Hold Open Title Policy for Flipping

[Kevin Fletcher]

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?

[Rob K.]

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.