Chapter 12 Escrow and Closings
What is the correct order for recording the closing of an escrow?
1. Deed of reconveyance - The deed of reconveyance is provided by the seller's lender (trustee) giving the seller ownership of the property. 2. Grant deed - The grant deed transfers title from the seller to the buyer. 3. Deed of Trust - The deed of trust transfers title from the buyer to the buyer's lender.
What are the typical steps to the escrow process?
Select the escrow company Send the purchase contract to the escrow holder Open the escrow Complete all items outlined in the escrow instructions Close the escrow
What is the difference in escrows between southern and northern CA?
South: buyers and sellers typically sign one set of escrow instructions at the time escrow is opened. North: it is customary for there to be two sets of escrow instructions. One set would be specific to the seller and signed only by the seller, and the other would be specific to the buyer and signed only by the buyer. The two separate escrow instructions would usually be signed at closing.
When does the escrow officially close?
After the deed has been recorded
What are some items payed in advance by the seller so the buyer will have to pay part of the payment?
An example of this could be property taxes. In California, property taxes are due November 1 of each year, and the tax year is from July 1 through June 30. Let's say the seller paid all the real estate taxes for the tax year on November 1 and the transaction will close on April 18. The buyer will owe the seller the portion of the taxes that applies from April 19 to June 30.
What is a chain of title?
It refers to the succession of property owners of record dating back to the original grant of title from the state to a private party.
Who can act as escrow agents without having a license?
Attorneys Banks Brokers Insurance companies Title companies Trust companies Savings and loan associations
Escrow companies must be licensed by who?
By the California Commissioner of Business Oversight
The purchase contract is often the basis for the escrow instructions. Which document is most used in CA?
CAR's Residential Purchase Agreement and Joint Escrow Instructions.
What are some of the licensee's duties in order for the closing of escrow to go as smoothly as possible?
Communicate with the client. Make sure the client knows what is happening every step of the way escrow process. Communicate with the other party's agent. A licensee needs to promote his or her client's interests, but everyone wants the sale to close. Make sure that the escrow instructions prepared by the escrow agent accurately reflect all of the terms of the purchase and sale agreement. Ensure contract deadlines, document requirements, and escrow funds are fulfilled.
What are some debits to the buyer (expenses they must pay)?
Contract sales price Mortgage recording fees Lender title insurance Appraisal fees Escrow fees Credit fees Survey Loan origination Attorney fees Homeowner's insurance Reserves deposited with the lender, such as insurance, taxes, assessments Inspection fees (if not already paid) Private Mortgage Insurance (PMI), if applicable Recording fees Prorations
What are the sellers credits?
Contract sales price Prorations
What is the Foreign Investment in Real Property Tax Act (FIRPTA)?
It prevents foreign investors from avoiding paying taxes on the sale of real property. If the seller is not a U.S. citizen or green card holder, the escrow agent must withhold 15% of the net proceeds of the sale and send it to the IRS within ten days of closing.
What are some items that are not included in a standard CLTA policy?
Defects known to the insured but not disclosed to the title insurer Easements, encumbrances, and liens not shown in the public record Rights or claims of persons in physical possession of the property Unrecorded claims that could be discovered by physical inspection or correct survey Taxes or assessments that are not yet liens Mining claims Reservations in patents Water rights Zoning ordinances
No title insurance policy protects against what?
Defects known to the insured but not disclosed to the title insurer Government zoning regulations
What are credits that a buyer has at closing (money they are receiving)?
Earnest money or deposit Loan amount Prorations
What are the sellers debits?
Existing loan payoff balance Broker commission Unpaid items due from the seller, such a home warranty for the buyer Title fees, such as for clearing the title Escrow fees Fees for preparing the deed Attorney fees
What does the CLTA usually cover?
Forgeries Acts of minors and incompetents Failure of delivery of a prior deed Federal estate tax liens Acts of an agent whose authority has terminated
What does RESPA prohibit?
It prohibits any payment or receiving of fees or kickbacks when a service has not been rendered. For example, an insurance company cannot pay a kickback to a real estate agent or to a lender for referring a client to their agency.
What are some other duties a licensee must do in order for the escrow to close?
