Surviving and Thriving in the New Boundary Reality

The evolving role of boundary due diligence in a title insurance-backed real estate transaction.

 Chris Kamarianakis

Executive Director, Protect Your Boundaries Inc.

May 31, 2017

Last month I was invited to speak at Realtor Quest, the Toronto Real Estate Board’s annual two-day trade show and education event for their 45,000 member agents.  The seminar was titled “Surviving the New Boundary Reality: 5 simple steps to protect your client, your deal and your reputation”.

In isolation this may not be of much interest to the surveying community.  However, we see it as yet another piece of evidence that boundaries are making a comeback in the Ontario real estate transaction.

The Ontario real estate juggernaut … that we’re not part of

Boundaries (or rather the true extent of title) have been all but neglected in the real estate transaction for the better part of 20 years since title insurance made its debut in Ontario and kicked the Surveyor’s Real Property Report (SRPR) to the curb.

In 2016 there were 243,400 residential property re-sales in Ontario (Globe and Mail, Jan 16th, 2017).  It’s doubtful that more than a handful of these transactions were completed conditional upon a new survey.  In Toronto the norm became fierce bidding wars, 24-hour offer periods, no conditions, and sale prices of 20%, sometimes 30% over asking. Scarcity of inventory, fuelled by the perception of foreign investors using Toronto as a safe place to park their wealth created a frenzied bidding environment more akin to a Black Friday stampede at Walmart than well thought out financial investments.

The ripple effects are now being felt outside of the GTA. Cambridge, Kitchener, Guelph, Hamilton, Barrie, Georgina, Peterborough and Bowmanville are all seeing unprecedented spikes in property prices as the aptly named “Toronto refugees” – Greater Torontonians in their 30’s and 40’s desperate to buy – move out of the GTA and accept a longer commute or even a job change in exchange for detached homes they can afford.

More risk? Not for the lenders

Facilitating this phenomenon is a system that enables a real estate transaction to be completed in record time, and with few checks and balances to protect the buyer and seller from transacting a “boundary lemon”.  That’s not to say that all the players in the deal are exposed.  Far from it.  Lenders have their interests protected and insured better than ever. Lawyers do too but to a slightly lesser extent.  It’s the homebuyer, home seller and real estate agent to whom risks appear to have inadvertently accrued.  At the centre of this system is title insurance.

Title insurance… don’t look now, you might see something you don’t like

I am a big proponent of title insurance.  In fact I would argue that it’s the best value insurance product one can buy.  For a one-time premium that averages $400 a homeowner is protected for the life of their ownership against defects in title, fraud, un-permitted or un-certified construction, and “some of what may appear on a new survey”, provided that the buyer and their representatives had no prior knowledge of the defect prior to closing.

It’s a fantastic product, but it’s in that last statement that the challenge lies.  The impact of the prior knowledge exclusion has resulted in a dangerous leap from “we’ll insure you against defects that you had no knowledge of when you bought” to “turn a blind eye to anything materially wrong in order to protect your insurance policy”.

The first statement is a promise of intent.  The second is a promotion of willful blindness, and it’s this that has defined the informal rules of the game for 20 years.

To understand how this came about and its true implications requires a deeper examination of title insurance.

Goodbye lawyer’s opinion; hello insurance policy

Title insurance exists principally as a vehicle to reduce lenders’ risks and costs in evaluating, issuing and holding mortgages.

Traditionally the lender relied on the lawyer to provide an opinion on a property’s title, a process that took several days if not weeks.  This was a check and balance demanded by the lender to satisfy, among other things, that the property was free of title defects and encumbrances that may diminish its appraised value.

Crucially this process had an added benefit:  each time a property changed hands we had a built-in mechanism for updated boundary due diligence.  A new survey was required (or an existing one with a statutory declaration that there had been no changes) along with an extensive title and off-title search to scour for title defects, unpaid property taxes, uncertified construction, permit violations, etc.  Buyers knew where the boundaries were and what, if any, issues they were inheriting.

Then as now the system ensured that the lender was protected. However, the system’s reliance on the lawyer’s opinion (which included a survey) had an exploitable weakness; it took time and was expensive.

Enter title insurance with a very simple value proposition:  replace the bulk of the lawyer’s opinion with an insurance policy that compensates for damages resulting from a property’s title and off-title defects carried into the transaction and subsequently exposed.  These defects are no longer identified before the sale closes because the lawyer is no longer required to look for them.

Overnight, buyers went from knowing the possible issues with a property before buying, to being told not to care about them because title insurance would cover them.

