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3 Reasons Not to Buy Title Insurance for Raw Land

A common misconception in the world of real estate investing is that you need to buy title insurance in order for a deal to be safe, or worse — legitimate. When I tell people I rarely use title insurance when purchasing raw land, many people look at me as if I’m breaking the law or I’m making some grave mistake. To the uninitiated, buying property without title insurance seems risky, but after reading this article I believe you’ll actually look at title insurance as a liability in most circumstances.

1. High Costs, Low Risks

Typically, title insurance for vacant land costs between $300-$600. Since you are forced to use escrow and close with the title company issuing the insurance, the actual costs end up closer to $1,000-$2,000. In California, it is usually around $1,500 for deals worth $10,000 or less. That means that if you’re buying a piece of vacant land for $10,000, you can expect to pay 10-20% of its value in closing costs. To put it in perspective, that’s 10-20 times more in relation to purchase price than most home buyers pay for title on their new home and they get better coverage (more on this later). Let’s look at it from an investors point of view. If you purchase between 5-10 lots worth $10,000 or less, you have guaranteed the equivalent of a 100% loss on at least one of those properties. Let’s not forget Warren Buffet’s famous rule for investing, “Rule No. 1: Never lose money. Rule No. 2: Never forget rule No.1.”

That being said, we buy insurance for a reason. We buy health insurance in case of a health issue, and car insurance in case of an accident. But are title issues so rampant that the cost of insurance is easily justified? The truth is that while title insurance costs have risen, the cost of title claims has gone down. Check out this graphic from Forbes:

These statistics only cover up until 2004 but data recently released from a large title insurance company revealed that this trend has indeed continued to this day:

So, based on the most recent data from Old Republic’s Title, title underwriters are now paying out as little as 1% of their revenue on claims. Consider the fact that health insurance companies, who are routinely maligned by the public as greedy and heartless, pay out a whopping 80% on claims — nearly 80 times more than Old Republic Title paid out to its policyholders. Similarly, car insurance companies pay out around 68% of total revenue on insurance claims, with a profit margin of only 5% when all other expenses are included.

You’re Odds Are Better at a Casino

Statistically speaking, you are more likely to lose money on title insurance than on a slot machine. Slot machines pay back a hefty 80-90% of what goes into them while title insurance averages a measly 1%-5% these days. Slot machines are rightly considered gambling but shouldn’t title insurance be considered a gamble as well? Just a thought.

Keep in mind that this does not mean that there is a 1%-5% chance you will buy a property with a faulty title. It just means that 1%-5% of their revenue was paid out for claims in total. The number is likely much, much lower. Possibly by a factor of 100 times or more lower depending on the size of the claims (minor dispute vs total loss). I know land investors who have done thousands of deals and have never run into any major title issues!

Much of the benefit of going through title is getting a preliminary title report and being able to see chain of title. But this is not what you pay thousands of dollars for (most title companies provide this for free). If you simply want a chain of title report put together by someone else, you need only pay a couple hundred dollars for a very comprehensive analysis, done by certified experts. Or you could simply do it yourself online for a few dollars. Land is much easier to understand than houses and generally does not involve as many lenders and contractors (fewer liens to worry about) making it fairly easy to check title. It should also make it much cheaper to insure, especially due to the dismal coverage they offer. The online era of free information should reduce this cost!

Years ago, in the paper dominant era, title searches took hours and sometimes even days to complete. A title company would have to send people to examine the physical documentation at each respective county office. In the era of technology and automation, title searches are done almost instantaneously and are even less prone to error than in the past. This is a major reason why a title company can reduce the cost of claims by over 1000% over the last 20 years while simultaneously cutting operating expenses. In the above Forbes article, the future usefulness of title insurance is even questioned:

…one day economic rationality and digital reality will catch up to the title industry. Real estate ownership records, always open to the public, are going online, alongside all sorts of other data. Today anyone can instantly learn a property’s square footage, its sales price history, even view satellite photos, at virtually no cost. If records are instantly accessible and accurate, the need for title insurance will fade away. “Eventually insurance won’t be an important component of the product,” he allows. [empasis added]

That quote is 14 years old. Today the digital reality is here and the economic rationality of buying title insurance is wanting.

2. Limited/Non-Existent Coverage

It may come as a surprise to many that title insurance policies generally offer land buyers little-to-no protection. Check out what one of the largest title insurance company in the U.S. was unwilling to cover on one of my deals (with added emojis for emphasis):

Title insurance for land is as good as poo.

Did you catch that? Everything you need to be covered most is not. Liens, easements, faulty property boundaries, and essentially anything else that they fail to find in public record is not covered. Getting protection for unforeseen liens, encumbrances, surveying issues, etc. is exactly why most people want to buy insurance. So to tell your customers that you do not cover liabilities outside the preliminary title report is to render your insurance essentially useless!

