Covering Your Assets With Title Insurance

This actually happened to one of our clients where he transferred a real estate from his name into an LLC. When he later sold it, escrow held out $130,000 because of the preexisting lien on that property that predated his ownership. Now, he had title insurance and when he went to make his claim against the policy, they denied him. Now, he made some mistakes along the way because he didn’t have the information, didn’t have the proper policy in place to protect him. I thought, “We’re all real estate investors here. This is part of real estate investing—knowing what you need to do to ensure that your assets are protected, not only with LLCs, but also from the standpoint of insurance.”

So, who better than to bring on to the podcast an expert in this field, an attorney, the COO of Texas National Title, Latra Szal. She is going to walk us thru all of the important aspects of title insurance. She’s got a tremendous background in this and she’s an attorney to boot. With that, I’m going to turn over to you, Latra. How are you doing?

Latra: Good, Clint. How are you?

Clint: I’m doing well. Thanks! I know people that are listening, they are going to want to know about how you got to where you are today and what exactly you do with Texas National Title.

Latra: Absolutely. After law school, I came back to the real estate community. I’ve been in it for years before. I’ve worked in basically every single department in the title insurance business which hopefully means I have a fair idea of what’s going on. On a day-to-day basis, what I’m doing is working our clients and also working with real estate agents in our community and investors to help them navigate the transaction. There are a lot of times where people would find themselves with challenging questions, situations they haven’t dealt with before. Part of my job with Texas National Title is to answer those questions for the parties to the best of our ability and get them through to closing.

Clint: Wow. What you do is to me, is this little obscure area of the law that really requires some specialized knowledge that most attorneys, they probably don’t even understand what it is you do or what goes on. Will you agree with that?

Latra: I would. It’s definitely a small piece of the pie and it’s something in real estate as a whole title insurance is often a really teeny tiny piece of it but it’s something that can go very wrong if not processed properly. Sometimes parties find out later that they wish they’d done a little bit different during the transaction.

Clint: That’s a perfect segue. Why won’t you tell us some of the mistakes that you’ve come across that people make when it comes to title insurance?

Latra: Some of the mistakes that we’re seeing lately, I would say the first thing is something good to talk about that you mentioned earlier, we see a lot of people take title individually, in their own names because it’s easier to get to closing that way, it’s the fastest route to it, and they’re not quite prepared yet. They haven’t gone out and created their LLC. After they take title to the property, they’re often coming back to us and asking us to prepare warranty deeds from their individual name into their deal entity. In many cases, they’re not realizing that may change the coverage under their policy. In some cases, it may even mean that they’re not insured anymore.

I think in our state, there is an important endorsement that’s available to investors. It’s called the additional insured endorsement. There’s a moderate fee to basically transfer or change the name on that insurance policy from the individual into their LLC. It basically extends the coverage to them.

Clint: Okay. With that issue right there then, what I’m hearing is if I want to put the policy or transfer my property into a limited liability company, then I need to get this endorsement. Because I was always under the impression that if you just sign a warranty deed, you transferred in, you don’t really need to do anything else. But what I’m hearing is that it’s important that you contact someone like yourself and inquire as to are there other endorsements there that are available.

Latra: I think that’s definitely what happens. With title insurance, Texas is one of the only states that’s highly regulated under a different organization called Texas Department of Insurance. Most of the other states are American Land Title Association States. Investors that work across the country are much more versed in ALTA endorsements, ALTA policies. Then they come to Texas, they don’t know the coverages available to them, they don’t know what to ask for. I think anytime somebody is transferring title, particularly in Texas, it’s really important for them to get this extra endorsement.

Clint: Is that not covered under an ALTA policy because that endorsement is typically not available?

Latra: I don’t know because we’re not an ALTA state. I can’t issue an ALTA policy.

Clint: Alright. If a lender saw that initially, so if I came to you, I’m buying a house, I’m getting a traditional mortgage for it, I wouldn’t want to pick this up on the frontend, would I? Because wouldn’t that clue the lender into the fact that I plan to move this into an entity?

Latra: It would clue them into that. Lenders are kind of split, so half and half would care about; the other half would probably have an issue with it. It depends entirely on how you’re structuring the loan. If you’re structuring the loan as an investment property, many of them are okay with it. In some cases, we have lenders coming to us saying, “We know our borrower is going deed out after closing. Isn’t there something he should be getting?” It just depends entirely on what kind of lender you’re working with. Certainly, the private financing, the hard money lenders, they tend to be way more open to it.

