Every real estate transaction involves several interested parties: a buyer, seller, broker, mortgage lender, a Qualified Intermediary (in the case of a 1031 exchange), and a title company. Most people who have participated in a real estate deal are familiar with the roles of each of these parties, but they may not be as familiar with that of the title company.
What exactly does a title company do, and what is their role in a 1031 exchange?
What is the role of the title company?
In a real estate transaction, a title company wears many hats, acting as a combined agent of the insurance company, buyer, seller, and any other entity involved in the agreement. Throughout the life cycle of the deal, the title company will primarily perform a title search to confirm the legitimacy of the seller’s right to dispose of the property. Next, the company will act as a closing agent to properly document the closing of the transaction and issue title insurance (typically to the buyer) on behalf of the insurance company. The insurance protects the buyer from a financial loss in the event of the discovery of a defect on the title of the property.
Title Search. A title company first becomes involved in a deal by conducting a title search and review of public records on the status and condition of the title on the property. The title company will search through public records to ensure the seller has the right to sell the property and that there are no outstanding issues with the property. These issues may include but are not limited to unpaid taxes or fees, debt or additional liens on the property, and special assessments such as environmental reports that highlight issues such as harmful contamination on or underneath the property. When the title company finishes its search, it will compile a report outlining any pertinent information a buyer will need to know about the property before continuing in the transaction.
Closing Agent. As the buyer and seller move closer to the consummation of an agreement, the title company will continue its involvement as a closing agent. In this role, the title company will execute closing documents, obtain signatures from all involved parties, hold funds in escrow, and distribute payments and deeds as appropriate. Once all involved parties have signed documentation finalizing the transaction, the title company will then file relevant documentation with the local county land records office. At that time, the company will release cash to the seller and deliver the deed on the property to the buyer.
Title Insurance Issuer. A title company will issue title insurance on behalf of a title insurance company and function as an agent that earns a commission for doing so. The actual premium paid by the policyholder is paid to the title insurance company. In real estate, buyers and lenders are the most common policyholders. In exchange for a one-time premium, title insurance protects both entities against loss or damage stemming from the discovery of defects on a title.
A title company is involved throughout the life cycle of a real estate transaction and exists to ensure that it occurs smoothly. These duties include ensuring that a seller has the legitimate right to sell the property, that the proper documentation is filed with appropriate counter-parties (including the local county land record office), and that the buyer and seller receive the deed for the property and cash, respectively.
What is the title company's role in a 1031 Exchange?
Although a 1031 exchange is considered a specialized real estate transaction, a title company is still involved and assumes many of the same responsibilities as it does in a standard contract. However, the role of a title company does differ slightly in a 1031 exchange.
A title company, because it is not considered a prohibited agent, can act as a Qualified Intermediary in a 1031 exchange in conjunction with its ability to serve as an escrow officer throughout the transaction. In a normal process, the title company will hold the buyer’s funds in escrow until all documentation is signed to officially execute the deal. In a 1031 exchange, the title company can do the same, by serving as an escrow officer on behalf of the taxpayer as he or she disposes of an initial property and identifies prospective properties that meet the requirements of a 1031 exchange to defer capital gains tax on realized gains.
In instances where the title company is not serving as a Qualified Intermediary, it will still have a role throughout the cycle of the 1031 exchange — conducting a title search, acting as a closing agent, and facilitating the issuance of title insurance to the appropriate parties. However, the title company will not deal directly with the buyer or seller, and instead will deal solely with the Qualified Intermediary facilitating the exchange.
Though the role of a title company may not be as easily identifiable as a buyer, seller, or broker in a real estate transaction, the title company plays an equally critical role as any of these entities in ensuring a successful exchange between a prospective buyer and seller is executed. The title company ensures that agents on either side of the deal have access to all pertinent information and that the exchange can legally take place.
Once a title search report is distributed, the title company will facilitate the execution of documentation that makes the agreement official. The company also acts as an escrow officer, releasing both the deed and cash to the buyer and seller — in addition to serving as an intermediary that issues title insurance to protect parties against financial damages that can be incurred during a transaction.
In many cases, a broker will connect the buyer and seller. Similarly, a mortgage lender will sometimes be called upon to provide financing for a buyer if he or she is not purchasing a property in all cash. In all cases, a title company is required to ensure that a transaction can successfully and efficiently take place.
The 1031 Investor's Guidebook
Tackle the art and science of completing your 1031 exchange.