Hold Open Title Policy for Flipping

18 Replies

I was told by a friend about using hold open title policy for flips because it can save a lot of closing costs when flipping. Does anyone have any experience with these? Is it a good option for flipping a SFH?

Yep. Your end buyer will need to use the same company for title insurance. You'll pay an additional premium based on the difference in value.

The problem with this is I've never been successful on convincing buyers to use my title company. It's buyers choice so holding it open only works if they agree to use the title company.

Depends where you are. Here in California the seller typically chooses the title company, so we almost always use a title binder on our flips.

Don't know what title insurance costs there, but here it's only about .5 to .6% of sale price.

I always buy a binder, even when the seller is paying for title insurance. Here it costs an additional 10%. Saves a lot of money for me. When re-selling, I've never had a problem getting the buyers to go with my title company.

@Account Closed Thanks, I think Ill try it on my next one. I think the only reason the eventual buyer should have a problem with using your title company would be because their an investor or they have an agent with a history or allegiance to a different title company. Do you just disclose that they need to use your title company up front? How do you let them know so it doesn't become a deal breaker?

You could do the same thing banks do with their REOs. You'll buy title insurance as long as the buyer uses your title company. If they want a different one, they have to pay. I suspect most retail buyers have no preference regarding title companies. An investor might, but might be willing to use yours rather than pay for the title insurance themselves.

A binder is a written commitment by a title insurer to provide future title insurance based on title as it currently exists. It is a common misconception that binders are title insurance. They are not. Just because you pay the full cost of a policy at the time you get the binder does not mean you have title insurance. What you have is an option to buy a policy in the future at a 90% discount of the stated coverage amount. Many title reps do not really understand what binders are.

When a flipper purchases a title binder as part of an acquisition, and then later uses the binder to purchase a discounted policy for the buyer of the flipped property, the binder terminates and ceases to exist. The new buyer will be indemnified in the event of a covered claim, but the flipper, who never actually had title insurance (only a binder that became void when the buyer's policy was issued) will not be indemnified by the title company.

One of the important features of a title policy is being provided the costs of defense when a claim arises. If a flipper gets dragged into litigation over a title claim, they will not have the benefit of a title insurance policy once the binder is used to issue their buyer a policy. When a flipper sells a property to a buyer, they are typically warranting at least marketable title. I personally think the risk of binders is not worth the cost savings. If you have ever been involved with the mess of a title claim, you might know what I mean.

Originally posted by @Rob K. :. I personally think the risk of binders is not worth the cost savings. If you have ever been involved with the mess of a title claim, you might know what I mean.

I've been involved in title chain messes but do not know what you mean. But you've got my attention. Can you give an example where buying a binder, and then selling and purchasing the discounted policy did not protect you.

Originally posted by Kristine Marie Poe:
Originally posted by @Rob K.:. I personally think the risk of binders is not worth the cost savings. If you have ever been involved with the mess of a title claim, you might know what I mean.

I've been involved in title chain messes but do not know what you mean. But you've got my attention. Can you give an example where buying a binder, and then selling and purchasing the discounted policy did not protect you.

Well, the possibilities of title related problems are only limited by the imagination of what could go wrong, but how about this one:

You are in California, so i imagine you are familiar with the California Association of Realtor's "RPA" residential purchase contract form.

Paragraph 12 of that form contains an affirmative representation by the seller that title is transferred free and clear of monetary liens.

Lets say that you acquired your property from a less than scrupulous seller who forged a reconveyance of a very large loan prior to you buying. Your preliminary title report does not show the lien as the title underwriter does not scrutinize it. You get a binder from that prelim and use it to give your new buyer a policy.

Lender than forecloses and buyer submits claim to title company who accepts coverage. Title company is also subrogated (steps into the buyer's shoes) to your buyer's rights under the purchase contract.

Remember, you never had a title policy, only a binder. Take a guess who the title company comes after based on the representation of no monetary liens under the RPA?

@Rob K.

I believe the flipper would normally get a owners policy for the acquisition deed AND a binder for the future resale deed, so there is coverage for the flipper and a discount on the new policy when reselling.

Originally posted by Account Closed:
@Rob K.

I believe the flipper would normally get a owners policy for the acquisition deed AND a binder for the future resale deed, so there is coverage for the flipper and a discount on the new policy when reselling.

If what was paid for at close of escrow was 110% of the cost of a policy, than all you have is a binder.

If a title claim arises before you flip it, you are OK as you would use the binder to purchase a policy for your self.

But if the claim arises after you use the binder to pay for a policy for your close with the buyer, you are to late. You are not covered.

Originally posted by @Rob K. :
Originally posted by @David C.:
@Rob K.
I believe the flipper would normally get a owners policy for the acquisition deed AND a binder for the future resale deed, so there is coverage for the flipper and a discount on the new policy when reselling.

If what was paid for at close of escrow was 110% of the cost of a policy, than all you have is a binder.

If a title claim arises before you flip it, you are OK as you would use the binder to purchase a policy for your self.

But if the claim arises after you use the binder to pay for a policy for your close with the buyer, you are to late. You are not covered.

so, for example, if I buy a 2 yr binder for 110% of the the cost of a normal owner's policy and I decide to not flip and move into the property, and after 2 yrs I don't use the binder to purchase a policy, I don't have and never had title insurance?

