The Two Different Title Company Business Models Explained
One way to know the real estate market is doing well is when you hear Realtor teams mentioning they are going to open their own Title Company. Now, I must preface by saying I don’t hear this on a regular occasion but in reality, I should hear this zero times…ever. There are many Realtors who don’t fully know or understand the full scope of what a Title Company does, let alone under the full scope of detail and liability they will be assuming by having ownership in…or fully owning a Title Company. Many see us Title Companies like the “piggy bank” and we rarely pay claims so we must be swimming in cash. That statement is far from the truth. In the hierarchy of real estate, we make less profit than the Realtor and the lender on a transaction. With this said, here are what Realtors don’t know about opening their own Title Company.
You are Now in the Insurance Business
If you read my blog about settlement agents vs Title Company you would know there are only a handful of Title Insurance underwriters in the country (Stewart Title is the 3rd largest). These companies underwrite and insure the Title for every settlement agent in the country. If a Realtor team wants to start their own Title Company, they must first form a company–“Realtor Settlement Company LLC” for example. They then need one of these underwriters to underwrite the Title Insurance policies on the transactions they close. This is not easy. First, none of the major underwriters will take you on as an unproven start-up company. You will have to get a 2nd tier underwriter to take you on as a brand new company with low cash reserves. Oh yeah…you need MONEY in the bank–hopefully lots of it to start a Title Company. You are now in the insurance business. You are now risking your real estate money to close purchase deals and ensure the Title to the homes you sold are clear. This leads us to the next phase…
Need Good Title Abstractors
People who conduct the 60-year Title searches on properties going to settlement are called “Title Abstractors.” Their job is to search the chain of title and make sure no liens, judgments, or any other Title defects are clouding the title. Essentially they do the grunt work to ensure that the Title Company can prepare the Title Commitment–and eventually, the Title Policy the buyer receives at closing. It is VERY important to hire good title abstractors. If they miss items during the title search, this can lead to the claims–and claims could put your entire real estate business–out of business.
Share in the Profits–Share in the Losses
Now that you are in the risk/insurance business, you need to be prepared to write checks to cover claims. The Title business isn’t all sunshine and rainbows. Most Title Companies struggle to hit a 20% profit margin each year, so don’t think that extra revenue stream will make you rich–unless you are closing a big volume of business.
Claims come when you miss items on Title, wire fraud, fraud in the chain of title, improperly insuring something on the Title, missed liens and judgments, etc. I wrote this blog last month on a story where a competitor had to pay a $68,000 claim because they missed a judgment on a previous seller when doing the Title search. Who says Title Companies don’t pay claims? Truth is they are paid all the time. What would a large Title claim do to your business?
Imagine you become a victim of wire fraud and accidentally wire $400,000 of your seller client’s proceeds to the wrong account? That is the end of your Title Company, as your Title Underwriter will drop you as a settlement agent, and probably the end of your real estate business.
I don’t want to sound doom and gloom but I think many Realtors don’t fully grasp what opening their own Title Company really means and the liability that comes with it.
Are you really a Neutral 3rd Party?
This is the last issue that really comes into play. Title Companies are a neutral 3rd party to a real estate transaction. In most cases (Virginia) we hold the EMD as well. Can you really act as a neutral 3rd party when you own the Title Company, and one of your agents is directing the buyer’s transaction? How would you feel like the listing agent? What if there is an EMD or transaction dispute? This could affect your real estate business, because as a listing agent, would you want to accept a buyer offer from an agent that is going to steer the deal to a Title Company that is owned by the Realtor team that you work for? Tough call.
Why Work With Stewart Title
If you work with Stewart Title, you can avoid ALL the items above and let us handle it. You can focus on your real estate business, and we can work alongside you to help you grow it. Fill out the form below and let me know how I can assist! Make sure to subscribe to my blog and YouTube channel in the top right-hand corner!
DCTitleGuy
Director of Sales/Marketing at Stewart Title
My name is Wade Vander Molen and I am the Director of Sales and Marketing for Stewart Title in Northern Virginia/Washington DC.I work with Real Estate agents and Mortgage Lenders helping them grow their business with Outbound and Inbound marketing strategies. If you wish to meet and set up an appointment call me at 480-203-6452 or email at wvander@stewart.com
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Great post Wade! Love it. As always, great content. Cheers from Denver.
– Jerad