This works well for the lender because it all but eliminates their reliance on the lawyer’s opinion. Their risks are now covered by an insurance policy, which the lender requires the buyer to purchase.

Winners, losers and the 4-minute process

Hardest hit were not the surveyors as we often lament, but the lawyers.  Admittedly surveyors lost a large chunk of their market overnight, but at least the sanctity of the OLS opinion stayed intact.  Real estate lawyers weren’t so lucky.  They went from being a central part of the transaction, their legal opinion on title pivotal, to (some might argue) insurance sales people and legal document managers.

Today four of the five title insurance companies operating in Ontario compete for a lawyer’s business based on how quickly their title insurance policy can be completed and approved.  First Canadian Title and Chicago Title (both US companies) promote a sub-4 minute process as their key selling feature.

Furthermore, the forms that are completed online are crunched through complex risk assessment and title check algorithms that spit back automated approvals almost instantaneously.

TitlePLUSTM, the Law Society’s title insurance product (and the only Canadian one at that) has steadfastly resisted the slide towards the fully automated transaction.  They require lawyers to do some title search work as part of the title insurance application process in order to offset some of the risks inherent on relying solely on an insurance product.  However, after 20 years in the business their modest market share is likely an indicator that for the majority of real estate lawyers the ship has sailed on any appetite for up-front due diligence.

That’s not to say all real estate lawyers have moved in this direction.  There are some who believe replacing the lawyer’s (up front) due diligence and opinion with (after the fact) title insurance coverage is a deterioration of standards that is not in their clients’ best interest, and will not work on a file unless the client is willing to accept the additional cost of a “full service” opinion along with a title insurance policy.

It’s not a product, it’s an industry re-engineered

When we grasp that title insurance isn’t just a product, but a part of a re-engineered mortgage approval process, we begin to understand how the early stages of the buying lifecycle – agents helping buyers decide on properties that meet their needs – have been affected.

Lenders care about growing their business and protecting their profits by managing the risk of bad debt. Title insurance provided a cheaper, faster way of achieving this outcome.

Real estate lawyers reacted by changing their business model. Many now work on volume, processing as many fixed-fee, “clean” deals as possible.   Exceptions are the enemy in this business model.  Driven by the market, lawyers engaged in a race to the bottom on price, and anything that requires them to touch the file more than absolutely necessary eats into their slim profit margins. Many have reengineered their process to discourage any and all “distractions”.

Yes, we represent a distraction

One of the most prevalent “distractions” is pre-bid boundary due diligence.  The message that buyers and their agents receive from most lawyers is to avoid pre-bid due diligence because anything they discover may be constituted as prior knowledge and could be excluded from coverage if they do go ahead with the purchase.

What they are really saying is “Don’t bring me distractions or exceptions…I’m on a fixed fee and tight margins.”  Efficiency and volume is the name of the game. Lawyers and lenders are not discouraging boundary due diligence because it’s in the buyer’s and seller’s best interest, but rather to protect a business model that hinges largely on clean title insurance applications.

Buyers and their agents aren’t blameless.  They enable this by opting for the cheapest version of something they don’t fully understand.

It is this behavioural cycle that caused the boundary baby to get thrown out with the legal opinion bathwater. Not just new surveys, but any kind of boundary due diligence has been erased from the real estate transaction in the name of protecting the title insurance policy.

Until recently…

The 49%

In 2014 Protect Your Boundaries and Krcmar Surveyors conducted a study to answer one simple question:  what percentage of residential properties have one or more hidden boundary issues?

The result was astonishing:  49%.  (http://www.protectyourboundaries.ca/press/PYB-2014-09-16.pdf).

While we cannot definitively point to title insurance as the smoking gun, we have to wonder whether the abandonment of surveys and boundary due diligence in the real estate transaction was partially to blame.  If it is then we’re seeing a cause and effect of epic proportions, and a serious dose of vindication for what we as an industry stand for.

Trending now … boundaries??

Most of us agree that, absent of a legislative change, the days of a new survey being commissioned as part of the real estate transaction are behind us.  The lending industry that uses title insurance, technology, algorithms, big data and cloud-based computing to increase their profitability isn’t going anywhere.

Critically, there is no place in that 4-minute process for a service that takes three weeks.

However, there is a growing cohort of real estate lawyers who recognize that their clients are not always best served by no pre-close boundary due diligence.  For those who cannot afford to buy into a boundary dispute or risk a failed title insurance claim, pre-close boundary due diligence is often more prudent than turning a blind eye and hoping the title insurance safety net will catch them.

