Understanding Hold Opens in Real Estate Transactions
What exactly is a hold open in the realm of real estate, and how can it benefit those involved in property transactions? In the domain of title insurance, a hold open refers to an arrangement where the title company that provided insurance for the initial property sale agrees to extend coverage for another sale of the same property within a 24-month period, commonly known as a flip.
The Advantages of Utilizing a Hold Open
Opting for a hold open can yield financial advantages for the original purchaser. When the original purchaser anticipates a resale within two years, the title company can "hold open" the file for the future transaction at a significantly reduced cost compared to what the original purchaser would have paid, even with a discounted reissue rate in title insurance premiums.
The process unfolds as follows: the original seller pays the applicable title insurance premium for the initial sale to secure coverage for the original purchaser. Subsequently, the original purchaser pays only a small percentage of the premium charge to keep the file open for the future resale. Notably, no owner's policy is issued at this preliminary stage.
Upon the resale of the property, the original purchaser is required to pay the difference in premiums between the original purchase price and the resale price. An owner's policy is then issued exclusively to the final purchaser.
Conditions for Qualifying for a Hold Open
To be eligible for hold open status, certain conditions must be met:
1. A commitment to insure the final purchaser is issued after recording the initial conveyance to the original purchaser, replacing the need for a title insurance policy for the original purchaser.
2. Any adverse matters recorded or discovered by the title company during the hold open period must be resolved before the final policy is issued.
3. The property must be resold as the exact same entity outlined in both the original commitment to the original purchaser and the final policy to the final purchaser.
4. The original purchaser must acknowledge the requirement to sell the property within two years of the initial sale, or else the hold open charge will be forfeited, and the policy will be issued to the original purchaser.
5. Both transactions must be insured through the same title company; the final transaction cannot involve another title company.
Fluctuations in Property Value
The hold open charge is calculated based on the full value of the real estate or interest at the time of the initial sale. Additionally, there is an extra charge of 10-25% (depending on the underwriter) of the premium paid, based on the original purchase price.
Upon the resale within two years, the owner's policy is issued to the final purchaser without additional cost. In cases where the purchase price increases between the initial sale and the resale, an extra charge is applied based on the discrepancy in premiums for the two purchase prices.
It's crucial to note that charges and timelines can vary based on the underwriter, so it's advisable to reach out to your closer or account manager for specific information on fees and timing.
