Do you buy title insurance policy on quick flip properties?

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Do you buy title insurance policy on quick flip properties?

Ruth Lyons
Investor · Colorado Springs · Member since 2016 · 232 posts · 150 votes

Looking for input from the bigger pockets family. I am closing on a flip next Friday. It 's a wholesale deal/assignment contract. The home has been owned by the same couple for over 25 years. A title policy will cost me $1,325 and I'll only going to own the home for 8-9 weeks since it's a quick flip. Would you purchase it or take a chance?

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Adrien C.
Property Manager · Griffith, IN · Member since 2015 · 1k+ posts · 913 votes
5y

You shouldn't even be asking this question. It's like all insurance. We hate paying it and never using it. Feels like a waste of money. But you love it when you need it. The risk isn't worth it. A title claim could be several thousands of dollars. Is it worth saving $1,325 and maybe taking on a claim of $60-80K or more. Even if they owned it years, the title company may miss something and it's on you to cover it. Maybe they miss a $150K IRS lien. That $1325 policy that shifts the risk to the title insurer is looking pretty good. Treat it as a cost of doing business. I don't say this lightly. I buy and sell 80-100 houses a year and half of those are wholesale deals (we close first) that have a turnaround time of 2 weeks. I always buy title insurance. 

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  • Adrien C.
    Property Manager · Griffith, IN · Member since 2015 · 1k+ posts · 913 votes
    5y

    You shouldn't even be asking this question. It's like all insurance. We hate paying it and never using it. Feels like a waste of money. But you love it when you need it. The risk isn't worth it. A title claim could be several thousands of dollars. Is it worth saving $1,325 and maybe taking on a claim of $60-80K or more. Even if they owned it years, the title company may miss something and it's on you to cover it. Maybe they miss a $150K IRS lien. That $1325 policy that shifts the risk to the title insurer is looking pretty good. Treat it as a cost of doing business. I don't say this lightly. I buy and sell 80-100 houses a year and half of those are wholesale deals (we close first) that have a turnaround time of 2 weeks. I always buy title insurance. 

    5Reply
  • Ruth Lyons
    OP
    Investor · Colorado Springs · Member since 2016 · 232 posts · 150 votes
    5y

    Thank you. 

    0Reply
  • Todd Rasmussen
    Rental Property Investor · Clarksville, TN · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    @Ruth Lyons

    I would be most likely to buy title insurance using a wholesale deal / assignment of contract.

    0Reply
  • Preston Porter
    Real Estate Broker · Alamosa, CO · Member since 2016 · 30 posts · 12 votes
    5y

    @Ruth Lyons I'd listen to @Adrien C. !  Sounds like he's the guy you needed.

    I will just add that depending on how your sale goes in 9 weeks, most likely the next buyer is going to want title insurance as well.  I've experienced significantly discounted "Re-issue" rates for Title Insurance on that second transaction, especially if you use the same title company.

    1Reply
  • Steve Morris
    Real Estate Broker · Portland, OR · Member since 2019 · 4k+ posts · 2k+ votes
    5y

    Considering that title insurance protects you as the owner from future title claims, think I would.

    0Reply
  • Ruth Lyons
    OP
    Investor · Colorado Springs · Member since 2016 · 232 posts · 150 votes
    5y

    Thank you for the replies. I do typically pass on my title insurance policy to the new owner and it saves them money instead of getting a new policy. And I appreciate the importance of insurance. I was looking at a policy though and there are so many exclusions That it made me wonder what I’m really paying for? Is there any true protection anyway? I’m just posing the question because when you’re doing a lot of flips, this expense increases The cost of doing business substantially.And then I heard that 70% of the premiums go to the title company’s bottom line so they are incentivized to sell title insurance to everybody whether you really need it or not.I can feel the backlash as many of you read this, but it’s ok to question the way things “have always been done”. My broker says he never buys it on flips. Additional thoughts?

    0Reply
  • Loren Clive
    Residential Real Estate Broker · Paia, HI · Member since 2016 · 479 posts · 311 votes
    5y

    ALWAYS buy title insurance! I work as an expert witness in bank foreclosures, and let me tell you, people DO challenge the foreclosures years after the fact. If you don't have insurance, you're screwed. 

    I'd be curious as to your broker's reasoning on this.

    1Reply
  • Ruth Lyons
    OP
    Investor · Colorado Springs · Member since 2016 · 232 posts · 150 votes
    5y

    Hi Loren, 

    On foreclosures, short sales, a property that's been bought and sold several times in the last 7-10 years and in most situations, yes, title insurance is a must. Even though it's expensive, it might just save my butt. Here's my reasoning for reconsidering it on this flip deal:

    -I am essentially buying it direct from the seller who's parents owned it for 25 years plus. There's no mortgage to pay off, HELOC or anything. They paid it off and own it outright.

