Welcome to this episode of the Contract to Close series! This episode features Josh Roling, a real estate attorney and an expert in all things commercial real estate acquisitions. Josh is a close friend and colleague of mine with whom I’ve done 48 deals!
In this episode, I speak to Josh about title insurance. It’s something people often forget about, and we do talk a little bit on why that is, but it is also something very useful. In short, after you buy a title insurance policy, if someone comes out and says, “I own this property,” you just call up your title company, and say, “I’m making a title insurance claim,” and they have to indemnify you, which means they have to defend it. If they lose, and that person actually does own the property and you don’t, they have to pay you up to kind of the amount of insurance.
Watch below to see Josh and I get into the weeds on how title works, how to use it, and other important information you may need for acquisition.
The Acquisition Process | Title Insurance
Resources from this Episode
Michael Belasco (00:11):
All right. Welcome back to another episode of the Contract to Close series. And I’m really excited here today because I have a close friend and colleague that I’ve worked with on, and I did the math, 48 deals together, Josh. It’s been 48 deals that Josh and I have worked on together. And so I’m going to first introduce Josh, and then we’re going to go in on a subject, we’re going to go deep on a subject. We’ll try to keep it entertaining. We’re going to talk about everything about title insurance. We’re going to start off about what is title, why get title insurance, what it is? And we’ll try to keep it entertaining and provide some stories along the way.
Michael Belasco (00:54):
So a little background on Josh. Josh Roling is senior counsel and real estate lawyer with Foley & Lardner. Josh represents real estate developers, investors, owners, and tenants in all aspects of commercial real estate transactions, including acquisitions and sales development, leasing, new market, tax credit financing, tax increment financing, private placement, and zoning. He also counsels clients in connection with the real estate aspects of corporate mergers and acquisitions and has significant experience in multi-state real estate portfolio transactions. Josh, anything you’d like to add to that?
Josh Roling (01:29):
Yeah. No, that’s a mouthful. But yeah, no happy to be here. And I’d say my bread and butter is kind of what we’re talking about today, which is kind of the acquisition process and all the various pieces that go into it. So I think we’ll do our best to keep it interesting. But it’s useful, if not always interesting.
Michael Belasco (01:54):
This is the nuts and bolts, the real foundational stuff that you need to know. You need to get this information into your tool kit so that you can go forward. And there’s no better expert. Obviously, Josh and I have a long track record together. So there’s really, in my opinion, no one better to be talking about this, and all other stuff related to due diligence and closing on real estate. Josh knows a tremendous amount here. So we’re really fortunate to have him. So why don’t we kick this off? Why don’t we back up to the whole process around title, right? We’re getting right down to the basics here. So Josh, why don’t you give us a primer? What is title? What is it?
Josh Roling (02:30):
Yeah, so title insurance I mean, it’s an insurance policy at its base. That’s kind of a piece that people sometimes forget about frankly, and we can talk a little bit about why that is. But at the end of the day, it’s an insurance policy you get from a title insurance company. So it has to be a big well-capitalized company. And they’re insuring that you own a piece of property, and the title to that property is subject only to an enumerated list of exceptions. So as you know, Michael, property in the US is a little bit unique in that you record deeds with a register of deeds in a county. And if you grant an easement, or put a declaration or any kind of restriction in place, that all gets added to the county records.
Josh Roling (03:33):
So the title company, essentially, they go, not in person anymore, but electronically, or somehow they search the county land records, just like they’ve been doing for hundreds of years, and come up with this list. And so the insurance piece is really, after you buy that title insurance policy, if someone comes out of the woodwork, and says, “Hey, I have a mortgage on this property,” or, “I own this property,” you just call up your title company, and say, “I’m making a title insurance claim.” And they have to indemnify you, which means they have to defend it. And if they lose, and that person actually does own the property and you don’t, they have to pay you up to kind of the amount of insurance. So that’s the insurance piece.
Josh Roling (04:32):
From a transaction perspective, I would say what we focus on title insurance is more the diligence perspective. Which is that list of exceptions really tells you what affects that property. And so some of those things may be innocuous. I mean it’s utility easements. There are electrical easements running along the street. Okay, well, that’s pretty typical. That’s not going to affect your use of the property or the purchase price.
Josh Roling (05:06):
But oftentimes you run into a declaration that restricts the type of uses or requires approval for building plans, that kind of thing. So that’s where even before, you essentially buy the title insurance policy by paying a premium when you close on the property, but before you get to closing, kind of the piece that you’re talking about in this series is the diligence piece where you’ve used that kind of title insurance commitment for diligence purposes to kind of understand what you’re working with.