If the licensee has the responsibility to order inspections, he or she should do so in a timely manner. If the responsibility belongs to someone else, the licensee should check on their completion and the delivery of the reports to the proper parties. Help the client through the process of approving or disproving the reports, asking for repairs, and seeing that those repairs are completed and re-inspected. Assist the seller in repair negotiations and advise the seller to continue paying loans, HOA dues, and anything related to maintaining the property as outlined in the purchase agreement. Check with the lender to see how loan approval is coming along. Check the appraisal results and help the client decide how to proceed if it comes in low. Review contents of the preliminary title report with the client when it comes in. Make sure the buyers have obtained homeowner's insurance and see to it that a copy has been delivered to the escrow agent or lender. Keep track of any special provisions included in the sale, such as items of personal property. Check to be sure the sellers have everything in order for moving out, such as arrangements for trash hauling or scheduling of a cleaning crew to come in and clean before the buyers move in. If buyers are moving in before closing, make sure the rental agreement is ready and signed.
What does title insurance protect real estate owners and lenders from?
It protects them against any property loss or damage they might experience because of liens, encumbrances, or defects in the title to the property. Each title insurance policy is subject to specific terms, conditions, and exclusions.
What is a suit to a quiet title?
It is to clear the title record of any unrecorded claims.
What is the purpose of the preliminary title report?
It is to show the condition of the title before the loan or sale transaction. It essentially outlines the chain of title of the property.
The California Land Title Association (CLTA) is a standard policy in CA. Who may it be issued to?
It may be issued to a lender only, a buyer only, or jointly to lender and buyer (called a joint-protection standard coverage policy).
Who typically pays the one-time premium for the title insurance?
In southern California, it's more common for the seller to pay the whole premium. However in northern California, the buyer typically pays the premium. In either area, the cost can be negotiated or divided between the seller and buyer. Typically the buyer is responsible for paying the premium for a lender's policy.
What is the 365 day proration method and what is an example?
It calculates the amounts on the basis of a 365-day year. Buyers Greg and Jane have arranged to take over Al and Kathy's insurance policy. The premium is $550 per year paid in advance on March 1. Closing on the property is set for June 11. What is Al and Kathy's share of the insurance cost? Total amount: $550.00 Daily amount ($550 ÷ 365) $1.51 Al and Kathy's share = $155.53 $1.51 x 103 days (March 1 through June 11) = $155.53 Greg and Jane's share = $394.47 $550 - $155.53 = $394.47 Since Al and Kathy paid the premium in advance, Greg and Jane's share of $394.47 will be credited to the sellers and debited to the buyers.
What is a title insurance policy?
It is a contract of indemnity where an insurance company agrees to compensate the insured, either a homeowner or lender, for financial losses that the insured has incurred because of defects to the title of the property.
What is a clouded title to a property?
It is if there is a missing link in the chronology of owners, or if there was a defective conveyance, the chain is said to be broken
What is the role of an escrow agent?
It is not to make a party fulfill their contractual obligations but to confirm all obligations have been met before releasing funds or transferring title.
What is a marketable title?
It is one that is so free of defects that the buyer is certain he or she will not have to defend the title.
What is an escrow?
It is the process in which a disinterested third party holds all money and documents relating to a transaction until all of the terms and conditions of the escrow instructions have been satisfied. The key to escrow is ensuring a transfer of ownership happens fairly, impartially, and with minimum risk to sellers and buyers through an escrow agent who is a neutral third party.
What is a title insurance commitment?
It's an agreement by the insurer to issue a title policy. The insurance company is making a commitment to issue an insurance policy for a specified amount of time at a specific price. The title commitment document is in the same format as the title insurance policy but it is NOT an insurance policy.
Example of a 12 month/30 day proration method.
Jim and Beth have sold their California single-family residence to Tim and Sue and are closing on April 17. The real estate taxes from July 1st to June 30th for the property are $1,950. Jim and Beth have already paid the taxes due up until June 30th. What is Jim and Beth's share of the taxes for the current tax year? What is Tim and Sue's share? Total amount: $1,950.00 Monthly amount ($1,950 ÷ 12) $162.50 Daily amount ($162.50 ÷ 30) $5.42 Sellers Jim and Beth's share of annual taxes = $1554.64 $162.50 x 9 months (July through March) = $1462.50 $5.42 x 17 days (April 1 though April 17) = $92.14 (1462.50 + 92.14) = $1554.64 Buyers Tim and Sue's share = $395.36 $1950.00 - $1554.64 = $395.36
Escrow instructions typically include what type of information?
