Ep. 15 | Title Commitment and Surveys 101 – Part 1 of 2

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In today’s episode of The Mobile Home Park Lawyer, Ferd discusses title commitments and surveys. In part one of this two-part series, Ferd goes through these documents step-by-step so you know exactly to look for when you are working out a deal.

 

“If you’ve got something complex, then talk to the surveyor or a title attorney, and the title company will probably help you with some of these for free. You can determine what quality of title you have and what problems you have with it.”

 

HIGHLIGHTS:

0:00 – Intro
1:02 – There are many title companies out there, it’s not necessarily important which one you use
2:05 – The first page is the Schedule A, this includes the date they did the survey on
2:56 – Schedule A will tell you what type of policy and the policy amount
4:20 – Next on Schedule A comes the proposed insured
4:50 – Next Schedule A talks about the interest
5:08 – Schedule A says who the title is currently vested in, followed by the land described
5:56 – Schedule B notes the requirements and exceptions
6:29 – You must be notified if someone else has an interest in the property
7:00 – Schedule B will have an affidavit which is basically to say that certain things don’t exist
8:22 – Schedule B will have some information about the documents of the title company required
9:10 – Schedule B part 2 is the exceptions, Ferd cares about the easements the most and they’re usually slower
13:05 – You need to work out what exceptions there are and fix them or work around them.
14:15 – This is when your objections come in
14:57 – If you have a lender involved, you’re going to need a loan policy
16:19 – You can get a closing protection letter
19:43 – The final step is the closing statement

 

FULL TRANSCRIPTION:

Welcome back mobile home park nation, here again today with an episode of the podcast. Today’s podcast is the first of a two-part series on title commitments and as they relate to closing, and then also surveys and how to order a survey and how to read a survey. I think the two are aligned because they both have to do with understanding what you’re buying and what the seller is representing.

So, for today, we’re just going to jump right into it, a title commitment. I think we’ve all seen these documents. They’re generally from a big title company, a First American or an Old Republic or Chicago title, but there are lots of title companies out there. I don’t have any, any one given title company that I’m a legion to. And sometimes it’s a big deal to the buyer, to the seller. And you can kind of cave on that issue. Now, I do have some title companies I’ve used more than once and kind of like them because I know what to expect, but it’s typically not the hill I’m going to die on. If there was a title company that previously did some title work on the property, it might make sense to go with them because it’s going to be a little less expensive. Maybe some economies of scale there, but I’ll just jump into kind of what is on a title commitment.

And at the beginning of the document, it basically says, here’s the issuing agent. Here I’m looking at one that says Illinois, Real Estate Title Center, LLC. Then it has a commitment number, has an issuing office file number. That’s just basically their internal tracking of what this policy number is. And then we’ll have the property address. So, assuming there’s a legal property address, you’re definitely going to want a legal description that a surveyor looked at, we’ll get into that more here later. And that the first page is really the schedule A. This has a commitment date. This is the date that they actually, the title company, did the research and pulled the title and pulled all the exceptions and easements things of that sort. And that’s not the day of closing. This is early on. Typically, the title commitment date is going to be a couple of days after the contract is executed. A lot of times the seller or buyer is not going to spend money on pulling title until after they have a deal, or they have a contract. And then it’s delivered during the due diligence period.

It’s negotiable who pays for this, but I’d say it’s a lot more common for the seller to pay for a title commitment. I mean, really it’s like if you’re selling 123 Main Street and you’re representing you own 123 Main Street and then put your money where your mouth is and show me what you’ve got, show me your title. So, when I’m selling, I’ll do that. When I’m buying, I kind of expect the other party to do so. And the next thing is on the policy, it will tell you what type of policy it is. Generally, it’s an Alta owner’s policy, which is an American land title association owner’s policy. And it’s got the date of the last update on that. Then you list the policy amount. It’s important that this is the right amount because sometimes in a mobile home park transaction, you’ve got a personal property like mobile homes or equipment. Maybe you have an intangible personal property like goodwill or going concern. And there’s, we have talked about some other episodes why it’s important to allocate that purchase price, but for the policy amount, you want to make sure that it’s the right amount for you, which typically would mean full consideration that you’re paying. And sometimes the title company will push back and say, no, I’m not going to cover the mobile home amount, but you can, you know, I’ve had them push it back up and push it to the full consideration price. What that does is it increases the premium. And then we’ll get into the closing statement here in a few minutes, but basically, either the buyer or the seller has to pay for the owner’s policy and the owner’s policy. It basically represents the title of the owner, which if I’m the one buying it on the day of closing that’s me. So, I want it to be good. But if there’s a problem, it’s really the seller’s problem because the seller currently owns the property. So, it’s more common that the seller will pay for the owner’s policy. Some jurisdictions have kind of local customs and practices, but as a general rule of thumb, I would say the owner’s policy needs to be paid for by the seller.