Michael Belasco (05:48):
Yeah. So why don’t we take a step back, and we’ll talk about how the process works. We have some stories. I know Josh and I have some stories of our own. Going through and finding out why the process of running due diligence on titles is so important. And you could discover things before you buy it that will actually prevent you from buying it.
Michael Belasco (06:07):
So if we step back, the first time you put a property under contract, you have a due diligence period. It’s usually a certain amount of time. Typically you’ll deposit some earnest money that will be refundable up until the due diligence period ends, right? And so during that time, there’s a lot of things that happen. One of which is doing with Josh had talked about, is doing due diligence on the title. Making sure there are no clouds or anything that might inhibit your ownership to that property.
Michael Belasco (06:34):
So as a first step, you’d engage with the title company. And I’ll kick it back to you, Josh, because there’s a process here that happens, right? They’ll first give you some documents, there’ll be a review. And there’s a critical piece that, from our perspectives, I would always use a lawyer to go through this process. And I’ve leaned heavily on Josh a lot through this phase and his whole team. So why don’t we kick it back to you. Go through the process and maybe we can splice in some interesting discoveries along the way through the process.
Josh Roling (07:08):
Yeah. Yeah. So like you said, the process really kicks off. Right when you sign a purchase agreement, you don’t want to waste any time getting a title insurance commitment ordered. So the first step is really to engage your title company. And we can talk a little bit about picking a title company.
Michael Belasco (07:33):
Yeah. How do you? What is that process? Why do you choose one? Is there a reason to choose one or the other? Are they commodities, title companies? How do you look at them from that perspective when you’re selecting?
Josh Roling (07:47):
Yeah. It’s an interesting business. I mean, it’s very localized. In that, as you said before, ultimately what they’re doing is searching a county’s land records. So if you have a property in Milwaukee County, Wisconsin, where I am, ultimately someone in Milwaukee, or close by, someone probably in Wisconsin is going to do that title search. So one thing you could do is just try to find a local title company wherever you’re buying property. If you’re in Pennsylvania, you might not know what’s a good title company to use.
Josh Roling (08:31):
So there’s a number, probably now just two or three, big national title companies where you can kind of work with one person. It’s a relationship business in that regard where there’s a salesperson who is very dynamic. They might not know the first thing about title, but you’ve got your sales person that kind of helps the process flow along. And then you kind of have one person that serves as a point of contact. And then they do the work of finding the Milwaukee County title search. Whoever needs to do the local search. So if you’re real active in the real estate market, and you’re not just doing a one-off acquisition, or one-off sale, that’s probably the way to go. Just because the longer you can kind of work with one title company, the more you kind of build some trust. They’ll try to make things work for you. And so that’s a kind of an aside on picking title companies.
Michael Belasco (09:41):
Yeah. We some have this ongoing thing. We’ve talked about this in our series three that we’re launching soon, which is a whole collection of podcasts that we did. It’s a running theme of just network and connectivity. And even with your title company, if you’re out there and you’re pretty prolific in the space, it’s great to have just a go-to title company. They know you, you know them, and they help movement. Some of these counties, it’s difficult. It takes a long time. And sometimes if you’re there, and you’re with these title companies, they can help move mountains for you. Josh and I have both seen it happen. So it’s a good group to have some continuity with. All right, great. All right.
Josh Roling (10:21):
Michael Belasco (10:23):
Go ahead. Sorry.
Josh Roling (10:24):
Oh, and I was just going to say the reason that those salespeople at title companies really like repeat business and serving as your point of contact is they get the lion’s share of the title premium. So there’s a financial reason that they want to keep you happy. They pay a little bit to their local searcher that does kind of the work, but they typically get a pretty big portion. And so again, that’s why having that relationship is beneficial for them, but it’s also good for you to have someone that wants to keep you happy. Because like you say, they can kind of pressure someone in a remote county that would otherwise just say I’m I’m going to put this to the back burner. I don’t care if we turn it around in a week, or two weeks, or three weeks.
Josh Roling (11:18):
So anyway you have your title company. You essentially just need to send them as much information as you can about the property. Typically, you send them the address. If you have kind of a legal description or a tax key pin number, anything like that, you’ll send it to them. And then they kind of take it from there.
Michael Belasco (11:41):
So you engage with them, and then you try to get them this information as soon as possible. Because time is of the essence still. Right now, you have a clock ticking. And so there are certain things you need to get them. Previous title commitment’s always helpful. Okay. So you get all that stuff, and then they take it. And then what’s the first thing they do? Are there deliverables they give to you? How does that whole thing work?
