Title Insurance & Escrow in California: What Sellers Need to Know

When selling a property in California, particularly in competitive markets like the Bay Area, understanding title insurance and escrow is essential to ensure a smooth and legally sound transaction. These processes protect both sellers and buyers by verifying property ownership, resolving title issues, and managing funds during the sale. For sellers, proper handling of title insurance and escrow minimizes legal risks, ensures compliance with California law, and facilitates a successful closing. This guide explains what sellers need to know about title insurance and escrow in California, with a focus on state-specific requirements and Bay Area considerations.

What is Title Insurance?

Title insurance is a policy that protects against financial losses arising from defects in a property’s title, such as liens, encumbrances, or ownership disputes. Unlike other insurance types, title insurance covers issues that occurred before the policy is issued, ensuring the buyer (and their lender) receives a clear title. In California, title insurance is a standard part of real estate transactions, and sellers play a key role in facilitating this process.

Why Title Insurance Matters for Sellers

  • Clears Title Issues: Sellers must provide a clear title to complete the sale. Title insurance identifies and resolves issues like unpaid liens or disputed ownership before closing.
  • Builds Buyer Confidence: A clean title backed by insurance reassures buyers and lenders, making the property more marketable.
  • Reduces Legal Risks: Addressing title defects upfront prevents post-sale lawsuits from buyers claiming undisclosed issues.

Types of Title Insurance

  • Owner’s Policy: Protects the buyer from title defects, such as undisclosed heirs or fraudulent deeds. In California, sellers typically pay for the owner’s policy as part of closing costs (per custom, though negotiable).
  • Lender’s Policy: Protects the buyer’s lender against title issues. Buyers usually pay for this, but sellers should ensure it’s issued to avoid financing delays.

What is Escrow?

Escrow is a neutral third-party process used in California to manage the transfer of funds, documents, and property during a real estate sale. An escrow agent (often a title company or independent escrow company) holds funds and documents until all conditions of the sale are met, ensuring a secure and fair transaction.

Why Escrow Matters for Sellers

  • Secure Fund Handling: Escrow ensures the buyer’s funds (e.g., deposit, purchase price) are safely held until the seller fulfills all obligations, such as clearing the title.
  • Compliance with California Law: Escrow agents coordinate disclosures, title transfers, and other legal requirements, reducing the seller’s administrative burden.
  • Smooth Closing: Escrow facilitates timely document signing, fund disbursement, and deed recording, ensuring a seamless transfer of ownership.

California-Specific Requirements

California’s real estate laws and customs shape how title insurance and escrow are handled:

  • Title Insurance Costs: In California, it’s customary (but not legally required) for sellers to pay for the owner’s title insurance policy, while buyers pay for the lender’s policy. Costs vary by county and sale price, typically ranging from $1,000 to $5,000 for a $1 million property in the Bay Area.
  • Escrow Fees: California custom splits escrow fees equally between buyer and seller, though this is negotiable. Fees depend on the sale price (e.g., $500–$2,000 for a typical Bay Area home).
  • Preliminary Title Report: Before listing, sellers should obtain a preliminary title report from a title company to identify any liens, easements, or encumbrances that must be resolved.
  • Required Disclosures: Sellers must provide disclosures like the Transfer Disclosure Statement (TDS) and Natural Hazard Disclosure (NHD), which the escrow agent coordinates for delivery to the buyer.
  • Proposition 13 Reassessment: A sale triggers a property tax reassessment based on the purchase price, which the escrow agent reports to the county assessor via a Preliminary Change of Ownership Report (PCOR).

Key Steps in the Title Insurance and Escrow Process for Sellers

1. Obtain a Preliminary Title Report

  • Purpose: The title company issues a preliminary title report to confirm the seller’s ownership and identify any issues, such as:
    • Liens (e.g., unpaid mortgages, tax liens, mechanic’s liens).
    • Easements or encumbrances affecting property use.
    • Ownership disputes (e.g., undisclosed heirs or co-owners).
  • Seller’s Role: Review the report and work with the title company to resolve issues, such as paying off liens or obtaining quit claim deeds to clear title disputes.
  • Bay Area Consideration: In high-value markets, title issues (e.g., old liens from prior owners) are common due to long ownership histories. Address these early to avoid delays.

Action Step: Engage a reputable title company to provide a preliminary title report before listing the property.

2. Address Title Issues

  • Clear Liens: Pay off outstanding mortgages, tax liens, or other encumbrances before closing, or arrange for them to be paid from sale proceeds.
  • Resolve Disputes: If the title report reveals co-owners or heirs, obtain legal documentation (e.g., quit claim deeds) to clarify ownership.
  • Entity Ownership: For properties owned by an LLC, corporation, or trust, provide documentation (e.g., operating agreement, corporate resolution) proving authority to sell.

Action Step: Consult a real estate attorney to resolve complex title issues, especially for tenanted or entity-owned properties.

