If you’re an experienced real estate flipper you may know about hold-open title policies because they can save you a lot of money on title premiums. Here are the ins and outs of hold-opens:
What is a Hold-Open?
When buying a home you usually receive an owner’s title insurance policy when you purchase. However, if you’re planning to resell the property in a short period of time (less than 18 months) a hold-open can save you money by avoiding the full cost of the second title premium for the new buyer. Instead of receiving the owner policy at the time of your initial purchase, the hold-open policy is “held open” for the next purchaser.
How Does it Save Money?
To demonstrate savings with a hold-open it’s necessary to understand what premiums are paid without one. If a house is purchased and then resold without a hold-open there are two title policies issued: one when you buy the house and one when you sell it. With two policies come two premiums to pay.
With a hold-open you pay a small hold-open fee and only one title premium. The hold-open fee varies by underwriter, but is usually between 10% and 25% of the title premium. Below is an example of the savings with a 10% hold-open fee. With each scenario the assumption is that you purchased at $250,000 and then sold at $350,000.
With a hold-open you would pay the base rate for the $250,000 purchase, which is $1,313.00, and you would pay the 10% hold open fee. All in first transaction is $1,444.30.
On the second transaction you would pay the title premium at the $350,000 sale price, which is $1,488.00 but you would get a credit for the $1,313.00 that you already paid for the premium on the first transaction. With the credit applied you would pay $175 for the second premium. Your grand total paid for title premium on both transactions is $1,619.30.
On the first transaction you would pay the premium of $1,313.00. On the second transaction you would pay a premium of $744. This assumes the short-term discount applies. Your grand total without a hold-open for premiums on both transactions would be $2,057.00.
Savings with hold-open: $427.70*
What Are the Restrictions with a Hold-Open?
The main restriction with a hold-open is timing. Some underwriters offer policies that can be held open for 18 months, but others can only be held open for 12 months. For property flips this isn’t usually a problem because you can usually resell within that time frame. The held open policy also needs to be for the same property. If you buy a property and then subdivide it, you wouldn’t be able to use a hold-open for reduced premiums on the separate resales. In that scenario you would want to purchase the title policy on the first transaction and then resell with a sub-divider rate, which is a reduced rate for developers who subdivide multiple parcels.
Can I Close the Second Sale at a Different Title Company?
A hold-open policy is only valid when the resale is with the same title company. That’s because most of the premium is being paid up front with the first transaction.
Whether a hold-open policy will save you money depends upon several factors, including the timing of your second sale, whether the other party is paying title premium on the transaction, and whether you’re intending to close with the same title company. If you have questions, calls us! We would be happy to provide quotes that fit your particular situation.
*The above state rates are for a 10% hold open through Alliant National Title Insurance. This hold-open rate permits you to hold the policy open for 12 months. We also offer a 25% hold-open rate written through Fidelity National Title that permits the policy to be held open for 18 months. Premium rates vary depending upon the underwriter, endorsements, length of ownership, prior policies, etc. The above scenario is for illustrative purposes only and should not be deemed as a rate quote.