And then it lists the proposed insured. Right here I’ve got my company, Third IV Properties, LLC, but that’s what the title company says. Cause sometimes they’re not that sharp, but in my contract, it says Third IV Properties, LLC, and or assigns. And I never buy a property in my holding in my kind of management company or my overhead company. I buy it in a specific, special purpose entity. So later I will send the title company in assignment document with the new, you know, 123 Main Street, LLC or whatever it is.

The next thing on Schedule A, is it talks about the interest or the estate to be described or referred to. And typically, it’s fee simple interest. You’re not buying as a mobile home park, typically a lease option unless you’re doing a lease. I mean unless you’re doing a lease option or a master lease, you’re probably going to go to buy the fee simple as opposed to a leasehold interest or something else.

The next it says, who the titles currently vested in. This would be the current owner. And you want to make sure it sounds, if you’re buying it from John Smith, and this says, John Doe, you better look into that. But typically, the title company’s going to do a lot of this work for you before closing, you want to make sure they get evidence of the LLC or the person that they own this property.

The next piece is the land describe, and this is a legal description, sometimes legal descriptions are easy. Like if it’s a platted lot, it may say like, you know, block five lot two of Smith subdivision situated in Chicago, Illinois, or Cook County, Illinois or something like that. But it’s usually not that easy. Usually it’s metes and bounds legal description that, it’s not really crystal-clear English, which is where a surveyor comes in handy.

Okay. The next part of this is really Schedule B and these are kind of requirements. And these are requirements are, this is kind of boilerplate, but it’s basically a number of things like in order for the title company to give you this title commitment. And again, the title commitment is basically representing that hey post-closing, if there’s a problem or somebody, you know, comes out of the woodwork and says hey, I’m the proper owner of that property. You want to be defended against that. So, the title company gives you that level of comfort, level of insurance, but they have certain requirements and exceptions. So that first requirement is typically like the proposed insured, notify them if they’re aware of any other party who has an interest in this. So, like, if you’re aware that, you know, cousin Larry has, you know, a right to purchase or owns 9% of the deal, you didn’t disclose that, and it’s not of record. You need to tell that to the title company and you have to pay, you or the seller has to pay the fees, pay the premiums for the policy, and then any documents that are satisfactory to the title company, which we’ll get into that are essentially the exceptions.

And in the next, they have a specific form. They call it an affidavit and sometimes it’s seller and buyer. I’ve seen it, most time it’s both, but sometimes it’s seller affidavit basically promising that A, B, and C do not exist, no known violations of government, no condemnation, etc. And in most of those sorts of items are in your purchase contract anyway, as seller representations, warranties. This is just a title company, essentially helping guarantee title for you post-closing. Sometimes title companies have additional requirements, especially if you make endorsements, which I’ll get into, but like a zoning endorsement or a survey endorsement, they want to see evidence of that. Like they’re not, zoning endorsement is basically saying the title company is going to give you an extra level of insurance that the zoning is appropriate. And then that way, if later on, there were some sort of error of the zoning. You’re still going to be good. And if the city, you know, puts the screws to you and you somehow lose your zoning, well, at least you get your money back in a sense from the title company. Well, title company’s not going to take that risk unless they have some sort of proof like a zoning letter or certificate of zoning. Same thing with the survey. They’re going to want to see a survey from a licensed survey, with a seal, with a signature on it before they’re going to give you a survey endorsement. And the survey endorsement basically represents the quality and the size and the character of the property which I’ll get into more in the next episode.

