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Builders Should Not Own Title Companies

 

Builders want to continue to force consumers to use their in-house title companies.   Allowing a builder to own a title company is little different than allowing a builder to determine if his own title is any good.  Builders recently pummeled HUD witha mountain of letters and a lawsuit to protect this anti-competitive, anti-consumer and manipulative arrangement.

New construction closings are likely the most complex and risky transactions a consumer or lender will ever do.  The title issues are enormously complex, fraud abounds and the potential for coercion and bait and switch is huge.  And it is the title company that must sort through the complex purchase agreements to properly represent them on the settlement agreement.  It is the title company that must uncover title defects created by the builder, mechanics liens that the builder hasn't paid and handle situations where the buyer and builder disagree.  Of course builders want to own the title companies that make these decisions.  What better way to protect their investment.

It doesn't take long to imagine a routine real life scenerio where a builder might abuse his ownership of a title company.  Here are a few:

  • Sub-contractors have filed mechanics liens on the property and the builder disputes them.
  • There is a blanket underlying mortgage on the entire development and the builder doesn't want to payoff the part due to release the subject property.
  • The builder is in financial difficulty and the title company is a perfect bank to "borrow" money.

Residential new construction is already a problem for consumers in that the purchase agreements are best described as contracts of adhesion and offer consumers no meaningful protection whatsoever.  The forms are typically custom forms in excess of 20 pages that would cost a fortune to even have an attorney review.  Consumers are already at a severe disadvantage.

In addition, title companies are responsible to collect and disburse funds in an unbiased manner that follows the instructions in the purchase agreement.  Is there any possible way to call a builder's title company unbiased? 

And if the builder is trying to cover up title defects such as unpaid mechanics liens or unpaid mortgages, what better way to do that than by owning your own title company?

The other problem is that builders coerce buyers to use their biased title companies by offering fake discounts that exceed the price of the title work often by a factor of 5 or more.  Free rooms, $10,000 in discounts, free granite counter tops are all things that we have seen.  When the title fees are only $1200 or so, the so called "incentive" to use their title company becomes more of a demand than a choice.

And if the builder is capturing all of the buyers' title work that comes through the door, what does that do to competition?   Competing title companies that offer title work for less won't be considered because they would essentially have to pay the buyer $8,000 to match the benefit the consumer is getting from the builder.  The discount is nothing more than a stick to whack the buyer with if the buyer refuses to subject himself to the risky proposition of allowing the builder to examine his own title. 

Allowing builders to own a title company allows the builder to neutralize the safeguards that the title company is there to provide.  If you're going to allow that to happen, it is CAARE's position that you would be better off not even examining title at all.

Comments

How true this is, I had a builder that insisted his title company close the sale. $150,000 lien showed up when my client went to
refi the property. I called the builder and told him he had better clear it up fast or I would report him. He did take care of it, probably put it
on other property, that builder was Parrish, the guy that went to jail!

Joann

How true this is, I had a builder that insisted his title company close the sale. $150,000 lien showed up when my client went to
refi the property. I called the builder and told him he had better clear it up fast or I would report him. He did take care of it, probably put it
on other property, that builder was Parrish, the guy that went to jail!

Joann

Builders should absolutely NOT own title companies or lenders. It is coercion. Period.