Josh Roling (12:07):
Yeah. So they’ll take what you give them, do their search of the county records, like we said before. And then what they kick out of that is it’s called a title insurance commitment. And so it’s called that because it’s really, they’re committing to issue you a title policy. And so again, as you get into this process, nobody thinks of the commitment really as something that you would find the title company with, but that’s what it is. And that’s why the title company is going to be careful. They want to make sure they pick up everything they possibly can because they’re committed to issue you a policy based on that commitment. And so they have to stand behind it. I’ve never been part of an adversarial where you actually show them the commitment and say, “You have to issue a policy,” but that’s why it’s called that at least. So they send you this commitment as well as copies of all the underlying documents that are referenced in that commitment.
Michael Belasco (13:15):
And what types of underlying documents? These are things they find when they’re searching, right? And they’re looking for-
Josh Roling (13:20):
Michael Belasco (13:21):
And this is where it gets… So usually this is where, Josh, you guys dive in. This is where you find all these interesting little nuggets that come out. So it’s very rare in the due diligence process for title to be the reason that a project dies or gets kicked out, but it does happen. And so Josh, I know you had some stories. And maybe you give us some examples of things you might’ve found when the title company comes back with their commitment, and you have to read through it. And there’s a process there. But maybe if you give a little anecdotal story of things that have come up.
Josh Roling (14:03):
I mean you and I have seen a couple. It’s stuff like a lien for unpaid assessments for a declaration. So you have kind of a shopping center and all the parcels are owned by different people. And everybody has to pay one central party to maintain, or clean roads, or something. And so if you just don’t do that, then it’s rare, but they’ll file a lien against your property. And so we had one deal where there was a lien filed. And that triggered to us to ask a question to the seller and say what is going on here? And yeah, I mean, it turns out that the tenant was not only not paying their assessments, but I think they weren’t paying rent. So it was kind of a red flag that triggered-
Michael Belasco (15:02):
Josh Roling (15:05):
… a more fulsome review of who we were dealing with and some concerns about the deal.
Michael Belasco (15:12):
Cool. Yeah. So there’s a couple others. So the commitment that you get back, it’s organized, right? It’s always the same. It’s templatized, right? You’re not going to get a different formatted commitment from one title company to the next. It’s all uniform. They follow protocol, right? Is there-
Josh Roling (15:32):
Michael Belasco (15:33):
Oh, go ahead.
Josh Roling (15:33):
For the most part, that’s true. It’s a little bit state-specific too. So Texas has a very particular form that’s somewhat unusual. But in general, you kind of see the same sections and kind of the same stuff reflected.
Michael Belasco (15:53):
Yeah. So typically, high level, what do you usually see? How do they flow?
Josh Roling (16:02):
Yeah. So typically you have, it’s broken into schedules, is the term they use. But so schedule A typically will tell you who the current owner is, which, as silly as it sounds, I mean, that’s the first thing you want to look at because there’s been times where we’ve gotten a commitment and the party that they say is the owner is not your seller. And that’s another one where you go, wow, we’ve better look into this a little bit more. And sometimes it’s just, they changed their name, or they were acquired, or there’s an explanation for it. But again, you don’t want to get to closing, and not be able to get a deed. You want to run that stuff to ground.
Josh Roling (16:54):
So schedule A will tell you who the current owner is. And then really the legal description of the property. So kind of the description that you need to use in the deed and that’s in the land records. And then there’s usually a schedule, it’s called schedule B-1, which are requirements. So this plays into it being a commitment. There’s a whole list of things that the title company says. We’ll issue you a title policy, but you need to satisfy all these things. And sometimes that could be three pages of stuff. And it includes getting organizational documents from the seller, and the seller giving a deed, paying the purchase price. Kind of basic stuff.
Josh Roling (17:43):
But sometimes you’ll see a requirement that the seller get a corrective deed from a prior owner to fix some historical issue. So it’s, again, one of those things where if you start seeing these a lot, you can kind of say, okay, all the requirements, yada, yada, they’re all the same. But every once in a while, they throw in some surprise. So you want to read through those, and at least make sure that there’s nothing in there that is going to take a long time to resolve.
Josh Roling (18:23):
And then what’s called schedule B-2, those are the exceptions. So that’s kind of your list of all the encumbrances that affect the property. And so, from the legal perspective, that’s where we spend our time is going through that list and actually reading each of those documents to make sure that really there’s nothing that affects the value of the property and kind of financial on that side. And then there’s nothing that affects kind of the operation of the property. And so those are kind of the two big mindsets you have. Because it depends on your client, but sometimes you have people that say, “Look, I don’t care. All I’m going to do is operate here. And I don’t care what’s on title.” And you have to say, “Look, if you go to sell this, or if you go to finance this, the buyer or the lender is going to care. So don’t just ignore it.”
