
"If a large real estate commission is riding on a deal I can guarantee you that Edina Title isn't representing the buyers."
That's exactly the point: in the typical foreclosure, there isn't a large real estate commission involved -- it's minuscule. Personally, I regard handling foreclosures as a loss leader. I do them because hopefully, at the end of the process, I'll have a loyal, referring client.
I wouldn't hand my client off to a sloppy, overpriced title company -- especially with all the risks involved with a foreclosure -- because that would jeopardize the deal, along with my client's goodwill (and future business).
It would also violate my fiduciary duty -- in layman's terms, "don't screw your client."
Take a look in the MLS and you will see that most Hennepin County foreclosures offer 2.7% - 3.5% as the co-op commission. In Minnesota, the normal range is 2.7 - 3.15%. That was on foreclosed properties in a price range from 90k to 1.2 million. The commissions are the same.
I don't get how its bad to use the foreclosure firm's title company but that somehow its ok for you to use your broker's title company. If anything the conflict is worse. Its a form of dual agency.
And, Edina Title IS one of the most expensive title companies in the state. And their underwriter almost just went bankrupt.
When's the last time your broker provided with you impartial information about Edina Title? They are supposed to be supervising their agents, instead they are using that statutory authority to convince agents to sell Edina Title and Mortgage. Has your broker told you about the Burnet class action, that Edina is one of the most expensive title companies and that their underwriter almost went bankrupt? They should have.
If you are serious about avoiding conflicts of interest and as an attorney and CPA you should be, then you should be looking for title companies that are well established, have attorneys on staff, have great service, great pricing and MOST of all are not related to your Realty firm. Heck, if you want to avoid the conflict and you want another overpriced big title company use Burnet Title! The fact is there are many independent title companies that have made a conscious choice to avoid these conflicts of interest and who embrace competition.
An inhouse title company has no reason to be competitive because no one is shopping them. Its called reverse competition and causes prices to spiral upwards.
Edina Title could have picked any underwriter in town, but they picked one of the most expensive brands. Was it becuase it was a better policy? No, everyone except First American is issuing ALTA policies. Was it because of better service? No, because most underwriters have a family of underwriters to provide different price levels.
Think about this. Fidelity just bought Edina's underwriter. Fidelity's attorneys and representatives service Chicago Title, Ticor Title, Fidelity and now Land America and Lawyers. Same paper, same service, just different prices.
Why did Burnet and Edina pick the most expensive underwriters in town? Because they know that their clients don't shop and compare and that their agents (supposedly fiduciaries) won't shop either. That's wrong.
One Stop shopping eliminates competition and the safeguards of an impartial title exam. If you are truly a fiduciary to your clients, your first job is to avoid conflicts, not intentionally engage in them. Might as well practice dual agency.
[This thread could REALLY get long . . .]
Empirically, pay-outs (what the buyer's agent gets) on foreclosures frequently are below the standard 2.7%: mid-2's seem the most common.
Selling banks then frequently try to reduce that amount prior to closing ("we're taking a haircut to get this deal done, you should, too").
I haven't seen many $500k foreclosures to date locally, but I've seen thousands under $100k -- some as little as $30k.
2.4% of $75k is $1,800 -- splitting half with your broker leaves $900. If you show the average foreclosure Buyer 30 homes (conservative, by the way), you've basically covered your gas and car insurance.
To get that $900, once your Buyer has made an offer on the property they want to buy, you can expect to spend up to a few months negotiating, re-negotiating, helping them navigate a nightmarish inspection process, waiting for bank responses, waiting some more, etc.
Does it really seem like Buyer's agents are the heavies here??
Why would I risk a liability 10X-20X greater than my commission cutting corners with my title insurance recommendations?
And tell me again: why should the Buyer place more faith in the Seller's title company than one recommended by their agent?
By law, the Buyer's agent owes them a fiduciary duty, has defined, agency duties, and has executed a Rep contract further specifying rights and duties.
The Seller owes the Buyer . . . exactly what?
The Seller has a property to sell, and wants to maximize the price. Period.
Edina's financial connections are stellar: Wells Fargo is the principal lender for mortgage, Berkshire Hathaway (bluest of blue chips) is the ultimate corporate parent.
Can't speak to your comment about the ultimate entity backing up Edina Title policies -- I'm not familiar -- but at the very least, it would be out of character for the company to knowingly engage in shady/shaky relationships.
Edina Title can and does match competitors' quoted fees all the time; they just did for my last client.
Per your comment, I'm going to amend my credentials to make clear I'm no longer actively practicing law.
In turn, I think in future posts you should identify yourself as President and CEO of Title One.
That's more than a little relevant to the dialogue we've been having . .
I stepped down as President of that title company over a year ago to start a non-profit consumer advocacy group called CAARE. I spend almost all of my time as Executive Director of Consumer Advocates in American Real Estate. And it was consumer advocacy that attracted me to your site.
