I have often found that many homebuyers lack a fundamental understanding about title insurance. While most past clients have admitted to briefly discussing the topic with their real estate agent, they don’t seem to understand its purpose or function–only that it will be an additional expense on the settlement sheet for which they are responsible.

What is Title Insurance?
Title insurance is a policy of insurance that protects against losses arising from defects in and/or claims against the title to property. Examples of such defects and/or claims include tax liens, easements, mechanic’s liens and ownership claims by third parties.

Lender’s Policy/Owner’s Policy
There is no legal requirement to purchase title insurance prior to acquiring a property. In practice, any lender will require you to obtain, at a minimum, a Lender’s policy of title insurance for an amount equal to the loan. This protects the lender’s investment in the event of a third-party claim. The insurance remains effective until the loan is repaid.

A homebuyer will also want to obtain its own protection of the equity in the property since a Lender’s only policy extends solely to the loan amount. This requires an Owner’s title policy for the full value of the home. Typically, the additional cost to add Owner’s coverage to the cost of the Lender’s policy is small; all the more reason for any homebuyer to get the necessary coverage. By way of example: If the sale price of a home is $500,000.00 and the homebuyer is borrowing $400,000.00—the title insurance policy would include Lender’s coverage in the amount of $400,000.00 and Owner’s coverage in the amount of $500,000.00.

Is title insurance similar to other types of insurance?
No. Most insurance policies protect against events that happen after the policy is issued, such as a car accident that happens 6 months after purchasing a new car. Title insurance in most cases protects against losses arising from events that occurred prior to the issuance of the policy. The coverage afforded by these policies typically does not extend into the future. The exception to this is certain enhanced title insurance policies, which offer coverage of a limited amount of future occurrences that are spelled out. All homebuyers should check the state in which they are buying in order to determine if such policies are available.

Is title insurance required for a refinance of the existing loan?
Yes. The lender will require you to purchase a new lender’s policy because 1.) the existing policy terminates upon the full payment of the mortgage and 2.) the lender wants to protect itself from any title issues that have arisen since you took title to the property. The good news is that you won’t need to obtain a new owner’s policy and title companies generally offer a discounted premium if your last policy was acquired within a certain amount of time.

What can I expect to pay for title insurance?
The premiums for title insurance policies are state specific. In some states, title insurance premiums include the actual insurance as well as the costs for a title search and title examination (to determine if there are any defects in the chain of title). In other states, the premium covers the insurance only and the homebuyer must also pay a third party company and/or attorney to provide the search and examination services.

Some states such as Pennsylvania and New Jersey strictly regulate rates and the premiums are the same regardless of the insurance carrier selected by the homebuyer. Other states do not regulate premiums and the homebuyer is wise to shop for the best available price.

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Tags: insurance, real estate insurance, Real Estate Law, real estate title, title, title-insurance

Banks require a preliminary title report on all real estate transactions. The preliminary title report serves many functions, but one that could cause you to loose a great deal on your next investment is the Chain of Title.

Most lenders require a title company to give them a 24 month chain of title. This simply is an overview of all individuals or entities that have owned the property in the last 24 months. Investors should pay careful attention to the property they are buying and who has owned them previous to the sale.

Some lenders and loan programs only allow one other individual to own the property in the last year. Banks look at the flipping of properties very closely. If a property is flipped too many times they may decline the loan. They could also ask their borrower or loan officer to provide documentation that the transaction is at arms length (the transaction is between unrelated parties).

The reason Banks pay careful attention to the 24 month chain of title is fraud. There are markets that the value of homes have been artificially inflated by properties moving from one borrower to the next with $10,000 to $100,000 added to the purchase price each time. There are reported cases of properties being sold to buyer A, then to buyer B, then to buyer C, then back to buyer A, and then to buyer D. All the parties were related in some manner and this fraudulently drove the price and demand up for the property. Although this generally does not happen in a down market, the flipping of properties is closely scrutinized by both lenders and title companies.