Michael Belasco (19:29):
That’s really an important point because you’re buying it for yourself, and while you might not care, if you’re underwriting it saying you’re valuing it, A, your aversion value, just because you bought it because you didn’t care to market. Most people in the market are going to look at that, and it’s going to inhibit their ability to pay what you thought you could pay. The other piece, like you said, is getting a mortgage, right? Lenders are extremely risk averse. If they see anything impacting the value, or the marketability of the property, then it’s a major red flag. It does show up.
Michael Belasco (20:03):
There’s one where we had, what was it? I forget the location, but there was a gas company that actually pretty much owned the land by the way it was written. It was basically the owners of the land couldn’t do anything without permission from the large gas conglomerate. And they hit a bunch of stuff, there was a bunch of environmental issues. But really what came down, you could get over the environmental, but what it came down to was really the title piece in that you owned it, but you kind of didn’t. You didn’t own it in a way that was marketable.
Josh Roling (20:41):
Yeah. Yeah. It’s consent for doing anything to the property. And yeah. I mean, you could easily kind of rush over that. If you don’t read through these documents you just say, oh, it’s kind of a restriction, but everyone’s operating here, and it’s probably fine. But yeah, that one was a real problematic one. And we’ve seen other deals, but I represented an apartment developer that was going to buy a vacant farm to build an apartment complex on. And there was a deed restriction on the property in favor of the US government that prohibited building anything over two feet tall.
Michael Belasco (21:31):
Two feet tall?
Josh Roling (21:33):
Michael Belasco (21:33):
Are you serious?
Josh Roling (21:33):
Yeah. So it was during the Cold War that this property was between a missile control site and a missile launch site.
Michael Belasco (21:44):
Josh Roling (21:46):
And they had to have a clean line of sight between where the controls were and where the missiles were. And so they put this restriction on that so no one could build anything that would block that line of sight. And so we read that. We were just like, “Wow, this is unusual.” And one of the things with title that’s tricky is somebody puts this stuff on in the 50s or 60s. And now to develop that parcel, you’d have to go and find someone who can sign on behalf of the United States government to release… This restriction is complete, they don’t need it anymore. These missile sites are no longer there, thank goodness. But that’s the kind of thing where people can gum up title by putting stuff in place and then forgetting to clean it up. So you never know. Yeah, you never know what you’re going to find.
Michael Belasco (22:47):
Yeah. So this is the meat and potatoes of going through procuring title insurance. And the rest of it’s pretty much boilerplate thereafter. Or am I missing something?
Josh Roling (23:01):
Yeah. So I mean, I guess the one thing to point out, this kind of goes to the timing piece is the main reason that you want to get your title order right away is that you’re likely going to get a survey of the property as well. And the surveyor needs that title commitment in order to do their work, or at least to finalize their work. So it’s kind of this first piece that later other people rely on.
Josh Roling (23:32):
Yeah. I mean, so essentially once you’ve reviewed, you typically have some kind of comment. You may say, “Hey this exception is listed, but it doesn’t affect the property.” Title companies are risk-averse, so they’ll list anything they can plausibly say affects the property. And so you’ll get a survey, and it’ll say this doesn’t affect. So you’ll have a little bit of back and forth with the title company.
Josh Roling (24:01):
And then really when you get close to closing, you’ll ask them to prepare what’s called a pro forma title policy. And so that’s kind of the last stage. And so the pro forma is really it just looks like a title policy instead of a commitment. It doesn’t bind the title company or provide any coverage. But it’s kind of your last way to make sure that all the T’s are crossed and the I’s are dotted, and everything looks correct.
Josh Roling (24:34):
But then yeah, when you close, you pay a one-time title premium, which is state-specific on what that costs. It’s based on the amount of coverage you get, which is based on the purchase price. And then the title company issues the title policy in the form that you’ve agreed on. And then as long as you own the property, if you own it 100 years, or you own it six months, you can make a title claim if there’s an issue. So I’ve actually never seen a title claim be made.
Michael Belasco (25:10):
After that, you never look at it. You never see it again until you got to sell it and you need to provide it. No. But really the crux is it’s a value piece, right? When you’re in due diligence, you’re looking at, like you said, operations and when you go to sell the property again. So really, it’s a critical piece. You have to do it, and it impacts the value of the building should you discover something. All right. Well Josh, this was great. Thank you so much for coming on. Anything else? Maybe something we missed. Anything else you want to add before we sign off here?
Josh Roling (25:49):
No. I mean, there’s just so much more to talk about, so we’ll have to do it again sometimes. We can talk about title endorsements is a whole separate thing.
Michael Belasco (26:00):
Oh, there you go.
Josh Roling (26:00):
And then there’s policies.
Michael Belasco (26:03):
We’ll have a title series within the Contract To Close series. So yeah. I mean, we could definitely do that. Awesome. All right. Well, Josh, this has been fantastic. And to everyone that’s out there listening or watching, I hope you enjoyed it, and we’ll see you on the next one.