The next one portion of the continuing here on, I guess, Schedule B part one, it will typically have some information about the required documents from the title company. So, for example, the company has the LLC documents on file for Third IV Properties. From this case, this title company already had my stuff on file. So, they’re saying so long as Ferdinand Niemann remains the authorized signatory, the company requires only an affidavit of no change. Typically, what they’re going to need is they’re going to need the formation documents of this LLC. They need formation documents of whatever the assignment LLC is, the asset and need and so forth. And that just basically proves that you’re able to, you’re representing and can prove that you’re able to close the transaction. They may want a resolution of the LLC authorizing you specifically to sign the closing documents. So, Schedule B part one is kind of benign.

Schedule B part two, I think this is the important one, frankly, this is the exceptions. And there are some standard exceptions like any taxes due and to be paid at closing and prorated, or they need to either be paid or be prorated so that the buyer can pay them. And then it’ll have generic exceptions, like rights of the public, the state, the county, the city, etc. And sometimes that’s pretty boilerplate and pretty benign. But other times you want to, if it’s like, if you’ve got, for example, property, that’s adjacent to a navigable waterway, then the Army Corps of Engineers and federal government is going to have, you know their clenches on you and they’re going to have, they have rights to that property. So that’s the government one that kind of scared me sometimes, just make sure there’s nothing like that.

And then there’s other rights away for drainage ditches or laterals, underground pipes, etc. And then rights or claims of parties and possession not shown by the public records. That’s, you know, it seems fair to me, to the title company that if they’re unaware of, by the looking at the public records that John Doe has some sort of deal where he can, you know, walk across the property with his 50 cows, you know, every Sunday, you know, and then you can’t build on that location on the property, that’s a big deal. But they don’t know about it, they’re not going to insure against it. So, this is just, you know, kind of the typical exceptions. The exceptions that I care about the most or easements, and you’ll see things, these are called exceptions and then there are exception documents. So, rather than me have to go pull all these documents that are referenced like this one is an easement contained in warranty deed recorded September 16, 1987 as a document number 87R24988. Okay, the document number tells you about the county recorder of deeds office, what that recordation number is. I don’t really feel like going down to the title company or the county recorder deeds office and pulling this information. So, I just ask the title company to give me the exception documents. And they typically do for free. Sometimes they’re slow, sometimes they are annoyed by this, but in my mind, that’s part of their job and they send you these, the good title companies will have them hyperlinked, you know, already in the title commitment. But the smaller, or, you know, more rudimentary places we’ll have to go pull them manually. And then they’ll give you a bunch of pdfs, which is okay as well. It’s just typically slower.

But anyway, you have to read those documents and sometimes you need to hire an expert, either an attorney or surveyor to help you read them. But sometimes, for example, of a gas line easement, if the gasoline easement says something like, you know, Kansas gas company can place gas lines on the eastern edge of the property for the first 10 feet along Main Street. That’s pretty easy for you to figure out, especially with a survey you’ll figure out where the exact boundary line is on the east side of your property along Main Street, and you can measure 10 feet and you know that any gas lines are supposed to be in there. This is really important for mobile home parks. Because if you want to bring more homes, you can’t put a mobile home on a gas line. You can’t put over power, you can put it under power lines, but if you have an easement that shows only on the available and allowed on the eastern 10 most feet, well then, you know, that’s great. Then you can determine is that going to be in the way of where I want to put my homes. As opposed to, if it has a blanket easement. Or have some easement that’s really complicated, like 297.68 feet, then north 20 feet, then westerly 297.68 feet on the line parallel to the north line of said lot one, then south 20 feet to the point of beginning for purpose installing and maintaining utilities. Holy cow. I don’t know what that means. That’s where the surveyor comes in. The surveyor can draw that, but the level of exception and the level of easement, and the complexity of those easement documents will help me dictate what level of survey I need. And we’ll get into that in the next episode. But really there, I kind of considered three main levels of survey. There’s the boundary survey. And then there’s a base all to survey, and there’s an Alta survey with a bunch of table A requirements. And the reading of these exception documents will help me determine which table A alter requirements I need.