In a down market foreclosures can change hands several times in a short period. Unfortunately there are lenders that only allow a property to change hands 1 or 2 times in a year. If your property has changed hands frequently you may be looking for a new lender.

The good news is there are several lenders that only look at the chain of title and do not hold it against you. A couple things they look for is almost common sense. Are the transactions at arms length and what are the increases in purchase price from buyer to buyer? If the transaction is fraud free it will be no problem.

How do you know which lenders and banks have no issues with chain of title? You don’t. Your loan officer or loan broker better, when interviewing your loan officer this is a question you should ask about. Most loan officers that have a track record with investment properties (and fix and flips) know the challenges and answers to chain of title and at arm length transactions.

Tags: chain of title, finance, flipping, investment property, loan, mortgage, real estate, real estate investing, title

Negotiating the terms of your loan can be as important as negotiating the sales price of your new investment property. Interest rates and closing cost a huge part of cash flow and return on investment, with the proper due diligent and negotiations, investors can be rewarded on every real estate transaction.

What can actually be negotiated?

Closing costs and interest rates are probably the first thing investors try to negotiate, but there are others like, time, appraisal and title, volume discounts and pre-payment penalties.

Some investors have lots of money, but very little time, ask about streamline refinance and purchase transactions. They may require more money down, but less documentation and are very quick loans to complete. In some instances it can take half the time as a normal loan.

Just about everyone in real estate is looking for business. Appraisers and Title Companies are no different. I personally have renegotiated my fees with all the vendors I utilize and in turn passed that saving to my investors. Rates have been so good the last few months I had to reduce the cost of refinancing so my investors can break even quicker on their refinance costs.

I am a firm believer in building your power team, remember a loan officer should be part of your team, and ask for discounts only if you can offset that with volume or multiple transactions. Most investors realize that a good relationship with their loan officer usually saves either time or money, sometimes both.

Those investors that are holding on to the property long term ask if there is a prepayment penalty that will help lower your interest rate. Three year prepayment penalties are common on the right loan and could reduce the interest rate .5%-.75%. This is a situation you should have a clear exit strategy. If you try to sell or refinance before the penalty is expired, it could cost you up to six months interest.

Remember, there more than one way to save money in real estate and there is no reason you should not use all of them.

Tags: closing, closing costs, escrow, Interest Rates, Investor Loans, loan, mortgage, real estate, title, troy schuricht

If you are averse to paper work, formal agreements and legalese, get over it. You can’t avoid it and it’s vitally important. Think of your contract as a big safe to protect your huge amount of valuables. The subject here will be the contract – I’ll circle back in later posts to cover the specific actions of due diligence leading up to the contract.

I’ll assume you’ve started your due diligence pre-contract. You’ve estimated the value of the property you’ve chosen, you’ve done the groundwork for financing, schmoozing with a lender after the way was cleared through recommendations from connected friends and associates, you’ve settled on an area you’re comfortable with and an investment you can handle, you’ve sent the Letter of Intent to the owner and broad strokes are agreed to, and now you’re ready to put it all in a contract.

Don’t do this alone, especially not your first time. Use a real estate broker or an attorney. Contracts are fairly simple at first glance, but they can get complicated. You want to make sure you have everything covered and two minds are better than one, more so when one of the minds is experienced at this sort of thing.

The attorney or title company will ensure there are no title problems; however there may be hidden liens, so it’s always wise to speak with your attorney about insurance to cover the title. Most of the language will be built into a standard contract. You will have to decide things like time of closing, length of due diligence period, who pays for surveys, what type of financing, and such, and then there are special stipulations. Special stipulations are agreements between the parties not written into the body of the contract or language added to strengthen and clarify what’s in the contract or what’s been verbally agreed upon, such as what is excluded or included with the property. You might have met with the owner and talked about, say, certain equipment remaining with a building that will be used as a restaurant. Don’t rely on verbal agreements, make sure it’s written down and part of the contract.

