With so many elements of risk within the commercial real estate industry, it is a smart idea to protect yourself and your assets whenever possible. Risk can be found from the beginning of the deal process to the end. With so many chances for mishaps and information, and the constant need to triple verify every fact surrounding a property, the city and funding, the more you can protect yourself the better.
Commercial real estate is ‘buyer beware’ so the purchaser is ultimately responsible for all facts going into buying a property. Escrow companies, title companies, and lawyers can all play a vital role in your success. The escrow process is extremely important.
Escrows are simply an arrangement where a third party holds the necessary documents, funds, or other properties to be transferred between two parties. The third party does not transfer anything until they are instructed to do so by each party and they have the necessary documentation stating that each party is in agreement with terms and everything is set for escrow to be closed- or the properties transferred from one party to the other.
In a commercial real estate transaction, the third party can hold documents from the buyer, the seller, and funds from the commercial lender. When the parties are in agreement, the escrow agents simply make sure that all items are distributed properly and into the correct hands. This saves the buyer, seller or lender from having to worry that one of the parties will not transfer the funds or other documents. Every party is protected because the proper forms are in the hands of the escrow agents with no personal investment in the deal. Every party can count on receiving the properties that were previously agreed upon in the contract.
If there is no escrow, there is room for a dishonest buyer or seller to either not transfer the proper documents or funds and get away or have some excuse as to why he or she is not delivering what was promised on the previous contract. Or perhaps they could show an overlooked conditional clause that allows them to alter from the stated claim and agreement.
Escrows can be companies within themselves, lawyers or title companies. Some investor have companies or people that they work with all the time, and they insist on using those people or companies because they know they have no personal interest in the deals. There can be fraud that occurs where an escrow company or agent secretly has interest in the deal and can play the deal in the person’s favor- with the buyer or the seller, whomever they are working with.
Always be sure to check the references of the escrow company or agent before agreeing upon a third party. For those people who will only use their company, make sure the company is reputable before conducting business.
Title companies are companies that specialize in researching public records to determine the status of a title to a specific property. The purchaser must find out if there are any liens or encumbrances on the property before purchase so the matter can be resolved before purchase by the seller.
Entire reports can be made regarding title of real property transactions which is used to issue title insurance. A title report is pulled at the beginning of escrow so the buyer can see the full status of the title of the property. This first or preliminary report then becomes a final report when title insurance has been issued. Title insurance protects the buyer from wrong information. The title company does not guarantee or otherwise have a law that surrounds the fact that their information on the title report was not accurate.
Title insurance is not necessary. The parties may choose to forego the insurance (which it is customary for the seller to pay) and incur the risk of the transfer of the property. This is not recommended for those who do not know each other well or have full trust in all parties involved.
Lawyers can also act as escrow agents, performing the same duties as an escrow company can. Again, it is imperative that you believe that this third party is acting with no personal interest.
With so many chances for problems to erupt, you can bet that they will. It is not a matter of if they will; it is a matter of when and how big the problem is going to be. The more you are aware of this issue, the better you can prevent anything from seriously threatening your commercial real estate investment endeavors and assets.