It was not my intention to draw attention online to the fact that your attorney license is long expired. That's why I sent you a separate e-mail. But I think your disclosure here is commendable.
Ross, there is a right and wrong here. No one likes being told what they are doing is wrong. I get that.
First, I apologize for the confusion regarding selection of the title company. I was not advocating using the sellers title company.
I WAS advocating for selecting a title company that has no ties to an interested party. Reduce the conflicts of interest as much as possible. And that seemed to jive with your original post where you talked about the importance of having an impartial entity examine the title. After all, why would you hire a title company to search and uncover title defects when that title company has a substantial interest (beyond their normal fee) in closing the transaction?
Your conflict of interest is that you and Edina Realty have a financial interest in seeing the deal close. So does Edina Title. You said yourself that they are accountable to you and that's one of the reasons you like them. They should NEVER be accountable to you. Its is exactly that real or perceived relationship that creates at a minimum the appearance of impropriety. Are they protecting your commission or the integrity of the transaction? Are they willing to insure over a serious title defect in order to preserve a large commission? Who knows - but the conflict is real. The parallel to your argument about not using the foreclosure title firm is almost exact.
What we need in residential real estate transactions is more impartial players. Home inspectors, appraisers and title companies are safeguard industries. It is their job to uncover problems with the transaction. Look what happened when we allowed mortgage brokers to select appraisers - we ended up with appraisals protecting the mortgage broker's fee and not the investor. The same holds true for any commission based player - they should not be involved in the selection process of service providers whose job it is to uncover problems.
You possess some unique credentials that give you an upper edge when working with buyers. You understand (or should understand) fiduciary law. Take a look at the Complaint I sent you regarding Burnet Realty and see how closely that complaint ties in to over 200 years of common law on fiduciary relationships.
The problems in residential real estate are widespread. And the Realtor Association is doing the bidding of the large corporations and making them worse with their immense lobbying power. Dual agency, once illegal in almost all circumstances is now legal ONLY for Realtors who no longer have to obtain the informed consent of their clients. Controlled business is no different. It is a breach of fiduciary duty (and one of the most serious breaches).
I could provide you with mountains of evidence for what I am telling you. All I'm asking is that you put your dusty attorney hat on when you analyze fiduciary duty. Pick up the Restatement of Agency 2d. For a moment, forget about the practices that have been ingrained in you as being ok and reinvent the process.
Just because everyone is running a red light, doesn't make it right.
You recognized the problem when it wasn't some of your long accepted practices on the line. Shine that judicial light on some of Edina's practices and give them some more thought.
P.S. I just searched the MLS for foreclosed properties only and most of the co-op commission splits were above 3%. And if you're showing your buyers 30 properties, most of the literature I've read says that's too much even in this unusual market.
You both have very good points, Ross & Doug.
I agree that using a seller’s recommended title company can end in less checks and balances.
I also agree that using a title company with financial ties to any part of the transaction can end in less checks and balances. (Burnet agent, Burnet title or Edina agent, Edina title, are the best known in Minnesota.)
My thought is that both scenarios above end in less checks and balances.
I also agree that a client’s perception of a deal gone wrong always lies with the real estate agent, loan officer, and/or title company. Clients don’t seem to understand how many moving parts a real estate transaction can have, even when we tell them.
I think both of these issues point to the same solution. Educating home buyers.
I’ve read somewhere in the past that a typical home buyer puts more research into purchasing a new car than into purchasing a new home when comparing the dollar amount of the transaction. If it’s true, maybe it’s because real estate transactions have more advocates to support the home buyer, such as realtors, loan officers, title companies, and attorneys. Ideally, a client should be aware of at least the basics of what makes a home buying transaction such as title insurance, types of realtor relationships, fiduciary duty, home inspections, association rules, homeowners insurance, loan programs, and sources to get loans. I want all home buyers to become educated as much as possible about such a large financial transaction. Trouble is, they don’t know where to start. In my experience, most start with their realtor, and then their loan officer. Also, most don’t want to be educated because they’re too busy.
I think online first time homebuyer programs through mortgage insurance companies and non profits can be good sources of information. Blogs such as searchlightcrusade.net may also be helpful. Do not forget about the library and bookstore. And finally, an independent attorney who specializes in real estate, although not free, can clarify difficult questions.
If a home buyer completely understood what dual agency is, would he still choose this relationship? If a home buyer completely understood the pros and cons of using a controlled or affiliated business arrangement for a title company, home inspector, or lender, would he still choose the relationship? I think buyers would choose the conflict free options in most cases.
If you’re a home buyer and reading this, please educate yourself first, and then ask questions from the professionals in the industry. Realize that the advice may be different depending upon whom you ask because most professionals in the real estate industry may have knowledge about real estate in general, but specialize in a specific area. Also know that fiduciary duty, although it’s been around for a long time, is not always understood by some real estate professionals. You are your best advocate. Making the right decision begins with you, the buyer. If you don’t understand something, don’t sign it.
Thanks to both Ross and Doug for a great debate.
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