For as long as I’ve known, real estate sales and mortgage people want to get into the title business.
Most see a title company as an ancillary business: hire Betty the ‘processor’ to ‘run’ your title company, set it and forget it. Collect your checks.
People confuse not understanding the title business with thinking it’s easy. They also confuse the lack of visibility in title with thinking it doesn’t drive sales or doesn’t matter.
Title companies are notorious for being bad operators.
That’s a nice way of saying, most title companies suck. And most people feel this and complain about it.
Yet when it comes to starting a title company or partnering in a Joint Venture or Affiliated Business for title, most people don’t make choices to solve the suck. They focus on percentage of ownership and nickels and dimes in deals, while missing the real money; more revenue and top line growth for your core business and increasing overall profits.
This used to be called, ‘being penny wise and pound foolish’.
Let’s examine:
- What can go wrong with the wrong operator
- What questions you should be asking before doing business with any title company
- What are the biggest mistakes Real estate brokers and lenders make when starting a title company
➔ I want to own a title company. What could go wrong?
Clearance risk
Title companies aren’t a business that sells a product and walks away. There’s risk on every transaction and it’s significantly more common than people think.
Every state and county makes up their own rules about what debt they can attach to real estate. Frequently, they purposely make it complicated; governments are incentivized to create and collect more taxes.
In some places, things like parking tickets and utility bills can attach to real estate. Deceased people from years ago can create unpaid tax liability. Divorces. Incomplete sidewalk repairs. Things that might surprise you.
Most people also believe that title underwriters hold the real risk and title agencies are absolved from claims, which is… eeehhh, not so true. I’ve seen many cases in which a title underwriter attempts to hold an agency accountable for an error or claim. Sometimes, even when the agency acts in good faith. If an agency makes an egregious error or is negligent, you can guarantee the underwriter will pursue damages. Because of the size of real estate transactions, in most cases one mistake will put a small agency out of business.
Fraud risk
By now, we’re all aware of how serious and real the risk of fraud is when moving money around for real estate transactions.
According to the National Association of Realtors in 2021, more than $6.9 Billion was lost, over 2,300 reported incidents per day. These numbers have grown exponentially over the last 5+ years and show no signs of slowing down.
Title companies are a particular favorite target for Bad Actors and I’m not exaggerating when I say that attempts to breach or divert funds in a typical title company – even a small one – are made almost every single day. Every day.
There are technology, tools and operating practices that can greatly reduce and in some cases totally insulate from losses for everyone. Unfortunately, barely any title companies utilize them properly. No regulatory authority mandates that title companies, Realtors or lenders take any particular action to prevent or protect against wire fraud. Cyber insurance has become prohibitively expensive and offers almost no meaningful coverage.
Disbursement Operations
Handling all of the money in a transaction is complicated. More than simply the seller’s proceeds and commissions, on each transaction there are real estate taxes, transfer taxes, recording costs to the county, vendors, lenders, Realtors, sellers, buyers incoming money, complicated execution instructions from lenders (sometimes +200 pages).
Almost every transaction requires work and maneuvering to get this perfect and any imperfection be raised with regulators and underwriters in regularly scheduled audits.
Operational Complexities
Reconciliations. Licensing. Subject matter expertise. Recording and Policy Management.
Title is a heavily regulated business that requires a lot of subject matter expertise. There’s a lot to do and it all carries real risk. And that’s just the day-to-day operations. Running the business, spending wisely, knowing what vendors to use and how to use them and generating profit is a completely different set of knowledge and is the real reason you want to be in business.
➔ What questions should you be asking before doing business with any title company
Now you have a small taste of the risks and operating needs. These are the first things to investigate when doing business with any title company, but also keep in mind why you want to be involved in the business in the first place: profit.
- How do you mitigate the risks of wire fraud? What technology do you use for this?
- Are you entirely dependent on people and local expertise when it comes to clearing debts and risks from title? Do you use any technology for this? What will you do if your ‘expert’ leaves?
- Do you push notifications in text and email to keep people informed and communicate?
- Do you have a portal or app so I’m in control or do I have to wait for phone calls?
- Can buyers easily send money for settlement electronically? Or do I need to send them to the bank to wait in line?
- Can you pay commissions and sellers electronically?
➔ What are the biggest mistakes people make when starting or buying a title company
There are three primary reasons someone starts a title company
- They currently work at a title company or have experience and want to go out on their own
- They control business now as a real estate broker or team, investor or fund, mortgage lender or broker and want to profit on title
- They buy an existing title company
For those that aren’t deep experts in title, the number one mistake made is hiring an experienced administrator to run the business and turning their backs.
By ‘administrator’, I mean someone with experience working in the nuts and bolts operation of a title company.
To date, title is similar to a skilled trade. Just like an auto mechanic, an experienced mechanic may know how to fix an engine. But if you started an auto shop, hired a mechanic and expected him to get new customers, run the P&L, vet technology, sell, manage, hire, fire, and know how to run and grow the business, that won’t work out.
In the last 5 years, title companies have become much more complicated, risky and expensive to run. More technology is required than ever before to mitigate risk and simply to compete. The free market is forcing title companies to adopt new technology or evolve.
The number two mistake made for all of the above scenarios of starting a title company, is thinking they can do everything themselves. People frequently start out to make money and take a hard left turn into seeing themselves build an empire of one. The complexity and challenges of title are often underestimated and people chase ego in the name of profit.
Think about what you’re really trying to do. What do you want out of this? Every business needs at least two great, high-level people: an operator and someone to drive new business. If you don’t envision yourself becoming a full-time operator (something required of title companies as small as $250K in annual revenue), then someone else has to do it. If you want the best business possible, you need the best operator you can find. That person is very expensive to hire and very hard to find and get. Your best bet is partnering with the right title operator.
The number three mistake made is not asking operating partners the right questions and choosing them based on simply trust or a feeling.
Now that you know some good questions to start with, you can avoid making this mistake.
Whether you want to start a title company because you currently drive business and want to expand your profits, you want to exit or sell your title company to retire or cash out or if you want to be entrepreneurial; ask yourself what you’re actually trying to accomplish.
Do you want to make money? Or do you want to figure out a puzzle and how to build a company?
Operating a title company is not easy and many people do it poorly. There are few great operators out there, and those few have it down to a science.
If you want to make money much more quickly, reduce your risk and learning curve, the best move is to spend your energy vetting the best operating partner that already knows what they’re doing.
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