What homebuyers don't know: The cost of ignorance

Given that homebuyers are confronted with monumental tasks in the home-buying process, it should be expected that many of the finer details are entrusted to their real estate agent or mortgage lender.

After a lengthy home search, contract offers and negotiation, gathering financial information for loan application, and making moving arrangements, the average homebuyer has had their fill.

Unfortunately, the choice of a settlement or title company is not high on a homebuyer’s priority list, and the homebuyer often defers to their real estate agent or mortgage lender to make this choice for them.

Deferring this choice to others, may be the costliest decision in the real estate transaction.

First and foremost, homebuyers should understand that it is their choice to pick the title & settlement company. In a recent cost-comparison survey among Washington, D.C. area title & settlement companies, the results showed a $1,342 difference in title charges between the lowest and highest quotes of nine competing title & settlement companies.

The survey was conducted by Veris Consulting, Inc., a Reston, Va. consulting firm. Veris requested quotes from each of the nine competing companies based on a $600,000 purchase price for a District of Columbia single-family home, and each quote was based on enhanced title insurance coverage.

Putting this into perspective, the $1,342 saved in title charges would pay for a good portion of the homebuyer’s moving costs.

It has been conventional wisdom, even among real estate professionals, that all title & settlement companies are veritably the same when it comes to fees and title insurance costs. This recent survey by Veris proves otherwise.

While it is true that price alone should not be the final determining factor when selecting a settlement service provider, it takes little effort to tap online resources for quality of service reviews.

Why the large cost differential in title charges among the nine competing title & settlement companies? Given that the services provided are virtually identical and the quotes requested and received by Veris were all based on current and thus, equivalent, market conditions, it begs the question posed above.

By more carefully examining the Veris survey, the answer primarily lives within the ownership and relationship between respective title & settlement companies and area real estate brokers.

That is, with one exception, the four most expensive companies in the survey participate in “legal kickbacks,” otherwise known as Affiliated Business Arrangements (ABAs).

This means that the participating title & settlement company shares its profits with real estate brokers. As a result, the participating company accepts slimmer, per transaction, profit margins in exchange for a higher volume of referral business. Because of the slimmer, per transaction, profit margin, the participating company has little to offer the homebuyer from the standpoint of cost savings.

The survey also revealed that the five least expensive companies were all independent. That is, these companies do not participate in the “legal kickback” arrangements and thus, had the flexibility to share some of their profits with the homebuyer in the form of savings instead of sharing their profits with potential referral sources.

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