Now, this is just one insurance company (the largest in this biz), but are all policies this bad? Unfortunately, except for title insurance for housing, I have not seen policies much better than this. I’m sure in the future, with more competition, this will change dramatically, but not as of yet.

Here is a snapshot a prolific land investor recently shared from a policy purchased on one of his properties:

Makes you feel really good inside that you just spent $1,000-$2,000 to end up with coverage this good, right? (That was in my sarcastic voice.)

3. Deal Killer 2.0

Delays, Delays, and More Delays ⌛

Title companies are a big deal-killer in the land business. They’re slow, expensive, snoopy, sometimes resentful, and did I mention slow?

On the buy side they kill deals because they give the seller too much time to potentially back out. On the sell side, many investors avoid buyers who want to go through title to avoid long delays in closing. In fact, one deal that was taking too long through escrow I backed out of because they had spent weeks working on a title report while I was getting daily calls from people interested in the property. The people calling me may want to offer a higher price, close in-house (I am a professional at this), or check out on my website with a credit card.

This means that even if you are only buying property for the first time and don’t intend on doing any more deals, you can still lose a deal due to being weeks in escrow. Even if you have a signed purchase agreement, it happens all the time in this business — especially land.

Doubt, Doubt, and More Doubt

Imagine this: you are buying a piece of land at a killer price when your contact at the title company asks the seller: “Are you sure you want to do this? That’s well below market value. You could get a lot more for your property.” The seller generally knows full well that they are selling their land below market value. In fact, on cash deals, we routinely sell at 50% below market value. But having a third party inject doubt into the transaction is notorious for killing deals.

I had a title company freak out when they found out that what they thought was a down payment was actually the price I was paying for the property. They said they had to talk to their ethics department and call the seller. Despite the fact that I had a purchase agreement established and explicit consent from the seller, they had to inject their concerns without any knowledge of the situation other than the purchase price. As you could have guessed, the deal never went through and the seller is likely to be left with nothing after the county sells it for unpaid taxes. Nice!

From Dealing to Stealing

Imagine the above scenario again. This time, the title agent goes behind your back and steals the deal. Sometimes a spouse or close friend of a title agent will do the deal-stealing. They call up your seller and offer 5-10% more than you. This isn’t the norm, and I’m not saying all title agents would do this, but I hear investors complain about it from time to time. It’s worth a bit of hesitation.

Conclusion

Financially speaking, title insurance is a very, very bad investment. The costs are wildly high with insurance payout rates of as little as 1% — 80 times lower than health insurance. Even if prices were to be significantly lowered, you still have the problem of almost non-existent coverage for raw land. While they may sell consumers on “being protected against title issues”, the fine print excludes nearly all known and unknown risks. For land deals, getting title insurance increases closing delays, invites Negative Nancys to sour the deal, and increases the risks of deal theft.

The title insurance cash cow is now obese and it’s time for them to cut the fat. There is still time for conservative treatment. Although, like any diet or exercise program, it will be hard at first but it’s down to either cutting the fat or killing the cow.

 

I am a Managing Partner of Golden State Investors. We work almost entirely with vacant land and pride ourselves on quick and efficient closing. But what really gets me excited is the possibilities that vacant land provides and the dreams and ambition of our buyers to turn those possibilities into realities.

Comments (6)

  • Excellent post but one question. If a covered claim ever is made, doesn’t a standard policy only cover up to the price paid for the property which can often be less than the cost of the title company closing?

    • Thanks John!

      Generally speaking, yes. It’s for the price paid unless it’s a lender’s policy in which case it is on the outstanding balance of the loan.

      -Bart

  • You wrote a persuasive article.

    Buying title insurance in Colorado is rather expensive since a minimum value of around $85,000 is set by title companies for their title insurance policies (maybe this is the same in the other states). So, even if you’re paying $8,000 for a property with a market value of $24,000 — you still get charged $900 or more for the title policy — about $1500 for the closing in total, which is nearly 20% of the purchase price.

    At what $ amount (property value) do you recommend a title closing? Do you close in-house up to a certain value? Say $20,000+?

    • Hey Neil.

      I close in-house on every deal unless the transaction cannot be completed without title. In other words, if using a title company makes a deal possible or adds more value, I use it.

      To your last point, I recently closed two Death of Joint Tenant deals in LA County worth over $50,000 without any title or attorney. Am I worried? Not at all!

      I would avoid paying more than 5% of what you pay for any property in closing costs.

      Hope that helps! 🙂

  • Very well written Bart. And it is so true, true, true! Title companies killed few of my deals and they let me wait forever to close deals. I might be done with them.

    • Thanks Milan!

      I think a lot of what title does will eventually be automated and replaced by AI. Only a matter of time!

      P.S. You got some sweet looking properties on your site. Nice work! 😉