Exercise Caution if Exchanging with a Title Company

All States 1031 has been involved in countless exchanges over the past few years. Many of the real estate closings have been conducted by competent, professional employees of major title companies. As the real estate market has cooled, however, some of these title companies have aggressively stepped-up their efforts to capture 1031 exchanges, often at the expense of the exchange client.

One scheme being used involves the solicitation of one or both parties to a real estate transaction being closed by the title company. Traditionally, the title company would prepare the necessary closing documents, collect and distribute funds, perform a final title rundown and record the deed and related documents. The current gambit, however, has employees of the closing department of the title company passing the personal information of the buyer and seller to the employees of the 1031 department of the title company. The 1031 sales representative calls to solicit both parties urging them to use the Title Company’s 1031 services. Along with the obvious questions regarding the use of confidential information, this scheme can also potentially confuse a less sophisticated client since the sales representative will be armed with enough information from the closing department to create the impression that the sales representative is knowledgeable in 1031 exchanges. This is not always the case.

Another ploy utilized by title companies involves interest. The title company sales representative informs the prospect that he or she will receive an above market rate of interest on the exchange funds, and that the prospect will keep all the interest earned. In order to earn the higher rate of return, most title companies commingle their funds and invest in more aggressive income producing assets including corporate bonds. The higher risk investments will produce a greater return than a money market account, but most exchangers prefer the security of segregated, cash accounts. Also, it has been our experience that the promise of keeping all the interest is capped at one month (per the exchange agreement), so any potential client should confirm the same.

In conclusion, title companies are aggressively pursuing new 1031 clients and are using questionable tactics to obtain the clients. If you or your clients are considering a title company as a qualified intermediary, make sure that they are knowledgeable, that the funds will be invested wisely and that any purported rate of return lasts the entire length of the exchange.