Increasingly it’s the reputational risk of promoting willful blindness that is fuelling a trend for real estate lawyers to distinguish (and protect) themselves with value added due diligence services which the client can choose from to augment the base offering.  Boundary due diligence is one such service.

Between a rock and a hard place… is the real estate agent?

Entrusted by their emotionally charged clients with the responsibility of finding the “dream house”, the real estate agent is caught on the horns of a dilemma.   Do they encourage the pre-bid boundary due diligence they know will serve their client best? Or do they bend to the pressure to turn a blind eye – pressure exerted on them by the lawyer whose business model favours a clean, no-questions-asked deal to process?

Too often it’s the latter, and when a client’s intended use of land falls prey to a defect not resolved by title insurance, the blowback on the unsuspecting agent can be devastating.

We often ask agents, “Would you buy a used car from Kijiji based on the pictures in the ad alone?”  The answer is always a resounding “No”.  But in so many ways that’s exactly the behaviour they are complicit in when they encourage wilful blindness to their clients.

Once again we see an increase of awareness in reputational risk.

The New Boundary Reality, and a new hope

It is here that we see the opportunity for the land survey industry to reassert itself:  title insurance, a hot and inflated market, a legal process that encourages willful blindness to protect lender profits not customers, and widespread boundary issues have created a “New Boundary Reality” where boundary awareness and due diligence is becoming important again.

We believe the opportunity exists now for our industry to become relevant in the residential real estate transaction again, but in a non-traditional way.  If we want “in” we have to reinvent ourselves and answer the question: “how can we add value to the current process?”

To do this effectively we have to evolve from being single mindedly survey-centric to positioning ourselves as experts in boundary intelligence and identifying and treating boundary risks.

We have to move from our position of “it’s a $2000 survey in 3 weeks or nothing at all”, to “how do we take our domain expertise and create products and services that reduce risk and costs for the stakeholders in the current process?”

We have to also look at how the lawyer’s opinion was traded away in return for a continued role in the process, and ask, “How do we maintain the role of the OLS as the protector of the public interest AND insert value into the real estate process?”

One of the most potent tools is education.  Real estate agents are working off the script provided by lenders and title insurance companies.   We can only change a market by introducing new perspectives and arguments, challenge the status quo and rewrite the script that helps put them and their client in the driver’s seat.

We believe that agents are ripe for empowerment.  The real estate lawyer has long abdicated responsibility for being the buyer’s safety net (although that trend is showing signs of reversing), and no one has filled the vacuum.

We believe that land surveyors can fill that vacuum working with agents as our partners and proxy.  Agents, with our help, have an opportunity to take ownership of that space, and in doing so give further justification to the fees they charge.

Arguably the single greatest risk to buying a property today is a boundary-related issue.  Of the 49% of properties in the GTA that have boundary issues, we found that 85% are expressly excluded from title insurance coverage (e.g. fence and boundary wall encroachments), heightening the reputational risk to lawyers and agents.

This is a powerful counter to the willful blindness doctrine that has persisted for 20 years.

Where to next?

Building products, services, processes and education that support the real estate agent, who is taking ownership of pre-bid due diligence, may be a great place to start – we at Protect Your Boundaries are having great success with that strategy.

Making existing survey plans available for purchase online is another, and allows surveyors to capitalize on their digital assets in a market that they are not currently active in.

Finding ways to help lenders and title insurance companies further increase their speed and efficiency is another, with data, insights and expertise.

Who knows?  If the prevalence of boundary issues continues to rise there may come a time when the title insurance company’s interests are best served by some pre-bid boundary due diligence.  For that we need to be ready with a new mindset, new tools and a new script.

For now we have to realize that the game on the real estate playground has changed and we’re not getting anywhere sitting on the sideline sulking because we’re not getting picked.

If we evolve, reinvent ourselves, we stand a chance of getting back in the game WITH title insurance, not against or instead of it, and once again assert our profession as the voice of reason and sanity in an industry in desperate need of it.

The views expressed in this article are solely those of the author and do not necessarily reflect or represent the position of the AOLS.

Chris Kamarianakis is the Executive Director of Protect Your Boundaries Inc., an Ontario land survey firm and host to the largest online database of land survey plans.  Chris is a proponent of balance between title insurance and up-front due diligence, and is a relentless advocate for the role of surveying in the real estate transaction.  Chris can be reached at chris@protectyourboundaries.ca