The Risks of Hold Open Policies: Why Real Estate Investors Should Think Twice

As a real estate investor, you’re always looking for ways to maximize your returns and minimize costs. One strategy that might seem appealing at first glance is the hold open policy. While hold open policies can save you money, they come with significant risks that could cost you much more in the long run. This article will explain what hold open policies are, their potential pitfalls, and why they might not be the safest choice for real estate investors.

What is a Hold Open Policy?
A hold open policy is an endorsement added to an owner's title insurance policy at closing. This endorsement keeps the policy open until the property is resold, typically within a specified period. When the property is resold, the policy costs the difference in premium between the original sales price and the final sales price. The primary appeal of this policy is the cost savings on title insurance premiums when the property is flipped quickly.

The Risks of Hold Open Policies
While the cost savings of hold open policies can be tempting, it’s crucial to understand the inherent risks. The most significant risk is that the original purchaser does not have title insurance. This means that during the period the hold open policy is in effect, the buyer is not protected against title defects, liens, or other issues that could affect the property's ownership.

Potential Issues Without Title Insurance
Here are some examples of what could go wrong without title insurance:

• Undiscovered Liens: If there are undiscovered liens on the property, such as unpaid taxes or contractor liens, these could become your responsibility as the new owner. Without title insurance, you would have to pay these liens out of pocket.
• Ownership Disputes: If someone else claims ownership of the property, such as an heir or a previous owner, you could face costly legal battles to resolve the dispute. Title insurance typically covers legal expenses in these cases, but without it, you would bear the full cost.
• Forgery and Fraud: If the property’s title was forged or fraudulently conveyed at any point in its history, you could lose your investment entirely. Title insurance protects against such risks, but without it, you would have no recourse.
• Easements and Restrictions: Unrecorded easements or restrictions could limit how you use the property. For example, there could be a right of way that allows someone else to use part of your property, which could affect your plans for development or use.

Why a Hold Open Policy May Not Be the Safest Choice
Given these risks, a hold open policy may not be the best choice for every investor. The cost savings can be attractive, but the lack of coverage leaves you vulnerable to significant financial losses. Here are a few reasons why opting for full title insurance might be a safer bet:

• Peace of Mind: Full title insurance provides peace of mind, knowing that you are protected against most title-related issues. This can be particularly important if you are investing a substantial amount of money into a property.
• Financial Protection: The cost of dealing with title issues can far exceed the savings from a hold open policy. Title insurance protects your investment by covering these potential expenses.

Conclusion
While hold open policies can offer cost savings, they come with significant risks that could jeopardize your investment. For real estate investors, the peace of mind and financial protection provided by full title insurance often outweigh the initial savings of a hold open policy. Carefully consider your options and consult with a trusted title company to ensure you make the best decision for your investment strategy. Your future self will thank you for prioritizing security over short-term savings.