There are a couple of standard answers to this question. Title companies close on home purchases or the refinance of loans. Or, title companies insure title to my property. Most consumers do not have the slightest idea how to go about choosing a good title company. They rely on the expertise of their lender or real estate agent to guide them. This article is an attempt to explain the three functions of a title company, Research, Closing and Insurance, and give you some tips on choosing a good title company.
When a real estate agent turns in a contract to the title company a two part process begins. The Closer and Closing Assistant (the Processor) order a title commitment and begin processing the file.

TITLE RESEARCH

Title Search and Examination
Preparation of a title commitment begins with a search of the public records to identify existing rights and interests in the property. When a person purchases real estate they are actually purchasing all right title and interest owned by their predecessors in title, along with all existing encumbrances and liens. Title is often described as a bundle of sticks. Each stick represents a right or interest in the property. The purchaser wants to own the fee simple title which represents the most vital and valuable sticks in the bundle. These sticks include the right of possession, occupancy, use, enjoyment, inheritance, etc. However, most property comes with some encumbrances or liens. These encumbrances represent the right of another to an interest in the property, a right to one or more of the sticks in the bundle. One example of an encumbrance is an easement. An easement gives someone the right to use the property for the purpose given in the easement.

Another stick in the bundle is the lien placed by your lender when you agree to give a mortgage on the property in exchange for the purchase loan. Your lender does not have an Ownership interest but has a security interest in the property.
Easements and mortgages are very common encumbrances on property and do not adversely affect the Owner’s interest in the property. Other encumbrances however, may show up that will affect the Owner’s interest.
The title commitment is the report prepared by the title company for the client and the lender. The title company will carefully review the public records and all recorded information and will report all information affecting the title on the title commitment. Schedule A of the commitment gives the pertinent details of the transaction.
Schedule B, Section One lists the title company’s requirements. The title company agrees to insure provided the Buyer and Seller meet the conditions in Schedule B Section One.

Title Exceptions and Clearing Title
Schedule B, Section Two lists all of the exceptions to the title policy. The title company agrees to insure the Owner against all defects and encumbrances, except for those items listed in B2. The Seller’s mortgage and existing easements and restrictions are listed on this page. Often other encumbrances appear that the Buyer will want cleared before the closing. Common title issues include judgments that attach as liens on the property, delinquent taxes, mechanic’s liens and unreleased mortgages. Other common defects include a break in the chain of title, missing heirs or forged deeds. There may also be exceptions for bankruptcy or probate proceedings. Clearing title may be as simple as obtaining a Quit Claim Deed or Affidavit, or may be as complicated as obtaining a court order or filing a Quiet Title suit. An experienced closing officer is familiar with these exceptions and will work with you and your client to clear these items from title before the closing.

Processing the File
While the title production office is preparing the title commitment the closing officer and the closing Processor have been working on the closing file. They begin by gathering information from the Seller and Buyer. The more complete the information the more efficient the closing office will be in processing the file. Trust, partnership or corporate documents will need to be reviewed in order to determine who has the authority to sign the closing documents. They will need to know how the Buyer wants to take title. The Closer will obtain updated tax information and pay-offs for existing loans. They may need to get a letter from the subdivision trustees or condominium association that states that all fees are paid to date. They will check with the sewer company for a final statement. They will contact the Buyer’s lender and will obtain loan documents. They will order the survey and will review any survey issues with you and your client. Finally, they will review the title commitment and in most cases help your client clear title issues.

Document Preparation
After the file is processed deeds affidavits and other documents necessary for closing are prepared. Upon receipt of the lender’s documents and final lender fees the Closer will prepare the settlement statement for closing.

Closing the Transaction
When you are working with an experienced team closing day should be a mere formality. All of the title issues have been cleared, the documents are prepared and the parties are scheduled to close. But, there are a number of reasons why the closing may not go as planned. At the closing the Buyer will sign his loan and closing documents and the Seller will sign his documents. The lender sends the loan funds through a wire transaction or forwards a check with the loan documents. The Closer cannot make any payments from those funds until she has confirmed that wired funds have arrived in the title company’s account and the lender grants permission for funding. The Closer must forward the necessary signed documents to the lender before the lender will grant permission to the Closer to fund the purchase. After these documents are transmitted the Closer will do her best to get permission to fund as soon as possible. The client should understand that the actual closing occurs when the parties exchange the deed for the purchase funds. Until that happens the transaction is not closed.

TITLE INSURANCE

Post Closing
A few weeks after the closing the Buyer receives a package in the mail with a title insurance policy. The title company is insuring that the Buyer and only the Buyer has all right title and interest in the property and no one can make a claim for any rights in the property besides those listed as exceptions in Schedule B.
Have you ever had a client question the need for an Owner’s policy of title insurance? Usually they give two reasons, The research is already done and the title is clear why do I need to insure against a claim? Second, my lender already has a policy; why do I need one?

Why Isn’t The Research Enough?
Sometimes, through no fault of the title examiner or the Closer, a title defect or a claim will show up after the closing. A title defect can be a missed heir. It can be an ex-spouse who claims that her signature was forged on the conveyance deed. It can be a bankruptcy trustee who claims that the property should have been included in the Seller’s bankruptcy estate. It can be the neighbor to the south with an adverse possession claim. Occasionally, the title examiner misses a lien or encumbrance. Let’s say the examiner missed a judgment and now the judgment holder is executing on their lien. Sometimes claims are based on that period between the last date that the title company can pick up recorded information and the closing date. We call that the gap period. What happens if a loan is recorded during the gap period. The loan doesn’t get paid off and now the lender is threatening to foreclose. Who is responsible for these? With an Owner’s policy the title company is responsible for defending all of these claims and clearing the title.

Why Isn’t My Lender’s Policy Enough?
Your client may ask why they have to pay for an Owner’s policy when the lender is already paying for coverage with a mortgage policy. As I explained above, the lender and the Owner don’t have the same bundle of sticks. In other words they don’t have the same interest. The lender has two concerns, that they will recover the loan amount if they must foreclose on your property and that they are in first lien position. The lender’s claim will not arise unless their secured interest or lien position is at risk. A myriad of problems can occur before that happens. The Owner’s right to use, enjoyment or other sticks in the bundle may be at risk but the title company’s obligation is to protect the lender not the Owner’s interests.

CHOOSING A TITLE COMPANY
Now that you understand the need for title insurance, the next step is choosing the right title company. Most clients will depend upon you to guide them. Here are some tips on finding the right title company.

Experience
Like every business a track record makes a huge difference. You should ask how long the company has been in business. Do they have a good mix of experienced closers and new employees? It’s not a problem to close with a new closer. They have to start sometime, but be sure that they have experience backing them. In this business you cannot replace experience. I’ve met a number of skilled closers who know more about title and closing than many attorneys. Mistakes happen but rarely by experienced closers.

Financial Strength
Are you dealing with a company that has solid financial backing? The title industry has changed enormously over the last few years. Many title companies have gone under over the last five years. When the title company closes its doors the escrow accounts may be tied up for some time. Deeds may not be recorded. Even if they get through the closing without incident what happens if the title company closes a few years later. Your client sees you as the link to the title company. Use a title company with a solid record and strong financial backing that will remain in business over the long haul.