What’s the Difference? Commercial vs. Residential Title Insurance
From modest homes to sprawling commercial properties, all real estate transactions have one thing in common — they should be protected by title insurance. No matter what the property type, a title insurance policy is the key to providing coverage against past problems like legal claims or record-keeping mistakes.
You may be wondering whether commercial and residential title insurance are all that different. After all, both types of policies include different types of insurance (owner’s and lender’s policies, for example) and insure the owner’s right to the land. However, closing on a commercial property is often much more complex, although surprisingly the process is actually less regulated than closing on a home.
Let’s dive into a few important ways that commercial title differs from residential policies.
Understanding the Complexities of Commercial Title
While residential title involves property purchased for individual use, commercial title deals with property that is sold, leased or used to achieve a predetermined business objective. Unlike residential title transactions, which often tend to be quite similar, commercial transactions have a wide variety of complexities depending on the size and scope of the property being insured.
For example, there is a big difference between the sale of a corner convenience store and that of a shopping mall with dozens of tenants. Even more complex would be the assemblage of multiple parcels to construct a new shopping mall, and then insuring the finance and construction from the ground up.
One of the primary ways in which commercial title differs from residential is the process of due diligence. Because the Real Estate Settlement Procedures Act (RESPA) governs only residential home sales, buyers and sellers in a commercial transaction must perform detailed due diligence on the property and the other parties involved in the transaction.
Title companies often assist the parties, their counsel and their lenders with due diligence. Whereas the final steps in a residential transaction include a home inspection and standardized appraisal, a commercial closing often requires the following:
- An ALTA survey;
- Assignment and assumption of leases document;
- Land and business appraisals;
- UCC (uniform commercial code) filings;
- Environmental assessments;
- Zoning reports;
- Customized policy endorsements;
- And more.
In addition, commercial sales have a more customized PSA (purchase and sales agreement), compared to the more standardized sales contract used in residential sales. The PSA, which requires more scrutiny, is designed to protect the parties’ rights, obligations and liabilities in order to close the transaction.
Who Is Involved in Closing on Commercial Properties?
As you can see, commercial transactions are much more involved than their residential counterparts — and the stakes tend to be higher with commercial properties, since there is an anticipated rate of return on the funds invested. With the added complexities, it’s common for the title agent to work closely with their underwriter’s legal counsel to assure nothing is overlooked.
Commercial title business typically is referred from commercial real estate agents, attorneys and commercial lenders. Instead of a contract between two people, a commercial real estate deal typically involves at least one contract between two or more legal entities. Let’s face it: These deals are expensive, so all parties strive to limit their liability.
Often, legal entities are created for the sole purpose of owning commercial real estate. For every entity involved in the transaction, including a corporation or LLC, additional steps must be taken to verify their fitness and ability to conduct the transaction. Due to the substantial risk presented to investors, legal entities are used to protect both buyers and sellers from liability.
The Advantages Unique to Commercial Transactions
Although commercial title is far more complex than residential title, there are unique advantages to title companies handling transactions involving commercial properties. For instance, the commercial title business is more resilient in a downturned market and typically slower to respond to economic shocks.
What’s more, due to the increased insurance amounts involved, commercial title work is often more profitable to the title agent than residential transactions. Commercial real estate transactions usually mean a larger price tag, often to the tune of tens of thousands of dollars, or even more. This makes commercial insurance policies both more expansive and expensive.
Turn to Proliant for Support with Complex Title Policies
Since no two commercial closings are completely alike, each comes with its own set of specifications that can quickly prove overwhelming. Luckily, there’s a turnkey solution for entrepreneurs who’ve set their sights on owning their own title company, yet are faced with a host of questions and concerns about complex closings.
Proliant Settlement Systems offers a simple path to title company ownership that eliminates the most difficult barriers to entry. Plus, Proliant’s fully compliant franchise system provides your back-office support — including all the guidance and assistance you’ll need for mastering complex title work. From underwriter approval and wire fraud mitigation to fully compliant software and cyber security, Proliant provides the expertise and support you need to run a successful full-service title agency.