Title Companies, Escrow Companies, and Real Estate Lawyers

What is a title company?

The purpose of a title company is to inform the buyer, seller, and lender about the title to the property, and to issue a title insurance policy. The title company will search through the county recorder’s books to find all recorded documents affecting the property, such as mortgages, easements (like a right-of-way), and liens. The company will then issue a title report showing the results of their search. The title report tells the parties lots of things, including who owns the property, who might be claiming to own the property, who has a right to use some portion of the property, and who has the power to foreclose on the property to enforce a debt.

Once the parties have this information, they can decide whether they want to go through with a transaction. For example, the title report might reveal that the seller does not actually own the property and have the right to sell it. The buyer then wouldn’t go through with the transaction. Or a lender might see that the property is encumbered by a right-of-way for the county to operate a water facility on the premises, lowering the value of the property, and decide the property is insufficient collateral for the loan.

A title company also has several other functions during the closing process:

• Issue title insurance – The title company will issue insurance to guarantee that the title report is accurate and correctly reveals the state of title as shown by the records of the county recorder. The purpose of the insurance is to protect you and the lender from any claim about the title of the property that is inconsistent with the title report.
• Hold escrow (if there is no separate escrow company) – Act as a neutral third party to hold your earnest money deposit, title documents, deeds, and loan documents until your closing.
• Order a land survey – Lenders require a surveyor to draw up the boundaries of the land you are purchasing.
• Verify property taxes and HOAs – Ensure all taxes and common charges on the property are up-to-date.
• Disburse funds and documents (if there is no separate escrow company) – After closing, pay out the escrow funds to the correct people, pay out vendors, such as inspectors and appraisers, and make sure all the documents are recorded in the county recorder’s office. The purpose of the county recorder is to provide a location where all documents affecting the title to real property can be recorded, and therefore found by a title search.

What is an escrow company?

In some areas, the title company will also perform the function of the escrow holder. In other areas, you will work with a separate escrow company that only acts as the escrow holder. Sometimes, the lender itself has an escrow department that acts as the escrow holder. But no matter who it is, the purpose of the escrow holder is to hold the deeds and purchase money until all conditions of the sale have been satisfied, and disburse the funds and documents to the correct parties upon close of escrow.

Like a dual agent, an escrow holder is an agent with duties to both parties to the sale. For that reason, escrow holders can only act in accordance with the joint instructions of all the parties. Sometimes the escrow instructions are the purchase and sale agreement itself, and sometimes they are a separate document. If the escrow holder receives conflicting instructions from the parties, it must wait until the parties or a court resolves the conflict before acting.

Do I need a real estate lawyer?

At any point in the process, you have the option to hire a real estate lawyer. Typically, you don’t need one until a contract is signed, but it’s prudent to have a lawyer review your offer beforehand to make sure you’re protected from legal action if the deal falls through. Your lawyer will also advise you on the proper contingencies to set to avoid losing your earnest money (more on contingencies and earnest money in the Prepare an Offer section).

In some cases, hiring a real estate lawyer isn’t optional. Some states require you to hire a real estate lawyer. (See a complete list of states that require real estate lawyers.) In some areas, particularly small towns where there are no title companies, real estate lawyers will hold escrow and facilitate closing the transaction instead of a title or escrow company.

Whether or not you choose to hire one, if your state doesn’t require it, it’s a personal choice, but most agents will recommend that you do. Real estate agents can’t do all the things that attorneys can do. They can fill in the standard real estate form contracts, but they can’t draft entirely new contracts for the parties. They can’t provide legal advice. For example, if there’s any dispute or uncertainty about the title, an agent can’t advise you about the dispute or the likely outcome. Nor could an agent analyze the CC&R for you or tell you whether a particular lien is valid (more on CC&R and liens in the Potential Issues section).

An attorney can do all those things. So if you’re doing a run-of-the-mill transaction on standard form documents, you’re probably not taking an unusual risk without an attorney. But for anything complicated or out of the ordinary, it’s better to get one.