When deciding on the due diligence period to be established in the contract, try to add time to your estimate to take delays into account, make sure you specify the days of the period are workdays and place a special stipulation that extensions are allowed if you can’t schedule all inspections within the period or if one inspection uncovers something that calls for a special inspection, such as signs of structural damage that would require a structural engineer to inspect an write a structural report.

Read the whole contract and understand it. Too many times people assume something is in the contract that upon further close inspection is not outlined clearly. Make sure if something important to you is not clearly stated in the contract that it’s spelled out clearly in special stipulations.

While most deals run smoothly, there are so many variables that it’s easy to find yourself in a misunderstanding that can kill a deal, waste your money or, worse, wind up in court. Take it from someone who knows, a tight, comprehensive contract is your best investment partner and guardian angel. You may have to amend the contract, so make sure you understand what the contract says about amendments and notices. They need to be in writing but how are they are delivered? By email? By phone? Fax? Hand delivered? By hoseback? Make sure you know what the contract says because you are agreeing to abide by it.

It’s also important to establish in the contract any representation. If you are being represented by an agent, make sure you have a representation agreement between you and the agent and that it’s clear in the contract. A listing agent you may have been dealing with represents the seller, even if they have been helpful to you and are really, really nice – unless you’ve signed a separate agreement where the agent is working as a dual agent (I don’t recommend this). This can get confusing if you’re not familiar with real estate agency representation, so I will explain this further in another post, but remember that the agent involved in the deal, if an agent is involved, is representing the interests of the seller if you have no agreement with the agent. If you are going to go through an agent it is best to have your own agent who is representing your interests.

Tags: agreement, contract, deal, due-diligence, escrow, real estate agent, real estate contract, real estate investing, realtor, title

(This is the second and final part to the article. Check out Part I)

The next afternoon I got a call from the buyers’ agent. She told me that the buyers refused to switch title companies as I had requested (the closing was set to take place four days later). I asked her when she was going to fax me a copy of the written refusal with their signatures as I had requested. She countered by saying, “That is ridiculous. I didn’t need anything in writing.”

I asked her what their reason for refusing was and she said, “They just didn’t want to.” Now for the readers following along at home, the reason I wanted to change title companies was because when the Realtor gave me the contract, she asked which title company I wanted to use.

I had told her I wanted to use Laughlin Law & Title (the owner is a top real estate attorney who is known for working with investors). The Realtor claimed she tried to look it up online but couldn’t get the spelling right. The end result was the Realtor went to Land America, which just happened to be located across the hall from the Keller-Williams office she worked out of.

Time Out – Check Ego’s at the Door

I want to go over something for a minute before continuing with the story. Most (if not all) real estate investors understand that most Realtors do not like investors. On the flip side, most investors don’t care for the majority of Realtors. To put it simply, real estate investors and Realtors view each other in a manner similar to cats and dogs. They just don’t seem to be able to work nice and play together.

I am a rarity because I am one of the few investors who LOVES Realtors. A good Realtor usually ends up playing an important role in every deal I do. In this case however, the buyers’ agent demonstrated that she was not a good Realtor. Actually, my house was only her second deal as a Realtor.

There are good real estate professionals and there are bad real estate professionals. Surround yourself with truly talented real estate pro’s. Life is easier when you are able to focus on how to do your own job without the added burden of making sure someone else is doing theirs.

The reason for explaining all of that is because I had determined that I was a marked target in this deal. The Realtor was not about to let some real estate investor push her around. The broker seemed to harp on me more than usual because I was not licensed. He spoke to me in an overly condescending manner after he was told that I actually teach distressed real estate. He was out to prove himself it seemed. I got a lot of attitude from the title company as well once they found out I was basically accusing them of stealing from me by padding the fee’s. The buyers’ lender was only too happy to help me spend every bit of the $6,000 I was contributing to closing costs.

