Real Estate investing has been a lucrative business for the last few years. Nearly every major market in the U.S. has seen significant appreciation in property values. This, of course, attracts investors of all types. Many investors buy properties at value prices then resell them at a later date for a profit. Maximizing profits is the name of the game.
One of the more commonly used tools that investors use to maximize profits is the title insurance binder or as it is often called, a “hold open policy”.
A hold-open policy or binder is a way that an investor can save a large portion of the cost of providing title insurance.
But how does the use of a binder work and how does it save the investor money?
When the investor purchases a property it is typical for the seller to provide a clean, marketable title and along with it a title insurance policy. But rather than just accept the title policy in their own name, the investor pays the title insurer a fee for a binder for future insurance. The fee which can be as little as 10% or as high as 25%, allows the investor to “hold open” the policy for up to two years. This gives the investor time to rehab or resell the property. When the investor resells the property they pass the title policy that was provided by the original seller to the new buyer. This saves the cost of paying for a new policy on the resale.
Let’s see how this works in the following example:
The investor buys a property for $100,000. The original seller pays the cost of a title policy for $100,000 at a cost of $750. But instead of just accepting the policy the investor pays the title insurance company a binder of an additional $150. The binder is essentially an IOU provided by the title insurer.
The investor holds the property for 1 year. In which time through a combination of improvements and market appreciation the property is now valued at $150,000. The cost of a new title policy of $150,000 would be $1000. But since they purchased the binder for the original $100,000 they only need to pay the difference. So the investor passes the policy through for the cost of $250 plus the original $150 binder. A savings of $500 to the investor.
Keep in mind when using the Hold Open policy that both transactions must be insured through the same title company. Which is why you will often see an investor/seller specify the use of their “preferred” Title Insurance Company. The final leg of the sale which was initially insured by the original title company cannot be insured by another title company without additional cost.
The use of the hold open binder is not without its risks. One downside to using a Hold Open policy is that the middle buyer, the investor, is not insured since no owner’s policy is issued to them. If a flipper gets pulled into litigation over a title claim, they will not have the benefit of a title insurance policy once the binder is used to issue a policy to the final buyer.
But despite the risk of using the hold open binder, the cost savings to an investor can be a compelling reason to a company that turns over dozens of properties a year.
Purchasing a property for investment or flip? Discuss with your options with your Title and Escrow partner to see if a Hold Open can save you money.