How Do Title Binders or Hold Open Policies Work for Investors?

What is a Hold Open or Binder Policy?

A hold open or binder policy is a discounted title product generally aimed at real estate investors and/or fix and flippers. It is not a title insurance policy, but rather a commitment to issue a title insurance policy when an investor sells a flipped property within a certain amount of time (generally 12-24 months). The binder shields investors, who don’t plan to hold property for the long term, from incurring the full amount of closing costs.   

Buyer State Vs. Seller State

Hold opens or “interim binders” are generally only used in states where it is customary for the seller to pay for the buyer’s title insurance policy. For example, when an investor purchases a property, the seller pays for their owner’s title insurance policy. Instead of accepting that title policy, the investor can pay for a title binder to “hold open” that policy for 1-2 years, and then eventually pass that policy through to their end buyer.  

There wouldn’t be any significant benefit to purchasing a binder in a state where the buyer pays for their own title insurance costs, such as Pennsylvania or Maryland. In this instance, the investor would be responsible for paying their own closing costs when they purchase the property, and their eventual buyer would pay for their own closing costs––eliminating the discount mechanism of a binder. 

Why Should I Use a Hold Open Policy?

The fee for a “hold open” is generally anywhere from 10%-25% of the original title insurance premium. Then when you sell the property to a buyer, you only pay the difference in price on the new premium vs. the old one. 

For example, if you buy a property in Phoenix AZ with Spruce for $100,000, the owner’s title insurance premium would be $1622 (paid by the person who sold you the property), and you would pay the 10% binder fee of $162. Then, when you go to sell the property for $150,000, the owner’s title insurance premium would be $1855. So, you’d be responsible for paying the difference between the two policies at $233. Your all in costs would be $395 vs. $1855

If you’re buying properties at scale, it’s easy to see how a hold open policy can have significant effects on your bottom line. 

When Can I use a Hold Open or Binder Policy?

Hold opens can only be used when the property being sold is in the same condition as when you purchased it. For example, if you purchased a multi-family investment such as a duplex, you must sell both units together for the hold open policy to apply. Similarly, if you buy a large tract of land and then subdivide it into separate parcels to sell, a hold open policy would not be applicable, since the condition of the property has changed. 

Important Things to Remember with Hold Opens

  • Binders or hold open policies are not a form of title insurance. They are a commitment to issue title insurance to your eventual buyer based on the title search performed when the property was purchased. 
  • Meaning, if a title claim comes up in the future and it happened during the time you held the binder, you would not be covered under an owner’s title insurance policy. 
  • Any newly recorded encumbrances and liens between issuing the title binder and the final policy to the final buyer would require clearance.
  • Your buyer must use the same title company that issued the binder. Hold opens are not transferable to another title company.
  • It’s a good idea to communicate that you have the binder to your listing agent, so they can let your prospective buyer know that they’ll need to use the same title company. 
  • Title binders can only be used for purchases, not refinance transactions.
  • Title binders only apply to owner’s title insurance. If you finance the purchase of the property, you will still need to pay for lender’s title insurance.

For more title industry insights, continue exploring the Spruce Blog or check out our FAQs.

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