It was not a fun place for me to be. It was 4 against 1 in my opinion. I felt added pressure overall because there were so many students and peers monitoring the transaction. My Realtor, Mark, was very helpful to me from start to finish but I had a Limited Service Listing with him. In other words, he took my listing at a discount so I didn’t expect him to speak for me as most Realtors do for their clients.

The Pressure Builds

I called Mark and he agreed that I was in a tough spot. At that point, even some of my peers were encouraging me to break the contract due to the mess that it had become.

I remember saying to Mark, “They are doing their best to prove they are idiots.” Mark laughed and I went on to say, “As my grandfather used to say… When you argue with an idiot, there are two idiots arguing.” Lastly I said, “I have an idea for how to handle this so I don’t get raked over the coals quite so bad. It seems that Dorothy (buyers agent) is keeping her finger on the trigger, just waiting for me to say something she doesn’t like so she can threaten to cancel the contract again. For now, I plan to shut up and not be a distraction.” Mark asked what my idea was and I told him, “I will let you know the morning we are supposed to close.”

I was not getting anywhere by challenging that Realtor, her broker and the title company. I decided I would sit back and wait until everyone had something to lose…Money. The closing was scheduled for December 21, 2006. That left just four days until Christmas. The buyers’ agent could buy a lot of Christmas presents with her hefty commission. Keller-Williams certainly wanted a $253,000 deal to close and people at Land America would welcome extra money right before Christmas as well. Having those folks expecting a paycheck, I figured would play out in my favor in the end. I would need leverage on closing day and I wanted the Buyers to provide that leverage. Yes, the Buyers. They were as stressed as I was and they faced having to move four days before Christmas.

An Impossible Task Over the Next 4 Days… I Had To Shut Up!

Closing Day:

I was scheduled to sign at 11:00 am. At 9:00 am, I called the Texas Real Estate Commission. I asked them where I would be able to find a certain form on their website that I was going to need that morning. They told me that there was not a specific form and they thought a basic addendum would be all I would need. But, they wanted to be sure so they went to the higher ranking people at the commission to confirm I could do what I had in mind. They ended up telling me to use the Addendum to the Contract form and be specific with what I wrote on it.

As I said previously, I read that contract, word for word, over and over, hoping I would find my “out.” I had a valid contract but walking away from the deal at that point would have been a horrible move on my part. Given my status in the local real estate scene, I was sure I would end up being sued by someone if I decided to breach the contract.

I Saw the Light!

While reading the contract for the 5th or 6th time, I saw something. I reread that part of the contract a few more times to make sure I understood it correctly. I knew I had found my way out. In the State of Texas, the standard practice in the event of a contract dispute is for the seller and buyer to agree to mediation rather than a law suit.

At 9:30 am, I faxed a formal request to go to Mediation to my Realtor, the buyers Realtor and the title company. I have to admit though, I was nervous at that point. What I had done was put the entire deal on hold. I knew that it could take several weeks to agree on a mediator. I stood to lose thousands of dollars in added holding costs if it went to mediation. Within minutes, my Realtor, Mark, was calling me.

He said, “How in the hell did you come up with mediation on closing day?” I replied, “Mark, I didn’t have any options. Had I requested it a few days ago, there is no way it would have carried the same weight as it will today.” He laughed and said, “Jim, that’s genius! You know that they are going nuts!”
I sure hoped that was the case.

“Move Over! I’m in the Drivers Seat Now!”

I had brought the sale to a complete halt. What I am most proud of was the fact that I was able to stand my ground and fight back without breaking the contract. It was 100% legal. I never heard of anyone requesting mediation before (I am certain it has happened but I never knew anyone that did it) nor have I heard about anyone doing it since.

It has been great being able to tell my students exactly how the mediation “loophole” can protect them in their own deals AND it is LEGAL!

C Y A… Always Cover Your Asset!