So today is kind of the precursor to that, to the next discussion. But ultimately you need to figure out what exceptions there are, and then you need to either solve them and get rid of them, objected to them, or live with them. You know, so for example, if there’s an existing line on the property, you’re going to want that to be taken care of at closing or prior to closing. If the taxes for the year are not paid and taxes typically are paid one time or two times per year, depending on the state. If you’re closing on June 1st and taxes are not due till November 31st, or it’s November 30th, well, then you need to get prorations, which is typically on a per diem per day basis. You need to get prorated for the first six months, a year that the seller owned the property so that when you have to pay the full bill, you basically already been pre-paid for the sellers half.

So, as you go through these exceptions, it’s important to look at each one of them. I’m not going to go through a bunch of them because they’re pretty self-explanatory. You got to figure out what they mean. And it’s generally, most of them are pretty much English. If you’ve got something complex, then talk to the surveyor or a title attorney, and the title company will probably even help you with some of these for free. And then you can basically determine what quality of title you have and what problems you have with it.

If you determine you have problems with the title, that’s where your title objections come in and title objections, this is basically where you have a right in your contract after receipt of title to object to certain things. I typically object to things like the time and date of the policy, because if it’s dated, you know, today, and I’m not going to close for 60 days, I want it to be updated and re-reviewed on the day of closing cause otherwise anything that attaches to the title between the date of search and the date of closing could potentially mess up my title. That’s pretty standard. And then I also sometimes object to the total consideration of the purchase price, as I mentioned, because I’d like to get the full consideration, which is impactful on my loan to also be insured.

And then we’re looking at my loan policy. I talked briefly about the owner’s policy, which represents and defends the owner’s quality of title. But if you have a lender involved, the lender is going to likely require you to have a loan policy. And if that’s an 80% loan to value, then the loan policy is going to be 80% of the purchase price. And that is for the benefit of the lender. Now, typically almost, I’ve actually never seen anything, but the borrower pays that. The lender makes you pay it. It’s part of their fees and the seller doesn’t pay it. It really doesn’t impact the seller, but you’re going to require having that. So, if you’d like, did a refinance for example, you may have a new lender. You have to have a new lenders policy, which may be at a different amount, but you may not need a new owner’s policy because you already have one as owner representing you. Now you may want to change the amount, but you have to pay premiums for all these policies. So, it may not make sense to you to proceed.

Then another objection that I typically do, and I actually send a formal objection letter to the seller’s attorney, to seller, to title company, but I’ll object to the standard exceptions. And I say, these are anticipated to be satisfied at closing. So like this is, you know documents from the seller and a buyer provided like LLC docs, things like, you know, the pay off certain mortgages, you know, I just basically tell the title company do not close, do not fund this deal. And I’m not going to buy this until you guarantee that these exceptions are taken care of, and you can get something called a closing protection letter. You typically have to pay for this also, but it’s pretty much standard is a closing protection letter. That is, you know, a nice golden piece of paper you can rely upon. It’s kind of like a life insurance policy you’ve got, here’s what you’ve got. Here’s what you’re, you know, here’s when you get paid, here’s what’s you’re covered. It’s a guarantee. Well, it’s the same sort of thing where the title company will say hey, look, here’s your closing protection letter. You are now protected. Back to the objection letter. Sometimes I have endorsements, which are typically not combative. It’s just hey, I want to serve endorsement. I want a zoning endorsement. Or you may get something called a comprehensive endorsement, which is more of an institutional lender will acquire that. And it basically supplements the basic title policy. I’ll sometimes mention on my assignment letter to, or excuse me in my objection letter, I will mention things like the assignment and assumption of leases. So, I will say the buyer will require an assignment and an assumption of leases. And buyer’s counsel has drafted, said, document for council sellers, council review, or buyers’ council will draft it, or seller’s counsel will, who’s drafts, that kind of stuff’s negotiable. I typically like to draft them, then I have more control over them. The same thing for the bill of sale for personal property.

As far as the warranty deed that will happen at closing. Typically, the seller drafts that and pays for that. In some states the seller is required, and in some states you’d have to have a local state attorney sign off on it. It’s like, that’s been annoying for me a couple of times where I’ve not licensed in every state, but I’ll have, and I can do lots of other work in every state, but I can’t write the dang warranty. And I got to hire somebody else to rubber stamp my document. Which is pretty inexpensive, but it’s just kind of a nuisance to find somebody, you know, Hey, what’s the cheapest fee you are going to charge me to, you know, sign off on the document that I drafted. But anyway, you can reference some of those things in your objection letter.