Clint: Okay. When you’re doing this then, if you’re concerned about it, you can, as I understand, you could pick it up later. You don’t have to get it at the outside; you can come back and do that.

Latra: Correct. Yes. For the parties that don’t get it at closing, they come back to ask for preparation of a warranty deed. We prepare that and we offer it to them at that time also.

Clint: Just on that deed aspect, could you maybe speak to how important proper deed preparation is? Because I’ve run into so many investors, they look at that as something anyone can do and they don’t realize, I think, that an attorney or someone specialized should be preparing it.

Latra: I definitely agree with you. We have a lot of people that want to do the DIY approach to legal documents but if a legal document fails for a particular reason then, at least in our state, it completely fails to give any kind of notice. I see them with defects in the grantor name, so it wouldn’t tie together who’s the new seller and who’s the new buyer.

I see a lot of legal description errors as well. With legal description, if you don’t include all of the necessary information when that warranty deed is recorded, that’s not going to post properly. Anyone coming behind you to do that research would not find it which actually would allow the seller to resell the property to somebody else if they were so inclined. It doesn’t mean the seller does it without liability, but it means that you’ve created a title mess for yourself.

Clint: That’s what I often people when they look at the deed of trust and they pull the description from the deed of trust, that’s not always accurate. Is that a fair statement? That you should always look at the actual deed itself and know where you’re pulling the information?

Latra: I think you need to look to the deed itself. Frankly, if you’re going to be spending the money on an investment property, you really ought to be working with the title company that can do a policy for you. We’re the ones that are going to ensure the legal description and we can provide the legal description to say this is exactly what you should be using. It’s really common for people to miss something as simple as a plat reference, which in our state, is incredibly important because that’s a major part of the index.

Clint: Okay. Moving on, we’re talking about LLCs but one other aspect I want to tie this down with, series limited liability company. For those people that are listening, that live in Texas, or a state that offers Series LLCs, what does it do for title? I’ve always had this issue where I’ve told my client, “Assuming you deed property or you transfer property into a series, there’s two ways you can do it. You can just deed it directly into the name of the series or you put a parenthetical notation in the bottom of the deed itself stating that this property is to be held by Series A, for example.” You’re actually deeding it to the parent LLC with that notation at the bottom of the deed.

With Texas National Title, what is your preference? How would you recommend someone do this?

Latra: What I’m seeing happen most commonly is that we’re deeding all the way into the name series. “1223 Main St., Series A, Series B,” whatever it is because that is what gets referred to in the real property records, that’s what will affect your taxing authorities, that’s what affects what shows up in MLS when agents start their marketing, that’s generally what gets pulled into the contracts. That tracks all the way through making it separate and distinct from the main entity.

Clint: Texas National Title, you all don’t have an issue then with issuing a policy to an individual series.

Latra: Correct.

Clint: Okay, that’s good. Because I know for a while there, it was hard to find a title company that would issue a policy because there was no way for them to independently verify the existence, as I understood, of that particular series that they’re transferring them to.

Latra: I think when Series LLCs first came out, they were relatively new in Texas and so it’s not something that a lot of people have a really good handle on. For the first couple of years, there was definitely some moving back and forth about what is it and what do we require. But I’d say over the last year or so, I’m finding that the parties that have created them with the help of counsel usually have really good, solid documents that control the company as well as give adequate naming description. We’re allowed to vest in the individual series.

Clint: Alright. That’s great. Just one other thing off this subject matter, have you ever seen an individual series or we could call those cell, come under attack? If you have, do you know how it played out?

Latra: I haven’t. It’s such a new creating in Texas that we just don’t have a ton of litigation on it.

Clint: Yeah, that’s been my experience as well. Okay, great. You said there’s some other issues as well, mistakes that real estate investors make with title, before we started this, you were talking about loans, when people are loaning money. Maybe expound on that a little bit.

Latra: Absolutely. One of the things that we’re seeing here recently are people that want to start to get into the individual financing arena. They’re loaning their own money to other investors that are going to purchase rehab, do some renovations to a property then resell it, and what I’m finding is that a surprising number of these folks are going to do it or try to do it without the benefit of title insurance. I think that’s an incredibly dangerous position for them to be in because the title insurance, to get to insurance part, you get what’s called a title commitment.