At 11:00 that morning, I walked into the title company to close. The Escrow Agent was stunned that I had shown up. I told her, “I was scheduled to close at 11:00 and now it is on record that I appeared as instructed with the intention to close.” She gave me the HUD-1 and I sat down to review it. None of the numbers had been changed so I got up and told her that I had requested mediation and since my dispute involved the figures on the HUD-1, I would not sign it and I left.

An hour later, I got a phone call from a person who identified himself as an attorney with Land America Title. He quickly made it clear that he was not affiliated with the Land America branch that was doing the closing and he asked me what I was demanding with the mediation.

I paused a few seconds and said, “It is my understanding that the mediator is to be a neutral, 3rd party observer.” He said that was correct. I continued by saying, “I have to ask that you have Dorothy (buyers agent) call me right away so we can agree on a mediator.” He then said, “I understand that but I am trying to help work this out as a neutral observer so we don’t have to pursue mediation.” I smiled real big and said, “I am sorry sir but, I am having a hard time understanding how you consider yourself a neutral observer when you are an attorney who is paid by Land America. This is very unprofessional of you and Land America to essentially ignore the addendum I submitted this morning in hopes that I won’t know any better and withdraw my request.” I said I was done talking with him and hung up.

Within minutes, I got a call from Dorothy. She was very polite and asked me what I was seeking thru mediation. I grinned and said, “I want the cost of the title policy to come out of the $6,000 I am paying for the buyers and I want the added fee’s Land America is charging to be credited back to me. I don’t have the HUD-1 in front of me right now so why don’t I just make it simple and tell you that I want a total of $4,000 credited back to me.” Dorothy was quiet for a few seconds and sounded like she was crying as she said, “This is just horrible. All I wanted was for to have a nice Christmas in their new house!”
I was quick to fire back at her and said, “I sure would hate to be in your shoes when you have to go to the buyers and tell them they can’t move into their new house because you screwed up and copped an attitude.” She quietly cried into the phone and said she would call me back.

At 5:00 pm that same day, Dorothy called back again and said she had a proposal for me. She said, “Jim, this can’t go to mediation. That would ruin everyone’s Christmas.”

She went on to tell me that the buyers’ lender had agreed to waive $750 they were charging for an origination fee. The title company had removed over $600 from the HUD-1 and credited the $600 to me. She had given up $750 from her commission (it had been over $7,000 before that) and Keller-Williams had agreed to credit me additional money from their profits as well.

The Shake-Down Worked!

I told her I would be there in 20 minutes to sign and I headed over to Land America.

It should have only taken a few minutes for me to sign and be done but I was greeted by Donald, the arrogant broker. He asked if I was okay with the offer and I told him I was but, I had one request. Since the sale had been in constant question from the start, I had not found another place until the day before and I would need until the next morning to have all of my things out of the house. Actually, the house was empty but I had moved all of my remaining things into the garage. He got pretty annoyed when I told him that and he said we won’t be able to close as long as I have any belongings at the property.

I remember shaking my head (as I lost my temper and any respect I may have had for him) and said to him, “You are just determined to foul this deal up any way you possibly can, aren’t you? SO! MY advice to YOU, is to lose that ego of yours and give me a simple Residential Lease-Back for one day and I will be out in the morning. This way the buyers can get start moving tonight.” In other words, the deal still closes but the buyers actually give me a one-day lease to allow me to finish moving.

Donald seemed a bit surprised at the aggression I displayed and said he would go talk with the buyers. Only now he didn’t see a problem with the one-day lease. He walked out of the room and into the room right next to the one I was in. I was surprised that I could hear everything he was saying to the buyers. He actually went on babbling to the buyers for 4-minutes about how serious the liability could be for them if they allowed the extra day. Pretty much what he was doing was trying to look smart by convincing them that allowing the lease-back could be a huge liability and they should seriously take that into consideration.

My jaw was nearly on the floor in disbelief as the Escrow Agent walked in with the updated Hud-1. I stood up and said to her as I walked towards the door, “When Mr. Trump decides to stop pounding his own chest and comes back in here, tell him I went home.” She didn’t say a word but her body language suggested she was stunned.