I take it you have never had the pleasure of dealing directly with a title company's claims department.

I recommend that for anyone who has recently gotten a binder on a transaction, when the binder arrives in the mail, read what it says. They can be very tricky and as I mentioned earlier, I think the risk outweighs the cost savings. There are enough problems inherent in getting coverage from an actual title policy itself, no need to complicate your life with binders IMHO.

One thing I did learn about binders recently is that if a flipper brings another party onto title (flippers often do this to bring in partners), guess what, you just blew your binder, you can no longer use it on the resale!

Originally posted by @Rob K. :
I take it you have never had the pleasure of dealing directly with a title company's claims department.

I recommend that for anyone who has recently gotten a binder on a transaction, when the binder arrives in the mail, read what it says. They can be very tricky and as I mentioned earlier, I think the risk outweighs the cost savings. There are enough problems inherent in getting coverage from an actual title policy itself, no need to complicate your life with binders IMHO.

I have plenty of binders sitting in files a few feet from desk here. I'll definitely take a look at them.

I'm confused how what I thought was a policy plus binder (at 110%) isn't a policy at all according to your understanding. I thought there was a policy and that the 10% fee was the binder. And that the policy on the re-sale was a discounted policy. Hmm. Will be looking into that.

Your example is disconcerting. You're saying the error was the title company's (failing to scrutinize the fraudulent reconvey) and that they refused to make the end buyer whole?

Originally posted by Kristine Marie Poe:
Originally posted by @Rob K.:
I take it you have never had the pleasure of dealing directly with a title company's claims department.
I recommend that for anyone who has recently gotten a binder on a transaction, when the binder arrives in the mail, read what it says. They can be very tricky and as I mentioned earlier, I think the risk outweighs the cost savings. There are enough problems inherent in getting coverage from an actual title policy itself, no need to complicate your life with binders IMHO.

I have plenty of binders sitting in files a few feet from desk here. I'll definitely take a look at them.

I'm confused how what I thought was a policy plus binder (at 110%) isn't a policy at all according to your understanding. I thought there was a policy and that the 10% fee was the binder. And that the policy on the re-sale was a discounted policy. Hmm. Will be looking into that.

Your example is disconcerting. You're saying the error was the title company's (failing to scrutinize the fraudulent reconvey) and that they refused to make the end buyer whole?

No, in my example they accepted coverage of the end buyer's claim, and as typically is the case, the title company's attorneys go looking to make third party claims against anyone they think is responsible for reimbursement of their indemnification costs associated with the loss, including the seller. They won't care that they gave you a prelim with an error in it if you did not obtain an actual policy from them. At least not in California. All they will care about is whether you are insured with them or not.

Not to be to technical, but a title policy issued to the end buyer does not obligate the title insurer to "make the end buyer whole". This is a bit tongue in cheek, but a title policy is more accurately described as a settlement agreement in advance in which the title insurer attempts to specifically define and limit their obligations in connection with any negligence they commit in their title search. That is how a claims department will view it. You will not find any language in a title policy which obligates them to "make an insured whole".

By the way, the example I gave is based on real life.

Originally posted by @Rob K. :
Originally posted by @K. Marie Poe:
Originally posted by @Rob K.:
I take it you have never had the pleasure of dealing directly with a title company's claims department.
I recommend that for anyone who has recently gotten a binder on a transaction, when the binder arrives in the mail, read what it says. They can be very tricky and as I mentioned earlier, I think the risk outweighs the cost savings. There are enough problems inherent in getting coverage from an actual title policy itself, no need to complicate your life with binders IMHO.

I have plenty of binders sitting in files a few feet from desk here. I'll definitely take a look at them.

I'm confused how what I thought was a policy plus binder (at 110%) isn't a policy at all according to your understanding. I thought there was a policy and that the 10% fee was the binder. And that the policy on the re-sale was a discounted policy. Hmm. Will be looking into that.

Your example is disconcerting. You're saying the error was the title company's (failing to scrutinize the fraudulent reconvey) and that they refused to make the end buyer whole?

No, in my example they accepted coverage of the end buyer's claim, and as typically is the case, the title company's attorneys go looking to make third party claims against anyone they think is responsible for reimbursement of their indemnification costs associated with the loss, including the seller. They won't care that they gave you a prelim with an error in it if you did not obtain an actual policy from them. At least not in California. All they will care about is whether you are insured with them or not.

Not to be to technical, but a title policy issued to the end buyer does not obligate the title insurer to "make the end buyer whole". This is a bit tongue in cheek, but a title policy is more accurately described as a settlement agreement in advance in which the title insurer attempts to specifically define and limit their obligations in connection with any negligence they commit in their title search. That is how a claims department will view it. You will not find any language in a title policy which obligates them to "make an insured whole".

By the way, the example I gave is based on real life.

Thanks for the additional info. I'm aware that a title policy doesn't obligate them to make the insured whole. In the title claim cases I've seen everyone names everyone and there are counter suits as everyone is looking for someone to pay. I was just curious who came out ahead, the end buyer or the lender.

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