The title commitment is where we, as a company, publish from our research what we found as far as who is the owner of the property, and what other prior existing liens might be out there. If you’re going to loan money to somebody on a piece of property, you definitely want to know that you’re transacting with the right person and that there’s not another lien out there that could buyback your lien. The way it works in Texas is if a superior lien holder forecloses it, wipes out all inferior liens if there’s no money leftover after the foreclosure sale.

I think it’s really important for people that are going to be on the loaning side, to make sure they’re dealing with the right people and that they’re going to get a policy that preserves or protects their lien priority.

Clint: I know there’s a lot of hard money lenders or just private money lenders and they’re not aware of this. I imagine that’s going to be a specific type of policy. You may need to know the right questions to ask. We’re going to take a short break here and then we come back, let’s address that aspect of it.

Latra: Okay.

Clint: Hi, everyone. Welcome back. It’s Clint Coontz here with Anderson Business Advisors weekly podcast. We are speaking with Latra Szal with Texas National Title. Right before the break, we were talking about loaning money on real estate and how important title insurance is or getting the title endorsement policy when you’re making that loan to protect your interest.

If somebody is going to loan money to another individual, you were talking about this, what should they be asking for? If they’re going to come to you—because they should obviously come to you and ask you to help them accomplish this—what could you do for them?

Latra: The most important thing for them is to make sure that you’ve got a quality escrow company that’s going to do all of the data research. There are certain companies in Texas. We have a couple of different ways that we can do our research. We can use what’s called a Thin Plan. With the […], you’re not getting all of the data that you could possibly get, or we’ve got a full […]. With our situation, we’ve got individual examiners that go back, and they search the […] books, they do all the research to get to a point where we’re comfortable issuing a title policy. Even as an individual investor, I think it’s important that you get a title policy because that’s where the rubber meets the road if your lien later is having some issues with enforcement.

One of the arguments against the lien would be that it was an invalid lien, not recorded properly, or maybe you didn’t have the right people sign on your lien instruments. That’s where the title insurance comes in to help you defend that position. It’s actually really an expensive in a purchase transaction. For a lien holder policy to be issued with an owner’s title policy in Texas at the same time, it’s called Simultaneous Issue. It’s an extra $100 plus whatever endorsements the lender requires.

I see investors walk away from requiring those lender policies all the time because they’re private money investors and they don’t know to ask for it. I think it’s really important that they do.

Clint: Alright. If I was going to loan money against another piece of real estate, I’d come to your office, what would you guys prepare for me? You’d want to see the promissory note, I’d assume. Right?

Latra: Yeah. We’re going to issue what’s called a title commitment. The title commitment is our report or our commitment to issue the policy. It tells you, “This is the data that we found. This is how we’re willing to ensure the transaction with this person signing on this legal description, subject to these liens or other encumbrances.” That title commitment report is what covers how we’re going to issue that policy. On the investor side, on a purchase transaction, you want to be sure that we’re going to payoff all the existing debts and we’re going to get a good deed from the seller and that is title 101, that’s what we do all day long. That’s an important piece for them.

If you’ve got somebody that is going to loan money on a piece of property that is already loaned by the LLC or by the entity they’re going to loan the money to, the most important thing in Texas is that you make sure that it’s not their homestead. Because homestead in Texas is very much protected. There are only a couple types of liens that are permitted on it and I would just advise staying away from that on the investor side.

Clint: I guess on following that out, if you were going to loan against a property in an LLC, before you issue a title commitment, would you check to make sure that LLC is not been revoked, it’s still in good standing, that the person who signs for it has the parent authority at least to sign?

Latra: Very good question. Our company does a pretty diligent search. We search the secretary of state to make sure that they are formed and that they’re in good standing with the secretary of state. If it’s an LLC or a corporation, we also search the comptroller’s website to make sure that they’re current on their taxes and that they haven’t forfeited their existence for either one of those entities.

We also then require a copy of all of their documents to show signing authority. That’s a challenge for people because first of all, not many of them have gone out and spent the time with an attorney to create them, or at least a good portion of them haven’t. Then every different type of entity can have a different set of governing docs and they’re all named something different. Our closing teams are often having to give a laundry list of things that we might accept but what we’re looking for is the agreement that mandates how the company is operated, who is responsible for management of that company, what their powers are, whether they can act all the time on their own or if they have to have additional member consent, and then what limitations might be on that power.