    - I'm only going to hold it for a few months and the chance of someone contesting the title during that time after my trusted title attorney does his research and delivers me clear title is pretty low. It's my understanding that I'm only buying insurance to cover those months. The new buyer's lender will insist they get a policy as soon as they close so essentially the property goes without title insurance for 2-3 months.

    - The exclusions in the policy are so broad that I don't think I'm actually getting any coverage of value. In all the deals I've done, I've sort of come to the conclusion that in some cases, title insurance is just a money grab for the title companies, confirmed by the fact that when I told the wholesaler's selected title company that I may go without it, they told me they don't offer that option. It's money out of their pocket.

    - The title company has E&O insurance that kicks in if there is a title issue and I didn't purchase the insurance.

    That's how I'm leaning anyway...any title people want to weigh in?

    Ruth

    0Reply
  • John Warren
    Real Estate Broker · 3412 S. Harlem Avenue Riverside, IL 60546 · Member since 2015 · 6k+ posts · 5k+ votes
    5y

    @Ruth Lyons I sold a flip for a local GC who does flips from time to time. He had purchased a great deal here in the Chicago burbs from a wholesaler, and when we finally got to market and got an offer we found out that there were around 45k in leans on the property. This was right at the beginning of the pandemic too, so the fun part was that the liens were accruing interest, but the whole court system was closed due to the pandemic. He barely got out even with a very competitive purchase process with multiple offers and highest and best. The only thing that saved him was that my attorney knew someone on the inside and was able to negotiate down the lean. I would buy that title policy for sure!

    2Reply
  • Rob Gillespie
    Specialist · Cleveland, OH · Member since 2011 · 1k+ posts · 852 votes
    5y

    @Ruth Lyons

    I personally do.

    You may take title in a trust and sell to one of your buyers in the same entity so they can just retain the insurance.

    You would probably be OK to not buy it, but without really diving into the history of the property it would be hard for me to give you that advice.

    Good luck and I hope you make a fortune on your deal!

    

    0Reply
  • Jonathan KlemmBusiness Member
    Moderator
    Contractor · Chicago, IL · Member since 2016 · 4k+ posts · 2k+ votes
    5y

    @Ruth Lyons - My question is, why wouldn't you take out title insurance?  It's like not having health insurance than having your appendix burst.  You need protection against unforeseen title clouds or old liens. 

    Definitely get title insurance.

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  • Whitney HuttenPro Member
    Investor · Boulder, CO · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    @Ruth Lyons YEEESSSS! Get the insurance. I did a "quick flip" and when I went to sell the property, 3 liens popped up that I had to clear (the previous closer didn't do a very good job) prior to being able to sell.  The insurance was invaluable in helping not only clear the liens, but doing so in a very timely way. Consider it your business insurance.  You hope you never need it, but when you do, it's there!

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  • Peter Walther
    Specialist · Winter Springs, FL · Member since 2009 · 1k+ posts · 747 votes
    5y
    Originally posted by @Ruth Lyons:

    Thank you for the replies. I do typically pass on my title insurance policy to the new owner and it saves them money instead of getting a new policy. And I appreciate the importance of insurance. I was looking at a policy though and there are so many exclusions That it made me wonder what I’m really paying for? Is there any true protection anyway? I’m just posing the question because when you’re doing a lot of flips, this expense increases The cost of doing business substantially.And then I heard that 70% of the premiums go to the title company’s bottom line so they are incentivized to sell title insurance to everybody whether you really need it or not.I can feel the backlash as many of you read this, but it’s ok to question the way things “have always been done”. My broker says he never buys it on flips. Additional thoughts?

    After doing claims for various title underwriters for about thirty years and as an active real estate investor, it's my opinion that it's an extraordinary risk for the average person to purchase property without getting title insurance.  The risk of a title problem is just too great to self insure.  I think you're misunderstanding the 70% of the premium going to the bottom line.  Title insurance policies are generally issued by a title insurance agent and not the underwriter.  The premium paid for the policy, not the other costs associated with the closing, just the premium is split between the agent and the underwriter as set out in the Policy Issuing Agent Agreement between them.  The split frequent is 70/30 with the agent retaining the 70%.  The agent is considered to have earned the 70% because they frequently not only issue the policy but they also search and examine the title to determine insurability and may have liability for errors and omissions in that process.  Now there are many problem in my mind with the way title policy are issued, that's the reason I retired, but even with short comings that increase risk for the unwary insured, it's still better than taking an uncovered risk. 

