THREAD: Title insurance — profitable cabal or steady workhorse?

Decide for yourself how this industry can pay huge sales commissions while sporting the lowest payout ratio in the insurance sector.

Time for a thread 👇👇👇
Title insurance policy protects the policy holder from financial losses due to defects in title.

For a refresher on title, deeds and why title insurance exists, read this thread.

Title insurance covers all sorts of unexpected issues

• Inconsistent wills
• Restrictive covenants
• Missing or flawed records
• Ownership by another party
• Incorrect signatures, forgery and fraud
• Encumbrances and judgements against the property
There are two separate policies: one for the owner and one for the lender.

All lenders require the borrower to purchase a loan policy.

Since most real estate transactions involve a mortgage, title insurance is effectively required.
Why do you need to buy two separate policies to cover the same property?

The policies are extremely similar, but not identical.

There are cases that would only be covered by one policy and not the other.
In some ways, title insurance is cheap. Pricing is regulated by each state and in Texas it would cost

• $1,720 on a $270,000 home

• ~$40,000 on a $10M apartment building

That's only ~0.5% of the purchase price.

If pricing were tight, you wouldn't expect these facts to be true

• Only ~5% of premiums collected are paid out in claims. In contrast, GEICO pays out ~75%.

• The title agent receives 70 - 85% of the premium as commission.

For an insurance company to pay out such a small percentage of premiums (the "loss ratio") means that

• premiums are high; and/or
• claims are rare

Insiders will say claims are rare because of the work they do upfront to mitigate risk. That's definitely part of the story.
Title policies last forever, so the title agent performs preventative and curative work that minimizes future losses.

Many issues are handled behind-the-scenes by the title company.

Others result in exclusions to coverage.

In the worst case, the policy will not written.
Title insurance is not alone in its emphasis of inspection and diligence on the front end.

Yet its loss ratio is far lower than its peers. For example, boiler insurance has a loss ratio of 40-50%.

So it doesn't add up that diligence alone accounts for the low loss ratio.
What about pricing?

The title industry is an oligopoly, with four companies controlling 80% of the market.

In economics, oligopolies are known for price-fixing. Indeed, prices are fixed by the state insurance commissioners.

Yet who influences the insurance commission?
A lot is made of the fact that title insurance is a one-time purchase that lasts forever.

But that's not quite true.

Every time property is bought and sold, the title company issues a new owner policy and collects more premium.

Plus, their risk on the old policy is eliminated.
When a loan is refinanced, a new loan policy is issued.

Even with a reissue discount of ~50%, it's still a bonanza for title insurers. There's almost no incremental risk.

Falling interest rate environment => more refinance activity => windfall title insurance profits
What about high title agent commissions?

The industry explanation is that the agent does most of the work and takes most of the risk.

There is truth to this.

The title agent does the legwork and assumes liability for claims due to their own errors and omissions.
One thing is for sure: there's a lot of money in title insurance.

Technology has brought down the underwriting cost considerably, and will consider to do so.

One day, those savings will be passed onto consumers ...

If you're working on this, get in touch with me!
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More from @evanmr

3 Feb
Real Estate Title & Deeds 101

Read on for the truth about how property ownership actually works, why our current system is a mess, and what the next generation will look like Image
First, some real estate definitions

"Title” refers to the ownership rights of a piece of property.

A “deed” is a document that transfers ownership from one party to another, which can provide evidence of title.

Confusingly, "title" is often used to mean "deed".
The most important issue in title is: how do you definitely know who holds it?

For some historical background, check out this thread to see how our system originated in English feudal times and how ownership was recorded in the Domesday Book.

Read 10 tweets
2 Feb
THREAD: A brief history land ownership and taxes

Our legal principles of ownership derive from English common law, dating back to feudal times.

It's fascinating history and important background to understand title issues. 👇 Image
1) After the Norman Conquest, William the Conquerer declared that all land belonged to the king.

He gave his supporters, who became barons, ownership over vast parcels of land (a fiefdom). In return, they provided knights for military service in proportion to their holdings. Image
2) There were two ways for a baron to provide knights:

a) use the money earned from the land to hire mercenaries

b) carve out of their land a smaller fiefdom, known as a manor, to a knight in exchange for service

In this way, a feudal hierarchy was established.
Read 8 tweets
26 Jan
Commercial Real Estate Money Reveal

Few people know just how much money flows through our ecosystem. Time to change that.

Follow me behind the scenes of a $10M apartment sale.

You won’t believe the number of parties involved or how much they earn.

Take the red pill 👇👇👇
1) Listing brokers represent the seller and market the property to find a buyer.

Compensation is ~2% of sales price, with a bonus for exceeding the target sales price.

They can also represent the buyer to earn even more.

Comp: $200 - 250k
2) Buyer's agents are less common in commercial deals because

➡️ the buyers are more sophisticated
➡️ unlike the residential world, commercial brokers tend not to share fees

They can make 0.5 - 2%

Comp: $50 - 200k
Read 34 tweets
26 Jan
1) A lot of people are seeking advice on how to scale up from a 4-unit.

Brokers with bigger properties aren't giving them the time of day.

I've been there. You need a credibility package.
2) Understand where the other side is coming from.

Brokers are bogged down by unqualified tire kickers. Until you can show otherwise, you are in this bucket.

Your 4-unit experience is considered residential and doesn't transfer over to 5+ commercial.
3) Your credibility package addresses each concern point by point.

✅ Introduce yourself and declare that it's not just about one transaction.

"I'm Evan, I own 4 units and I'm looking to partner a broker like yourself who can help me grow my portfolio."
Read 8 tweets

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