If we can get a copy of the agreement of the operating documents for the company, we track it all the way down to the individuals that can sign. If we’ve got a limited partnership that’s managed by an LLC, that’s managed by another LLC, I need all those docs. But once we get them, we put together an approved signature of authority for the parties so that they know we’ve done our research.

Clint: Alright. Let’s assume that I am buying a property in the name of my LLC. This is the way is structured. We have a Texas LLC that is member-managed, and it’s member-managed to buy a Wyoming LLC, so an out of state LLC. The manager of the Wyoming LLC is Clint. I’m looking to buy this property in the Texas LLC. So, it’s Texas LLC, Wyoming LLC and then Clint is down there, he’s the owner and manager of that.

When you look at the Texas’ secretary of state website, what you’re going to see when you look at that Texas LLC is, you’re going to see all the information for the Wyoming LLC being that it’s the member manager. And then when you look at Wyoming, you’re not going to see any information because Wyoming doesn’t publish any information other than the name and the RA.

Is that going to create a problem for you if somebody gives you all the LLC operating […], they’re all put together and it shows how that whole process there of the Wyoming, my name would be listed as the member, I’d be listed at the manager, and then on the Texas LLC it showed that my Wyoming LLC is the member manager of it, and quite possibly, I’m also listed as the president because the LLC appointed […].

Latra: For us, that’s not an issue. We need to make sure that the entity going into title or coming out of title is registered with Texas and in good standing. But we don’t then continue to search the good standing portion or the out-of-state registries for the interior companies because for us, that’s not really the company going into from another title. On that example, I’m going to require the LLC docs for the Texas entity and the search for the secretary of state and the search for the comptroller. Then I’m just going to need to see the documents for any interior companies. For the LLC out of Wyoming, I’d want to see their company agreement or regulations or operating agreement. Once I get to where it shows that Clint can sign individually without any input from anybody else, and that’s where we would stop with our research.

Clint: For those individual listeners that are on here that live in Texas, I know many of them do, you said something there that I don’t think most people would pick up on. You said, company agreement, if I heard you correctly.

Latra: Correct.

Clint: Now, that is a Texas-specific term. How often do you find LLC operating agreements that are brought to your office that do not refer to them as company agreements but refer to them as operating agreements?

Latra: Oh, probably half of the time. Everybody has it something different. We see company agreement, company regulations, operating agreement, LLC agreement. People call them all different things. What we’re really looking for is the authority and what limitations there might be on it.

Clint: Alright. You’re going to let that one slide even though in Texas they’re supposed to be called company agreement.

Latra: Yes.

Clint: I often wondered if that would throw off title. I mean, it’s one of those things I often tell people when I look at an operating agreement. It’s like, “You either did it yourself or you used some […] email […] a mistake,” because they shouldn’t be called an operating agreement. That’s great.

On a different matter, land trust. Are you familiar with those?

Latra: I am.

Clint: Okay. We’ll start first with this. I’m going to transfer real estate that I own into a land trust. Do I have to do anything different with that as far as policies are concerned?

Latra: Not as far as a title insurance policy is concerned though.

Clint: Okay. Because you look at it as a grantor trust, I can just deed it in. I don’t need that other endorsement that you needed with the LLC.

Latra: Hmm.

Clint: Ahh, I asked you a tough one here.

Latra: Yeah, that one I probably have to research before you keep it in your podcast.

Clint: No, no, it’s alright. If you’re not sure about it that’s great because it’s something that people should know because we have a lot of individuals that use land trust. I’m sure that if someone’s listening to this podcast and they invest in Texas, I hope they’re going to call you and have you guys, do the work. But land trust, do come up. I mean, in my experience, I tell people that as far as a due on sale clause is concerned, it’s not something that they need to be worried about if they’re transferring into a land trust or an LLC because lenders typically want to accelerate.

Latra: It’s true.

Clint: But I do see people who buy at auction like to use land trust because they can just create the trust right then and there and then take title in it because many of them typically don’t have their LLC set up or they haven’t created the series LLC so they can just create the sale agreement on the spot. That is a common way for an auction investor many times require real estate to keep it out of their name. I was just wondering if they didn’t do that or their use of the land, does it create an issue on your side.