    1Reply
  • Darius Ogloza
    Investor · Marin County California · Member since 2018 · 1k+ posts · 2k+ votes
    5y

    It would seem that the greatest risk you face when the seller has owned the property for 25 continuous years is the unrecorded lien - which title policies do not cover.  I too would hate to shell out cash in that circumstance.  However, consider the issue from your buyer's perspective.  What impact would your not insuring title to the property have on your sale?   Could it result in your buyer thinking there may be defects in title (hence why no policy issued in connection with your purchase) and thereby in loss of your sale or in a reduction in the final sale price?  Just food for thought.

    1Reply
  • Alexander Szikla
    Real Estate Agent · New York City · Member since 2020 · 818 posts · 639 votes
    5y

    You should absolutely get title insurance! Because I'm sure the next buyer (your flippee) will!

    0Reply
  • Bonnie LowPro Member
    Lender · Asheville, NC · Member since 2016 · 1k+ posts · 1k+ votes
    5y

    Yes. Always buy title insurance. I can't think of a single instance in which I wouldn't do that - even if I was buying from someone in my own family. You just never know what is owed on the property or who else has claim to it. And in the off chance you get into a situation where there IS a claim or a problem with title, it will cost you far more than the title insurance cost to fix it.

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  • Brian Spears
    Rental Property Investor · Rome, GA · Member since 2016 · 12 posts · 3 votes
    5y

    @Ruth Lyons

    As long as you’ve had the title searched by a good attorney you should be fine but for piece of mind, I would recommend purchasing the insurance. I have only had to use title insurance once in my investing career. The property I purchased had a property tax lien sold months earlier but wasn’t recorded until 2 days prior to my purchase which was a day after my attorney had searched title. Most of the time you will be safe but crazy things can happen.

    1Reply
  • Crystal SmithPro Member
    Moderator
    Real Estate Broker · Chicago, IL · Member since 2014 · 2k+ posts · 1k+ votes
    5y
    Originally posted by @Ruth Lyons:

    Looking for input from the bigger pockets family. I am closing on a flip next Friday. It 's a wholesale deal/assignment contract. The home has been owned by the same couple for over 25 years. A title policy will cost me $1,325 and I'll only going to own the home for 8-9 weeks since it's a quick flip. Would you purchase it or take a chance?

    If we are assigning a contract then the assignee buys the title insurance, not the assignor, me. If the only way to execute was to double close on the property then I would purchase the title policy.

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  • Eric M.
    Flipper/Rehabber · Louisville, KY · Member since 2008 · 1k+ posts · 1k+ votes
    5y

    I have always bought title insurance but I have not done something as short as 8 weeks.

    I did read about something called an insurance "binder" that seems to be a sort of temporary title insurance specifically for this short term ownership situation. The implication is that it is much much cheaper. But I have never used it and don't know the ins and outs.

    https://spruce.co/blog/how-do-...

    0Reply
  • Jacob Frenkel
    Member since 2020 · 8 posts · 0 votes
    5y

    I sure would there is no way of knowing if you can get Title insurance on the property until you get the commitment yourself .any future buyer will not close with out title insurance .Being in the Title insurance business I just had a client with a similar situation who did not insure  and is down the road now after purchase trying to insure.

    Best of luck 

    jacob

    0Reply
  • Rene Owczarski
    Rental Property Investor · Des Moines, IA · Member since 2020 · 232 posts · 116 votes
    5y

    @Ruth Lyons You mentioned in one of your follow-up's that "I am essentially buying it direct from the seller who's parents owned it for 25 years plus". So do the children own the home, or is it still in the parent's name? Which then begs the question, has the parents estate been settled, and do the children have the right to sell the home? Because if the parents estate hasn't been settled, and the kids are selling the home without any legal authority to do so, that's a big issue in the chain of title. And that's just scratching the surface, on if their might be any unknown/open creditor claims against the parents estate, which the funds from the sale of the home would settle. Since if the home is owned free-and-clear (which you mentioned above), and the estate is not settled, you could have creditors popping up out of the woodwork after closing (like un-paid credit cards, gov't entities wanting repayment if they were in certain types of elder care, etc.), that want a slice of that homes equity. This isn't to scare you, however these are some big risks/unknowns, and title insurance would give you some protection, but not complete protection, from some of those scenarios. So if it were me, I'd buy the title insurance and just build it into my costs on the deal. Best of luck.

    0Reply
  • Tom GimerBusiness Member
    DMV · Member since 2017 · 3k+ posts · 3k+ votes
    5y

    @Ruth Lyons If you decline title insurance (this is done via written agreement) the title company's E&O policy would likely not cover your future claim as you would essentially be self-insuring. You would also be paying your own attorney fees in any lawsuit... that alone is reason enough to purchase owners coverage.

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