What’s a ‘Closing Protection Letter,’ and When Do You Need One?

The Colorado Division of Insurance reports that over the last 10 years, title companies have misappropriated $9.4 million dollars in funds related to real estate transactions. $340,000 of that was not covered by insurance, but could have been with a Closing Protection Letter (“CPL”). To better protect consumers, the Division now requires that title companies inform consumers of the availability of CPLs in their title commitments, but that disclosure is buried within the lengthy title commitment and does not explain why the client would want a CPL.'

Lenders have always demanded and received CPL’s to protect themselves, and that coverage protects the parties to the transaction, but some buyers and/or sellers want the added peace of mind of having their own CPLs, which range in cost from free to $25. A cash buyer definitely should request a CPL for their transaction.

 

At Golden Real Estate, we recently devoted one of our office meetings to the topic of title insurance and learned the importance of obtaining CPLs to protect our clients.

Published March 23, 2017, in the Denver Post's YourHub section and in four Jefferson County weekly newspapers.

Real Estate Commission Warns About Affiliated Business Arrangements

Real estate brokerages are allowed to own title insurance companies, mortgage companies and other “settlement service providers.” The Colorado Real Estate Commission merely requires that such arrangements be disclosed in writing, along with a warning that the fees charged by settlement service providers can vary.

Both title insurance and loan costs do vary substantially. Title insurance exists to insure buyers (and their lenders) that the property is being transferred free and clear of any liens. Policy rates are filed with the Division of Insurance and are pretty competitive. Also filed with the state are “reissue rates” based on how recently title insurance was purchased, such as when the seller refinanced his mortgage. Reissue rates and the fees for conducting the closing can vary significantly. I’ve seen closing fees as low as $100 and as high as $700. Don’t let your agent steer you to utilize their in-house title company without asking about the reissue rate and closing fees.

 

Lenders are also highly competitive, and your broker’s in-house mortgage company may not offer the best deal, when you factor in not only interest rates but the other fees associated with getting a loan.  Request a “Loan Estimate” from multiple lenders.

 

Almost all large and many medium-size brokerages own or have a financial interest in a title company and/or lender, and, if so, you will be presented with an “Affiliated Business Arrangement Disclosure” when you hire an agent from one of those companies. That disclosure will contain the following statement: “The rates quoted by these companies may not be the lowest available and are subject to change.”

 

In addition, the standard state-approved listing and buyer agency agreements state that the seller or buyer “acknowledges that costs, quality, and extent of service vary between different settlement service providers.”

What concerns the Real Estate Commission is that consumers typically do not “shop around” and typically accept the recommendations of their agents to use their in-house title company and/or lender.

Before starting Golden Real Estate, I worked at two brokerages which owned both a title company and a mortgage company. Although broker associates were free to recommend other title companies or lenders to their clients, we quickly learned that agents who “captured” clients for the title company and mortgage company were favored by the managing broker when it came to dispensing relocation and other leads.

Ideally, an agent will give you two or more title companies and lenders from which to choose. Even so, that agent is likely to “sell” the client on using his brokerage’s own title company or lender, without it being obvious to the client how the use of that title company or lender benefits the agent. 

I don’t know if this is still the case, but when I was with my first brokerage, the company-owned mortgage company would provide free business cards and free flyers for our listings, in return for letting the lender promote itself on the back of our business cards and flyers. The toll-free number listed for the lender on those business cards and flyers was unique to me, which allowed the mortgage company to know that the call came from my business card or my flyer. I know that this information was provided to my managing broker so that she, too, would know that I was “playing the company game.”

 

Typically, the seller, through his agent, selects a title insurance company, which is listed in the MLS, for purchasing the “owner’s title policy” which guarantees free and clear title to the buyer. Theoretically, the buyer can select his own title company, but this is rarely done for two reasons.

 

First,  the seller typically pays for the owner’s title policy. If the buyer wants to change that selection, he is expected to assume that cost, typically over $1,000.

 

Second, if the buyer exercises his right to select a different title company for the policy which covers his lender for the amount of the mortgage, the cost for that “lender policy” will be much higher than it would be if purchased as a “piggy-back” policy from the seller’s title company.  As a result, the buyer almost always goes along with the seller’s choice of title company to avoid paying significantly more for coverage.

Golden Real Estate has no affiliated business arrangements and has no plans to enter into such arrangements. 

 

Published Jan. 12, 2016, in the YourHub section of the Denver Post and in four Jefferson County weekly newspapers.

Who Pays for What When You Buy or Sell Real Estate? It’s All Negotiable

Compared to most other states, Colorado is blessed with low costs for both buyers and sellers. The biggest costs for buyers apply only when there’s a mortgage. For sellers, the only significant costs are the purchase of title insurance for the buyer and the commissions owed to both agents. 