And then sometimes, this’ll be a chance if there’s any other problems like, you know, this example I’m looking at here in response to an exception number three, it’s anticipated that closing will occur after the date when the second half of property taxes are due. So, buyer or me will require 2019 payable, 2020 taxes be paid prior to or at closing. And then I got another one here, in response to exceptions number 14 and number 4, buyer requires at a satisfactory warranty in with the property free of any mortgages or digitrust trust be transferred to buyer at closing. So this deal, I don’t remember this one, but it must have had it where there was some complexity with quitclaim deeds and inter-party deeds and kind of, I think this one had some like seller-financed, family promissory notes, and deeds of trust and stuff floating around out there. So, I was just like, I don’t want to read all these and get in the middle of this family drama. I just want you guys to make it all go away at closing. And if you don’t, I object.

So, some objections are for things that are actually flaws on title. And typically, the seller has a right to respond and either cure them or pay for them to go away. Or perhaps this is negotiable under contract. Perhaps they get the right to just not cure them. And then in which case, the buyer has the right to close anyway or bail. Oftentimes you’ll have a, like a monetary limit. Like if anything can be satisfied by the seller, by the payment of money of say less than $10,000, then the seller just has to do it. They can’t just say no, if it’s a small amount of money, they may figure that, Oh, the buyer will just eat it and close anyway. And that’s not really fair to the buyer. So that’s kind of the basics on the commitment, kind of the closing protection letter, we talked about the objection letter.

And then you kind of get into the closing statement. And this is your last review. Typically, these are delivered, you know, two or three days before closing, you know, they’re supposed to be basically, but sometimes it happens really late, but this will cover some of the same information. You know, name of the escrow officer, title company, address, legal description, borrower, or seller-buyer, settlement date, disbursement date, all those things. But then basically it’s a big math problem of seller debits and credits and borrower debits and credits. And each half has to add up. That’s how counting works, right? But you’ll have fees in there. You know, this one I’m looking at, there was a 0.25% loan point. So, a quarter point loan point, that was to my lender. And then you’ll have the proration of taxes proration of rents. If the security deposits, those transfer to the buyer and this one over some state tax fees, there’s a search fee, which is to the title company, search fees typically paid. This one was split 50-50, seller-buyer of 75 bucks apiece. There’s a settlement fee. This is paid by the buyer. Closing protection letter to the seller, a closing protection letter to the borrower paid by me, the buyer, and then closing protection letter to the lender paid by me, the borrower. Lender’s title insurance paid by the borrower, a settlement fee that’s typically paid by the seller. And then in this case, I had several Alta endorsements like access and entry, CCR, covenants conditions, restrictions, same as survey, zoning. So, any of those endorsements, those are typically paid by the buyer because they’re the buyer’s discretion.

And then the owner’s title policy this one was about $1,200. And this is on a relatively small deal, it is $520,000 purchase price. So, the owner’s policy, the premium amount of that is a function of the sales price, it is a function of the insured amount and the same for the lender’s policy. This one, there was also the seller had some delinquent water bills with the city. So that was a lean on title. So, we required at closing that that money, this was $19,000 to water, and we required that money be tied up at closing so the city could be paid, so they didn’t come after me. And sometimes the attorneys will be paid on the closing statement or any commissions. This one had a commission paid by the seller on the closing statement, recording fees. Those are typically for the loan for the deed of trust. Those are typically paid by the buyer, there’s transfer taxes, or sometimes called sales taxes or transfer stamps. Those are negotiable, but typically paid by the seller. And then in this case, the seller had an exchange, a 1031 exchange. So, he had an exchange fee to his qualified intermediary. And then at the end, you know, in this case, the seller got money due to seller, which was a small number actually, because he had a big 1031 exchange and then due to seller borrower. Well, this was money due from me, you know, I had to bring my down payment and with my closing costs and all the adjustments.

So that’s just kind of the blocking and tackling if you will, of title commitment, title insurance, objection letters, closing statements. So, this is part one of this topic, and then the ancillary part two is coming up next and that is going to be identifying, ordering, and reviewing a survey. So that’s all for today. Thanks for listening to The Mobile Home Park Lawyer podcast.

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