30 minutes later, Dorothy called me and was frantic and asked why I left. So, here I was, finally at the end of a 6-month project I had taken on (oddly enough, it was my ego that got me into it after those two students made their smart ass comment) and the past 5 weeks had been so trying with all the attention and added stress I had to deal with that, well…. I was just tired and really didn’t care what Dorothy had to say. I was mentally exhausted.

I let out a sigh and said these exact words using a very calm and quiet voice….

“Dorothy… Shut up.” She didn’t make a sound. I continued by saying, “You have made my life hell the past 5 weeks because you were unwilling to take responsibility for mistakes you made and your half-assed attempt to cover them up has made you a laughingstock. The sad part is, you are being paid a lot of money for being an idiot. I hope will be happy in their new house. I am sure they haven’t enjoyed the grief you have put them through. So please, just shut up! I will be there in the morning to sign and I hope I never have to deal with you again. Have a good night, Dorothy.” I hung up.
The following morning I signed and it closed.

Was the Gamble Worth It?

Was it really worth it for me to go to the extreme of requesting mediation on closing day?

Well in the end, after it was all said and done… Keller-Williams, the Realtor, Land America and the buyers’ lender, managed to give me just under $4,000 that otherwise would have gone to all of them.

I remember feeling as though a massive weight had been taken off of me. I smirked as I walked to the car and thought to myself, “Maybe Dorothy isn’t an idiot at all.”

I laughed as I asked myself, “Who would buy a house, rehab it themselves, move into it, subject themselves to some of the most critical people in the business, only to face 5 weeks of hell while trying to get it sold?” I shook my head as I got in my car and I said out loud… “Only an Idiot!”

Ahh… Real Estate! You gotta love it!

Tags: closing, real estate, real estate investing, texas, title

Upon signing the agreement of sale in most residential real estate transactions, the buyer pays an “earnest money deposit”, which signifies his intention to purchase the property. Typically, the earnest money deposit is held in the escrow account of the listing broker (who represents the seller) and is applied toward the buyer’s down payment and closing costs at settlement.

Know Your Rights!

The parties to any residential transaction, including the brokers, should be aware of the rules and responsibilities that surround any deposit monies that are being held in escrow—the laws vary from state to state, so it is imperative that you familiarize yourself with the laws of the state that govern your particular transaction. Using the Commonwealth of Pennsylvania as an example, a broker receiving money that belongs to another must deposit that money in an escrow account by the end of the next business day following its receipt. This duty can’t be waived and it can’t be altered by agreement between the buyer and seller or by the brokers to the transaction. Although the law is clear as to the course of action a broker must take upon receiving monies belonging to a third party, the law does not dictate who must hold the funds in escrow. Therefore, it is up to the parties to come to an agreement on who will hold the escrow; some examples include the broker for the seller, broker for the buyer, attorney for the buyer, attorney for the seller, builder, or bank. It should be stated either in the agreement of sale or by way of an addendum who will hold the deposit monies. In Pennsylvania, the standard Agreement of Sale contains a default provision, which states that unless agreed upon otherwise the listing broker holds the deposit monies until closing.

The buyer, seller and brokers should be aware of the fact that many third parties, such as a title company or bank, will require the execution of an “Escrow Agreement” as a condition of holding funds. The Escrow Agreement usually states the amount of money being held, the terms and conditions that must be met prior to the release of the funds, and a disclaimer of any liability in the event that the escrow holder releases funds upon a good faith reliance on documentation submitted by an authorized party. Further, both buyer and seller need to understand that just because the deal falls through doesn’t necessarily mean that the deposit money goes to them.

Since the deposit monies are being held in trust, both buyer and seller must agree as to the disposition of the funds before the escrow holder will release it. In most states, the escrow holder can only release funds if there is a written release executed by buyer and seller, if a settlement takes place, or by court order. Therefore, if a dispute has arisen between buyer and seller, the parties would be wise to work out some sort of agreement with respect to the escrowed funds otherwise the monies will remain tied up.