3. Open Escrow

  • Select an Escrow Agent: Choose a title company or independent escrow company, often recommended by your real estate agent. In the Bay Area, title companies like First American or Old Republic commonly handle escrow.
  • Deposit Documents and Funds: The seller provides the signed purchase agreement, disclosures (e.g., TDS, NHD), and any tenant-related documents. The buyer deposits earnest money into escrow.
  • Escrow Instructions: The escrow agent issues instructions outlining each party’s obligations, such as delivering a clear title or completing inspections.

Bay Area Consideration: Escrow periods in the Bay Area are typically 30–45 days but can be shorter for all-cash sales common among tech investors.

4. Provide Required Disclosures

  • Mandatory Disclosures: Deliver the TDS, NHD, lead-based paint disclosure (for pre-1978 homes), and tenant-related disclosures (e.g., lease terms, rent control status) to the escrow agent for the buyer.
  • Tenant Protections: For tenanted properties, comply with the California Tenant Protection Act (AB 1482) and local rent control ordinances (e.g., San Francisco, Oakland), disclosing lease details and any buyout agreements.
  • HOA Documents: For condos or HOA properties, provide bylaws, CC&Rs, and financial statements to escrow.

Action Step: Work with your real estate agent to ensure all disclosures are complete and delivered to escrow on time.

5. Facilitate Buyer Due Diligence

  • Inspections and Appraisals: Allow buyer-requested inspections (e.g., general, pest, environmental) and appraisals, coordinating access for tenanted properties (24 hours’ written notice, per California Civil Code Section 1954).
  • Title Review: The buyer’s title company will confirm the title is clear. Be prepared to address any issues raised during their review.
  • Contingency Removal: Buyers typically have 17–21 days to remove contingencies (e.g., inspection, financing). Ensure the property is in the agreed condition to avoid disputes.

6. Close Escrow

  • Sign Documents: Sign the grant deed, escrow instructions, and other closing documents to transfer title.
  • Pay Off Obligations: The escrow agent uses sale proceeds to pay off mortgages, liens, property taxes, and seller-paid closing costs (e.g., title insurance, escrow fees).
  • Record the Deed: The title company records the deed with the county recorder (e.g., San Francisco or Santa Clara County), officially transferring ownership.
  • Disburse Funds: After recording, the escrow agent releases the remaining proceeds to the seller.

Bay Area Consideration: High-value sales in the Bay Area often involve all-cash buyers or 1031 exchanges, requiring precise coordination to meet tight timelines.

Common Risks and How to Mitigate Them

  • Undisclosed Title Issues:
    • Risk: Liens or ownership disputes can delay or cancel the sale, leading to buyer lawsuits.
    • Mitigation: Obtain a preliminary title report early and resolve issues with the help of a title company or attorney.
  • Tenant Complications:
    • Risk: Non-compliant tenant notices or undisclosed rent control status can lead to tenant lawsuits or buyer disputes.
    • Mitigation: Disclose all tenant details and comply with AB 1482 and local ordinances (e.g., San Francisco’s Rent Ordinance Section 37.9E for buyouts).
  • Escrow Delays:
    • Risk: Missing documents, unpaid liens, or buyer financing issues can delay closing.
    • Mitigation: Provide all required documents promptly and ensure financial obligations are current.
  • Cost Disputes:
    • Risk: Disagreements over who pays title insurance or escrow fees can stall negotiations.
    • Mitigation: Clarify cost responsibilities in the purchase agreement, following California custom (seller pays owner’s title policy, fees split).

Bay Area-Specific Considerations

  • High Property Values: Bay Area homes often exceed $1 million, increasing title insurance costs and the stakes of title disputes.
  • Tenant Protections: Strict rent control and just-cause eviction laws (e.g., San Francisco, Oakland) require careful disclosure of tenant status to avoid legal challenges.
  • Fast-Paced Market: The Bay Area’s competitive market demands quick escrow timelines, especially for investor-driven or all-cash sales.
  • Seismic and Environmental Risks: Disclose earthquake and fire hazard zones, common in the Bay Area, and confirm compliance with seismic retrofit ordinances.

Work with Professionals

Navigating title insurance and escrow in California requires expertise:

  • Real Estate Agent: A Bay Area agent can recommend reputable title and escrow companies, coordinate disclosures, and manage tenant access.
  • Title Company: Verifies title, issues insurance, and handles escrow, ensuring a clear and secure transfer.
  • Real Estate Attorney: Reviews title issues, tenant agreements, and closing documents to ensure compliance with California law.
  • Tax Professional: Advises on capital gains taxes or 1031 exchanges, especially for investment properties.

Final Thoughts

Title insurance and escrow are critical components of selling a property in California, ensuring a clear title and secure fund transfer. For sellers in the Bay Area, where high property values and tenant protections add complexity, thorough preparation and professional guidance are essential. By obtaining a preliminary title report, addressing issues early, and complying with disclosure and tenant laws, sellers can minimize risks and achieve a smooth closing. Working with experienced professionals ensures a legally sound and efficient sale process.

Disclaimer: This article provides general information about title insurance and escrow in California and is not a substitute for professional legal or tax advice. California’s real estate laws are complex and vary by locality. Consult a licensed real estate attorney, tax professional, or real estate agent for personalized guidance on your specific situation.