Last year, Americans took out about 7 million mortgages — either to refinance an existing mortgage or to buy a new home. For each one, the lender required the borrower to buy a title insurance policy.
Title insurance does an important job: it protects property rights of real estate owners and lenders. But unlike other forms of insurance you buy, fewer than 5% of premiums end up being paid out in claims.
Why? Because a lot of the cost goes into making sure no claims will arise in the first place. This makes sense, because if you were to suddenly discover that someone else actually owned the home you thought you owned, a lengthy claims process followed by a payout would feel like small consolation.
The work that goes into establishing that certainty costs money, so you would expect some of the premiums to go towards that. However, that’s not all that is going on — title companies are far less efficient than they could be at doing that work. The research, processing, escrow and closing that comprise a title company’s role in ensuring and insuring that a real estate transaction is legally effective are often extremely manual, paper based processes. That means they’re more costly than they need to be, more error prone, subject to increasing amounts of fraud, and provide a slower and more opaque process for borrowers than might otherwise be possible.
Why haven’t these companies kept up with the times, and applied modern technology to their operations? Lack of incentive, of course.
Demand is guaranteed — mortgage companies require you to buy a policy, and realtors and lenders often direct you to one specific title insurance agent that would consider you a ‘captive customer’, leaving you open to the possibility of paying more than you should for what could be a worse experience than you deserve. As the California Dept. of Insurance put it:
“expenses are inflated as title insurers compete for the producers of title business — the real estate agents, mortgage brokers and lenders and others involved in real estate settlements.”
In other words, these are their real customers, even though you pay the expenses and deal with the often opaque experience.
These sometimes “inflated” expenses result in around $15 billion in annual premiums, most of which are retained by the title agents, along with an estimated $5 billion or so in extra fees charged for closing and escrow services. In fact, fees to the title company are normally the single largest closing cost when buying or refinancing a home.
In our previous roles working at Betterment, my co-founder and I saw first hand the power of thoughtfully applying technology with a customer-centric focus onto true domain expertise. The result was a generational improvement in access and experience, which left the entire industry playing catchup.
And after hearing of countless frustrating experiences from the mires of real estate transactions, we saw a great need to apply those same principles, knowing that doing so could have a big effect. We’re working with the best in the industry to create a new kind of title and closing service. We are combining cutting edge software with real estate and insurance expertise. But even more importantly, we are aligning our offering around individual homeowners, putting their interests first.
Today, when you — the borrower — use Spruce for your title insurance, you’ll have access to our digital closing experience. This means you will save money by avoiding the ‘junk fees’ often added by title agents and you’ll have an assigned expert to help quarterback when needed. We’ll never ask you to sign a document you haven’t had a chance to review or pay a closing cost you don’t completely understand and agree to.
We are excited to be doing business, but this is day one of our mission. Over the coming months and years we will be working tirelessly to build on this foundation in order to enable real estate transactions that are truly fast, frictionless, transparent, and secure.
Of course, these transactions involve multiple parties working together so you’ll be seeing us partner with the best lenders and real estate companies — those who share a similar customer-first mindset. (If you want to work with Spruce, drop me a line at email@example.com)
Today we operate in 11 states — growing next month to 24, and we hope by the end of the year to be available across the country. If you’re refinancing or buying a home and want an ally in the process, please reach out and get a quote. Or, if you’re interested in helping us on our mission, get in touch or view our open roles.
This post was first published on Medium.