Commercial Title Search, Explained
You can never be too thorough when it comes to making a commercial real estate purchase. After all, you’re prepared to invest a huge amount of money, and you need to consider everything. The location matters. Taxes matter. The look of the property and the cost of upkeep matter. More than anything, the price matters.
If you aren’t comfortable with any of the above, chances are you’ll back away from the sale, or continue to negotiate.
And if the property checks off all your boxes, you still need to conduct a title search.
You may be familiar with title searches, especially if you’ve recently purchased a home. Commercial title searches are similar to residential title searches on the surface, as both seek to prove the ownership of the property. It’s a three-step process of sorts, with the search followed by a report and completed with insurance.
Commercial title searches are far more complex than residential title searches, however, because they involve companies and not individuals—there are far more documents to sort through. A commercial title search is an investigation that can make or break your real estate purchase.
Here’s what you need to know.
Why Is a Commercial Title Search Important?
A commercial title search is important for the same reason any purchase is important: You need to know exactly what you’re buying. When hundreds of thousands, and potentially, millions of dollars are involved, the stakes and risks are much higher. Uncovering the history of the property can assuage your concerns, or give you a leg up in negotiations if the search reveals title issues.
What Does a Commercial Title Search Entail?
A commercial title search looks for documents recorded against a property in the past and those that are active: mortgages, easements, liens, and more.
That’s a simple way to describe a complicated process. Commercial documents are indexed by name, not by address as in residential cases. Companies may have multiple documents for different properties and additional filings like employment and civil records.
If that company changed names or wasn’t consistent in filing its name, the search is more difficult: Just because you didn’t find a lien doesn’t mean it’s invalid.
You need a qualified title company that you can trust to be thorough. Otherwise, you’ll add unnecessary risk to your purchase.
What Does the Commercial Title Report Mean?
The title report offers the seller and buyer an opportunity to review the search.
In an extreme case, the search might reveal the seller doesn’t have a legal claim to the title at all, which would nullify the transaction. If other issues arise, the seller can dispute them by countering with their own title search.
For the buyer, the commercial title report can mean two things. First, if it says what you expect it to say, you can move on to title insurance and closing the deal. Second, if it reveals an issue, the report becomes an important piece for negotiations.
For example, there might be an old municipal violation still on title that will cost X amount to remedy. In turn, you’d ask to reduce the purchase price or have monies put into escrow for resolving the violation. If the issues were concerning enough, you could walk away from the deal completely.
Once buyer and seller sign off on the report, they can move on to title insurance.
What Role Does Title Insurance Play?
Title insurance effectively guarantees the results of the commercial title search and protects the involved parties going forward. It plays a vital role in title for that reason, and also because real estate transactions can grow complex, especially when there are large sums of money being exchanged.
Most policies cover boundary disputes, environmental impact concerns, and zoning conflicts, in addition to title defects. As in residential title insurance, there are two kinds of policies: lender’s and owner’s.
A lender’s policy protects the bank’s investment should a title issue arise in the future, while an owner’s policy protects the buyer.
The process of purchasing title insurance policies varies from place to place. It’s often factored into the closing costs, though.
The journey from a commercial title search to closing a real estate transaction can feel detail heavy and complicated, but you’ll be glad it is. After all, you’ll have enough concerns running a business. You don’t want title to be one of them.