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Title Insurance and Why You Need It

Title Insurance and Why You Need It

What is Title Insurance?

Buying an investment property is one of the biggest purchases anyone can make. To protect the investment from tangible, physical damage like fire, storms or vandalism, hazard insurance is often purchased. What if mistakes are made related to the legal ownership involving the property being purchased? This is where title companies and title insurance come into play. While hazard insurance is easy for most of us to understand, title insurance is often an afterthought, as it occurs automatically as part of every transaction at a title company.

If you are new to real estate investing, you may not be completely aware of why you close at a title company in the first place. Also, there are many investor programs and seminars out there that discuss acquiring real estate without stepping foot into a title company. Many of these “no money down” strategies can create enormous problems for investors, the most important one is losing money! Before we spend time addressing why you should purchase title insurance, let’s make sure there is a thorough understanding of what a title company does.

Value of a Title Company

A title company is a neutral third party that assists in the conveyance (or transfer) of ownership between sellers and buyers of real property. Title companies make sure that the title (proof of ownership) to a given property is legitimate, and free and clear of all liens and judgments before a transaction is closed. Title companies offer insurance on the title to the buyer (called an owner’s policy) and also to the lender (called a mortgagee’s title policy) if the property is going to be financed. These title insurance policies ensure there are no other claims against the property, for example, by other family members or heirs, or by vendors who may not have been paid by the seller of the property for work performed.

A Real-World Example

Consider the following: You buy a house that is deeply distressed.  You execute the documents, money changes hands, and you take possession of the property. Two months later, an heir to the property has their attorney contact you stating they have legal rights to the property and are going to sue for possession. Maybe this happened to be from an estranged sibling of the seller, who is still entitled to their share of the property. You are blindsided by this.

Scenario A:  You closed this transaction by getting the deed to the property conveyed to you directly by this seller or someone who claimed to be the owner of the record, without closing at a title company. You trusted the tax records and thought no one else needed to be involved from the seller side. Also, you were super excited about the deal and just wanted to focus on getting possession. The seller was behind on their mortgage, and your plan was to catch up on the note and start making payments. You even gave this seller $10K for the deed to the property, as this was an incredible deal that you didn’t want to lose. Now you are in a situation where you are most likely going to lose money and/or the property. If you think this hasn’t happened before, think again. There are many stories out there similar to this one.

Scenario B:  You closed this transaction through a title company.  You call the title company who issued the policy and file a claim. At this point, the title company will handle the heirship issue, and you will either be getting money back or be allowed to keep the house.

Performing transactions without a title company can be a recipe for disaster. Not only can you lose all of the money invested and/or the property, but you may also be in a situation where you need to hire an attorney to defend yourself, potentially costing thousands of dollars in legal fees.  

While there are many federal regulations regarding real estate transactions, most real estate laws are governed by the states. Title companies understand not only how heirship issues are addressed, but also how liens and encumbrances to title impact a specific deal, based on the laws in your state. Relying on them is critical to having a successful transaction, and protecting you as an investor.

Conclusion

As a long-time private hard money lender in Texas, we have seen many title issues not get resolved in the closing timeframe of the buyer and seller. In fact, many may not get resolved without legal pursuit. However, doing all of the research to discover what is needed to effectively close a real estate transaction is what a title company gets paid to do. This is why closing at a title company and buying title insurance should not be a consideration, but a requirement in every real estate transaction you pursue in Texas.

Why Flipping Multiple Deals Too Quickly Can Cost You Big!

As many of you already know, real estate investing can be very exciting. Especially when you get that deal you know is going to sell for a nice profit. Most of you who are new to real estate investing is going to take it one step at a time – certainly the smart (and correct) move in the beginning.

However, once you fully understand all of the benefits of real estate investing, one of which is the potential to grow very quickly using leverage, you may decide to buy as many deals as you can, as fast as you can. If you fit into this profile, pay close attention to what I am saying, so you don’t get burned and potentially lose money.

If you are buying houses to flip, many things can happen that can hurt you and prevent you from doing other deals. Consider the following situation that prompted me to share this with you.

A Painful Flipping Story

Mary and Greg are new to real estate investing, and just completed a weekend flipper training course. They decide that they are going to rehab and flip 3 houses every month. Just in case you are new to this, rehabbing and flipping 3 houses a month is a lot! Start with a single house!

They have excellent credit and good reserves and use leverage with hard money to finance 2 deals with one lender and 1 with another, all within 30 days. Why did they use 2 lenders? Their first lender was not comfortable with them doing more than 2 deals simultaneously and strongly advised them not to do deal 3. Unfortunately, they took another path. Let’s look at each deal and see what happened.

Deal 1

The rehab begins and they complete it with some subs they know (it was a very light rehab) and put it on the market. No offers yet but they expect one soon. After 60 days, they finally get an offer. It’s also a bit lower than expected but Mary and Greg accept it. The inspection takes place and a list of repairs comes back that includes a roof and a hazardous electric panel that the buyer demands be replaced.

Mary and Greg didn’t notice this when they purchased it from the wholesaler. In fact, they only had 5 minutes to make a decision to buy as there were multiple buyers ready to purchase it if they did not. It was a thin deal, to begin with, and now with items, they agree to fix, plus additional unforeseen closing costs, Mary and Greg get lucky and break even.

Deal 2

Mary and Greg give their contractor a check to get started and after 3 weeks of no work performed, start to wonder what is going on. The check cleared the bank, but their contractor cannot be found – $6,000 gone! They find another contractor (this time a reputable one) and have to start from the beginning. They learn a lot from this experience, and from breaking even on Deal 1, and realize they better make sure this one is market-ready.

Mary and Greg have to spend a bit more money than they anticipated, but believe it will pay off for them when they go to market. It does and they end up making $7,500, which is less than half of what they originally expected. The good news is they will not lose money but will need to use all of this profit for Deal 3.

Deal 3

This turned out to be a very big project with over $40,000 in the total scope of work. Unfortunately, this bid came from their first contractor who stole their money and walked off the job. After the new contractor assesses the property, they receive a more accurate bid in the amount of $66,000 – OUCH! Mary and Greg realize they should probably wholesale this deal as is. Unfortunately, there isn’t enough room in the deal to move it and they would have to take a $5,000 loss just to get rid of it. Against their better judgment, they decide to keep working on it. After 6 months of work (and interest payments), and more than 50% over budget, Mary and Greg end up losing over $16,000, for a net loss of $8,500!

Conclusion

In real estate investing, anything can happen. Even with the most experienced investors. However, when you are new in the business, you are exposed to more risk due to the fact that your experience is limited. What I see consistently with new investors is they overpay for real estate deals and they underestimate the true scope of work.

Overpaying for real estate deals, because you are in a competitive situation, is a recipe for disaster. Be patient. There will be other deals that will have better numbers. Also, never put down non-refundable earnest money unless you have done your due diligence.

Your rehab budget should have a minimum 10% buffer in it for unknowns (and the older the property, the higher that percentage should be) and be created by a reputable contractor. Failure to appropriately estimate the true costs of rehab could cause you to be out of pocket with a significant amount of capital to cover these unforeseen costs. If you have multiple deals going on simultaneously, you could potentially be in a situation where you run out of money!

The point here: start with one property and get some experience before diving in too deep by trying to rehab and flip multiple houses each month.

If you are new to the Real Estate Investing, learn from the story shared above and work with one property at a time, that too with the reputable hard money lender within the area.