Understanding the Ins and Outs of Title Insurance, Escrow, and Tax Sale Properties
You're supposed to get insurance on that?
What do you mean a "tax sale property"?
There are a lot of tiny details when it comes to real estate let alone real estate investing. We know it can get a little confusing.
So in this blog, we'll dive into the nitty-gritty of title insurance, escrow, and tax sale properties — three essential concepts every real estate investor should be well-versed in.
What is Escrow, and What is the Escrow Officer's Role?
Escrow is a term used to describe the independent middleman or third party in a transaction, who ensures that the contract is executed according to its terms. An escrow officer is your point of contact throughout the process, guiding you and making sure everything runs smoothly.
What is an Escrow Account?
An escrow account can hold funds for taxes and homeowners insurance throughout the term of a mortgage which can help protect the lender and you. An escrow account can also just be used for home buying. We are just going to cover the latter.
The escrow account protects the buyer's deposit in order to ensure the money goes to the right party if the process has went according to the conditions of the sale. When buying a property either as your home or for an investment, the purchase agreement can sometimes include a good faith deposit, or earnest money. This just shows the seller that you are truly interested in purchasing the property. To protect both the buyer and the seller an escrow account will be set up to hold onto that deposit. Then as long as there are not any reasons for an escrow holdback the funds will be released to the appropriate party
Escrow is not just a real estate term. It can also be applied to other transactions, like buying a domain name, as long as there's a third party involved who holds the money and ensures everyone's obligations are met.
The good news is that escrow officers and title companies are heavily regulated and audited, which means your money should be safe in their hands.
Buzzwords: Tax Sale Properties and Title Issues
A tax sale property is a property where the owner hasn't paid their taxes, so the government repossesses and sells it to recoup the unpaid taxes. But do you get a clean title when buying one?
In short: not necessarily. There might be other outstanding liens on the property, which you'll have to clear if you want to sell it later. Moreover, if the previous owner can prove they didn't receive tax notifications and are willing to pay outstanding taxes and fees, the courts might rule in their favor.
It can be another source for deals if you invest in real estate. Our own CEO David has been attending tax auctions since his one of his own properties accidentally was sold at a tax auction. It's definitely a crazy story that you can check out on his Instagram.
The bottom line: with tax sale properties, you should be prepared to do some research and possibly spend time clearing the title before selling it.
The Importance of Title Insurance: A Real-World Example
Title insurance might seem like an unnecessary expense — after all, how often do title companies mess up? While the answer might be "not often," it’s crucial to have it for those rare occasions when something does go wrong.
Again, title insurance protects you just in case.
Consider the following real-life example. An iBuyer (a company that buys properties quickly to resell them) bought a property, flipped it, and sold it in three months. But the new owner soon found out that there was an outstanding lien on their home from the previous owner’s home equity loan.
It turned out that the initial title company had made a mistake and didn't pay off the lien. Thankfully, the new owner had title insurance, which meant their own title company’s lawyers stepped in to halt the foreclosure and work with the previous title company to sort out the issue.
Handling Criminal Activity with Title Insurance
Title insurance companies can also help you deal with criminal activity that might affect your property's title. For example, if someone forges a signature on a deed to steal ownership of the property, having title insurance ensures that the title company's lawyers will handle the issue on your behalf, saving you time and money.
Navigating the world of real estate can be complex, but having a solid understanding of concepts like title insurance, escrow, and tax sale properties will set you up for success. Stay informed, and don't be afraid to ask for help from your escrow officer or title company if you run into any challenges. Happy investing!
About Samantha Ankney
Samantha has been a media specialist for DealMachine for 1.5 years. She produces, edits, writes, and publishes all media that is distributed to the DealMachine and Real Estate Investing community.