But buyers don’t always pay the “buyer” costs and sellers don’t always pay the “seller” costs. What follows is more detail about typical closing costs and how the payment of them can be shifted between buyer and seller:

* Commissions to the listing and selling agents are always paid by the seller, although it doesn’t have to be that way. Listing agreements specify the total commission paid by the seller, and how much of that commission the listing agent will share with a buyer’s agent — if there is one. The MLS requires that the listing agent offer compensation to other MLS members, but that offer could be as low as $1.00. Typically it is 2.8%, but not always.  

Denver’s 2.8% co-op originated when listing commissions were fixed by the Board of Realtors at 7% and it was deemed appropriate to give 40% of that amount to the buyer’s agent.  When the Department of Justice declared such price-fixing illegal, the listing commissions started dropping to where they now average between 5 and 5.5%.  The 2.8% co-op commission, however, has lived on, out of fear that agents wouldn’t show homes which paid them smaller commissions.  As a result, it’s not uncommon for buyers’ agents to get bigger commission checks than listing agents at closings.

Many buyers are under the impression that the seller pays the buyer’s agent’s commission, and that an unrepresented buyer saves a seller 2.8%, but it doesn’t work that way.  If the buyer doesn’t have an agent, it just means that the listing agent keeps that 2.8% — unless his listing agreement with the seller provides for a “variable” commission. For example, my listing agreements always have a provision that if I don’t have to share my commission with a buyer’s agent, the commission charged to the seller is reduced by 1%.  This way it’s a win-win.  I earn more, and the seller pays less. Only 15% of listing agents (my calculation) include this provision in their listing agreements. If a listing agent doesn’t proactively offer that discount, you will want to request it.

* Title insurance is the other big cost to sellers at closing.  Here in Colorado (unlike elsewhere, I’m told) this is typically the seller’s expense on the theory that it’s the seller’s obligation to provide clear title to the property being sold. The cost of title insurance is pegged to the sale price and is regulated by the state.  Each title company must file their rates with the Division of Insurance, so they tend to be competitive. What’s not competitive and therefore varies a lot is the “re-issue” rate. Most title policy underwriters offer big discounts if a title policy had been written on the property (even by another company) up to 5 years or more prior to the current closing date. Title policies are issued when you refinance a mortgage, not just when you buy a house, so the majority of transactions nowadays qualify for a re-issue discount — if you choose the right title company for the closing.  Ask!

* Buyers who don’t pay cash have the highest closing costs on real estate transactions. These fees are imposed by the lenders and can vary greatly. Typically, the lower the interest rate you are quoted, the higher these fees will be, so don’t just go by the interest rate. That’s the purpose of the “Loan Estimate” document now required in all such transactions. Space does not permit me to be more detailed here, but you absolutely should comparison shop lenders.

Mortgage-related costs are sometimes paid by the seller through “concessions.”  The purchase contract can include a provision that the seller will pay up to “x” dollars toward buyer’s loan costs, but this is a direct hit to the seller’s bottom line.  Buyers use this strategy so that closing costs can be included in the mortgage. For example, instead of buying a house for $250,000, the contract might have a purchase price of $255,000, with the seller paying $5,000 of the buyer’s loan closing costs.

* One of those mortgage-related expenses is the title policy that protects the lender. This is a “piggy-back” policy on the policy purchased by the seller to protect the buyer. As with re-issue rates, the rates for these lender policies vary among title companies. Buyers theoretically get to choose their own title company for the lender policy, but the title company writing the seller’s policy will give the buyer the best price.

* The fees charged by HOA management companies can be scandalously high and are totally unregulated.  We’re talking hundreds of dollars for nothing more than providing a status letter (showing whether the seller is current on his HOA dues), providing board meeting minutes and financial statements, and changing the name of the property owner on their books.  Worst of all, these fees benefit only the management company, not the HOA itself.  Usually the seller pays these fees, but a buyer might offer to pay them as an incentive to accept their contract. over the contract from another buyer.

* The “closing services fee” charged by the title company for conducting the actual closing can vary significantly. I’ve seen this fee range from $100 to $700. It is typically split 50/50 by the buyer and seller, but again a buyer could offer to pay the full fee as an inducement to accept their contract instead of another buyer’s.

That covers the common costs of closing a real estate transaction. There are other deductions from sellers’ proceeds, but these are not costs of selling.  The biggest of these is paying off any mortgage or other liens. In addition, the seller will be debited for property taxes pro-rated to the date of closing, and a few hundred dollars will be escrowed toward of the final water bill.

After closing, the seller can expect three checks—a tax & insurance escrow refund from the mortgage company, a return premium on the homeowner’s insurance, and the balance of the water escrow from the title company.

 

Published July 28, 2016, in the YourHub section of the Denver Post and in four Jefferson County weekly newspapers.