Whether you are the buyer, seller or broker involved in a residential transaction, you need to know what will happen with any deposit monies, so here’s a quick review:

1. Know the laws in your state dealing with escrowed funds- Who is authorized to hold funds in escrow? What are the escrow holder’s responsibilities? If there is a dispute between buyer and seller, what happens to the funds?
2. Identify the escrow holder in your agreement of sale or by way of addendum
3. If there is an escrow agreement, it should be reviewed by all parties. If you don’t agree to its terms, don’t sign it!

Tags: buyer, escrow, real estate, real estate attorney, Real Estate Law, seller, title

Caveat emptor is Latin for “Let the buyer beware”.

A recent class-action lawsuit filed in the state of Minnesota is bringing to light a long-standing issue that affects buyers of residential real estate throughout the country—alleged steering of home buyers to affiliated title, settlement and mortgage companies by large realty brokers. This widely utilized practice often leads to consumers incurring a considerable amount of extra fees and costs when compared with fees and services offered by non-affiliated competitors.

Many real estate brokerages rely on the income generated by clients using mortgage and title companies that are affiliated with them. Brokerages often attempt to maximize their “capture rates” - the percentage of all home-sale transactions that use the affiliates’ services. A consumer typically ends up paying more fees than if he/she selected a non-affiliated competitor. The brokerages justify the additional expense to consumers by claiming that even if the affiliates’ fees or mortgage rates are not the lowest available, the quality and dependability of the affiliates’ services more than compensate for any price differences.

Over the past several years, many cases involving financial relationships between brokerages and their affiliates have withstood legal challenges. So long as the financial arrangement was properly structured to comply with federal anti-steering and anti-kickback rules, the Courts have been reluctant to intervene in these arrangements.

In the Minnesota lawsuit, two buyers filed claims against Coldwell Banker Burnet Realty Inc., one of the largest realty firms in the state. The Plaintiffs in the litigation charged that Coldwell Banker breached its fiduciary duties under state law when it steered the buyers to its own title and settlement affiliate, Burnet Title, despite knowing that the affiliate’s fees were significantly higher than those available from non-affiliated firms. In the case of a broker-client relationship, fiduciary duty means that a real estate broker is bound to put a client’s best interests ahead of the broker’s, and must not profit from the fiduciary relationship unless the client consents. A fiduciary is also supposed to disclose material facts that may affect the client’s best interests.

The claims asserted in the Minnesota litigation could be duplicated in other states: When real estate brokers or sales associates knowingly steer clients to higher-cost services that benefit the broker financially, they may violate the fiduciary responsibilities owed to those consumers. The Plaintiffs also alleged that Burnet Realty failed to disclose that its affiliated title company “retains at least 75 percent of each insurance premium,” or that the title affiliate’s fees “are among the highest, if not the highest, in Minnesota.” On a typical $250,000 home purchase, according to the suit, the title affiliate’s fees “can be several hundred dollars more” than those of non-affiliated competitors.

Consumers should be aware of the fact that often times a brokerage will pressure its sales associates to direct their clients’ closing and title insurance business to the affiliate. The company may also offer financial incentives to sales associates who cooperate, including a “quick check” program that pays agents’ commissions at closings, rather than at a later date, if the closing occurs at the affiliated title company.

So, how can home buyers protect themselves in these situations?

First, it is imperative that you read the fine print. Brokerages are required to disclose their relationships with affiliates, but often times the language is buried in small print somewhere in the agreement that the buyer or seller signs with his/her agent. Most importantly, consumers must remember that they have a choice. There is no legal requirement that a consumer utilize a mortgage company, title company or settlement company that is affiliated with the consumer’s broker. Make sure to check out the competition and shop around for the lowest cost title, best mortgage rates and other services.

Tags: mortgage, real estate agent, real estate broker, Real Estate Law, residential, steering, title