Escrow & Title: The Major Service Providers in Real Estate Transactions, Their Purpose, Their Fees and Who Shops Them!

Escrow & Title: The Major Service Providers in Real Estate Transactions, Their Purpose, Their Fees and Who Shops Them!

December 9, 2020

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By Saeed Ghaffari

Whether you are buying a property, refinancing an existing loan or taking a new loan out on your property, there are fees and expenses associated with that transaction.  From the start of a transaction to the end, there are many service providers entangled in one another, interacting, communicating and providing their enormously valuable services to successfully close the transaction.

In addition to the lenders and real estate brokers, two of the major services involved in a transaction are an escrow and a title insurance company.  Below is a brief clarification on the purpose they serve, their fees and who shops them for you. Let’s start with the escrow company first.

In a real estate loan transaction, there are many people and entities involved, such as the clients (buyer and seller), the lender, the title company, mortgage and real estate brokers, appraisers, county recorder’s offices, etc.  An escrow company is an unbiased third-party service provider, bonded, insured and trusted by everyone involved in the transaction making sure all terms and conditions agreed upon by parties in the transaction are met before loans are funded, funds are exchanged, deeds are recorded, and properties are transferred.

In some states (mostly east coast), the escrow services are offered by attorneys while in other states, they are offered by private businesses known as escrow companies. The states are referred to attorney or escrow states respectively.

Escrow Fees: In CA, an escrow state, fees range from $1.75 to $2.00 per thousand on the transaction amount plus a base fee ranging from $200 to $350.  In a purchase transaction, the fee is based on the purchase price and applies to both buyer and seller.  In a refinance, it is based on the loan amount. Many escrow companies throw in additional itemized fees for document preparation and loan tie in fees also, $100 here, $200 there, etc. for additional revenue. These one-time small fees maybe insignificant for clients buying properties once every few years, in hundreds of thousands or million dollar ranges, but without much extra expense or effort, they add up to a respectable revenue source for the escrow companies over the number of transactions these companies handle in a month or a year.

The choice of an escrow company is supposed to be negotiated between a buyer and a seller, and in a refinance transaction, it’s supposed to be the client’s choice. But that is far from reality. Escrow services are picked by loan brokers and realtors on behalf of the clients.  Their choices are mostly based on the knowledge and experience an escrow officer brings to the table and the quality of their services. The cost is secondary, as it should be in the grand scheme of things.  If your escrow fees seem unreasonable, in a real estate transaction you may want to have your realtor and, in a refinance, your lender look into to it for you and have a talk with the escrow officer/rep, as they have quite a bit of influence on such services.  Escrow fees are negotiable to a certain degree, especially on higher transactions for repeat buyers and sellers such as fix & flip investors.

What about the title insurance companies?   A title insurance company provides protection for the buyers and the lenders providing finances to the buyers, against any claims or clouds on title.  In other words, the title company searches the property records, divorce decrees, wills, judgements, and all sorts of public records, making sure there are no unsatisfied claims on the property and the seller is the lawful owner of the property with the right to sell it, free of any liens and encumbrances, protecting the buyer’s and the lender’s interest in the property. 

Title insurance fees vary based on the policies they issue and the amount of coverage (the sales price for the owner’s policy and the loan amount for the lender policy). For example, on a purchase transaction with the purchase price of $500,000 and a loan amount of $400,000, the seller pays $1450 for the basic policy for the benefit of the buyer and the buyer pays $575 for the benefit of the lender. The title insurance fee for a refinance borrower for the same loan amount of $400,000 is $625.

Title companies publish a rate schedule, tabulating their rates from coverages starting at $100,000 to millions of dollars, like $5M.  For coverages above the $5M, they charge something like a dollar per thousand.  Don’t ask me for the formula they use to come up with their rates. Examining multiple companies’ rates, it appears that the total cost of a title policy adds up to about .5% of the coverage amount.  Just like escrow companies, title companies also have a few itemized fees such as endorsement fee, sub-escrow fees, title search fees, etc.  In addition, they pass their 3rd party expenses such as bank wire fees, courier fees, overnight charges, notary fees to the clients in an itemized list.  Same with escrow companies, the choice of a title insurance company should be clients’, but in reality, the loan brokers and real estate agents, make those choices for their clients based on the level of service, the flexibility in underwriting and the expertise title officers and title reps bring to the table (at least that’s how it should be).

Both title and escrow fees are negotiable and can be paid by any party for the others. For example, a lender may consider paying the borrower fees by offering a higher interest rate to them. A seller may consider paying for all or portion of buyer fees if they feel they have got a good price for their home, and on the same token, a buyer may consider paying for all or a portion of seller fees if they feel they have got a bargain on the price of the house. Last but not least, realtors, especially on bigger transactions, may also consider pitching in toward the client’s escrow and title fees only to save the transaction.

In our efforts to bring you transparency, literacy and connection, we hope the above information helps you make more intelligent decisions in your future real estate endeavors.

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