Latra: The key for us is always the documentation of the authority part. Most of the parties in Texas, they take title and then we’re dealing with them on the sales side or they’re going out to get a loan, and that’s where we need to be able to see any trust agreements to make sure that we’ve got the right parties that we’re working with.

Clint: If you look at a land trust, for instance, and I had on there, Clint Coontz as trustee, because the client wanted to set it up where they wanted to use myself as a nominee trustee, and then I resigned and I appointed Karen as the trustee because she’s also the beneficiary but that doesn’t show up on the title. Is that going to create an issue for you?

Latra: Not as long as you’ve paid for it properly. That’s something that we see people that pay for it really well and they have years and years of records and that’s always kind of our best example. Sometimes we see people not documented at all and that is really hard to retroactively go back and fill those gaps because it just becomes something that, as an underwriter, you look at and you’re saying, “Well, they didn’t really have any other paperwork,” and so now it looks different going backwards that it would as if you’ve taking care of it at each step.

Clint: Wow. That’s really interesting you say that because I’ve run into a lot of title companies before when it comes to the land trust, they just wash their hands off it. They don’t even want to listen, they don’t even understand it, and they kill the deal and clients are forced to go to a different title company to work with them. I’ve never quite figured it out why they were averse to the trust.

Latra: It depends on where the information is going to. Sometimes you’ll have a closing team that may not understand the issues and so they don’t what questions to ask of their underwriter or to pose to me. Sometimes it’s an underwriter decision. Texas National Title is multi-underwriter. I have five different underwriters and if one of them doesn’t like a transaction, then I shop the other four. That’s a huge thing for us to be able to get some of those deals closed because sometimes underwriters will pick a position if they don’t like a certain type of transaction. If you only have that one line that you can write on, it’s really challenging to get transactions closed. We probably shop our five underwriters weekly with different deals because they each have different risk tolerance levels.

Clint: How common is that for title company to have five different underwriters?

Latra: Previously, in another company I worked four years ago, we only had three. We had to write 95% of it on one. That was a really restrictive environment for us. It’s common to have many when you’re an independent agent like we are. But if you’re a wholly owned company, then generally, you don’t get to have many options.

Clint: If somebody was coming to a title company and they’re a real estate investor, are there any questions you think they should ask to make sure that that title company truly understands the real estate investor mindset and the strategies they’re going to be using? Can you give me keywords?

Latra: I think it’s important to ask about how many underwriters you have because you don’t want to put all your eggs in one basket and then have that underwriter change their mind on what they will or will not accept for risks. I think it’s really important that the closing team that they’re working with understand the model particularly if it’s a fix and flip, if it’s somebody that’s going to acquire and sell the same day because they’re wholesaling it. All of those concepts are very far outside of the regular residential market. You can’t fit a square peg in a round hole, necessarily. They want to make sure that the person that they’re working with understands and has done these transactions before. Thankfully, we do a lot.

Clint: Wow. That’s awesome. It sounds to me, what Texas National Title is, it’s the real estate investors’ title company because of just the words that you used. You’ve talked about wholesaling, fix and flip. I’ve dealt with so many title companies before and if you threw those words out, they would have to Google them to figure out what it is.

Latra: Well, flip used to be a bad word, back a couple of years ago. It’s been hard and a challenge to get people away from the negative connotation into, “It’s just a business model.” And getting people to understand that has been something that’s, thankfully, our guys have adopted really well.

Clint: Wow. That’s great. I know I’ve taken a lot of your time. You have other things to do today but is someone wanted to get ahold of you, and to reach out to you, how would they go about doing that?

Latra: My email address is latra@texasnationaltitle.com. Our website is www.texasnationaltitle.com.

Clint: Great. Alright, guys. If you want to reach out to Latra, you can see the information in the show notes. You can click on that and be immediately connected to her via email or you can go to the website. Latra, thank you for coming on today. I know this was powerful information, I’ve got a lot to digest. I’m going to go back and listen back to this because you taught me a few things that I hadn’t known when it comes to title insurance. I’m sure I’m going to incorporate it into my events going forward to make sure we’re always giving the most accurate information. With that, is there any parting comments you have?

Latra: I don’t think so. Thank you for your time.

Clint: Alright. Thank you very much. Take care.

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