Names buyers and sellers Terms of the transaction and conditions that must be removed before the sale can be completed Date of closing and possession Name of title insurance company the parties have chosen Requirements of money that must be deposited into escrow and by whom (typically this includes earnest deposits and down payments by buyers and balance of the purchase price deposited in the form of a loan from a lender) Requirements of documents to be deposited into escrow, including deeds, loan documents, lien information, etc. Conditions that must be met for closing, such as inspections, repairs, reports, receipts, contract contingencies, etc. Prorated items, including taxes, insurance, interest, HOA dues, etc. Fees to be paid by seller and buyer Information on how title will be taken
A face-to-face closing is where everyone meets in one room and exchanges documents. What is this typically called?
Passing papers
What are typical conditions that must be met for a title policy to be issued at closing time?
Payment of the seller's mortgage Payment of taxes Payment of all liens against the property Reconveyance of the deed currently encumbering the property Recording the new deed Recording the documents securing the new loan Payment of all taxes owed at the time of the sale A valid deed transferring ownership Proof of Identity
What are the duties of an escrow agent?
Receive money from lenders and/or buyers Dispense funds to lienholders, sellers, and other parties due monies from a purchase transaction Obtain payoff letters from existing lenders Issue receipts for deposits of funds and documents Order the preliminary title report Prepare grant deed or other type of title transfer Prepare deed of reconveyance Obtain title insurance Prorate items for buyer and seller Ensure the appropriate paperwork is obtained and signed by the necessary parties Record deeds and other documents related to the transaction Verify the terms of the sale (outlined in the contract) have been met Prepare closing documents Close the transaction according to the contract and other legal considerations
What are the buyers duties during escrow?
Review and sign escrow instructions Review preliminary title report Complete loan application in a timely manner Provide required documentation to lender, escrow agent, or broker when requested Review all loan documentation Obtain and review property inspections Conduct a final walk though Obtain hazard insurance Deposit all the required funds necessary for a closing, including additional earnest monies, down payment, closing costs, etc.
What are the seller's duties during escrow?
Review and sign escrow instructions Review preliminary title report Provide required documentation in a timely manner to escrow agent or any interested party when requested Provide a title insurance policy and disclose any re-recorded item that may affect title Provide appropriate information on existing loans on the property If the property is a rental, provide all applicable information on the current tenant Complete a transfer deed to be delivered to the buyer
What are the prorated (or divided proportionally) expenses between the buyer and seller?
Taxes Insurance Mortgage interest Utilities
What are the 2 common types of home insurance policies in CA?
The California Land Title Association and the American Land Title Association
What happens at the closing of a property?
The buyer completes his or her financing arrangements (referred to as closing the loan). The seller transfers the title. Both the buyer and seller pay the necessary taxes, fees, and other charges.
When opening an escrow, what type of information does the escrow holder need?
The length of escrow Terms of loans Commissions Instructions about inspections, such as termite reports Personal property included in the sale Legal description of the property Earnest money deposit
What does a preliminary title report include?
The owner's name and property description A list of any outstanding assessments, such as taxes or bonds Any covenants, conditions, or restrictions Recorded liens or encumbrances Legal description of the property A plat mat of the property according to public records
Escrow agents must report the required tax information associated with the sale of real property. What are the 2 most common requirements?
They are the 1099-S reporting requirement and the Foreign Investment in Real Property Tax Act requirement.
What are escrow instructions?
They are the written authorization and instructions for how an escrow agent will perform in the transaction. Most escrow agents create the escrow instructions using pre-printed company forms. Both the seller and buyer must sign and acknowledge the escrow instructions.
What are some things escrow agents are not allowed to do?
They can never offer legal advice, settle disputes between the parties, change documents related to the transaction, show any bias toward one party, or release funds without authorization from all parties.
The ALTA policy gives coverage to who?
This policy gives coverage to the lender, not the buyer. However, a buyer can purchase an owner's policy that provides the extended coverage.
The majority of escrows are handled by which entities?
Title insurance companies Independent escrow companies Large institutional lenders who have escrow departments that handle the closing of loans in-house.
True or False: The American Land Title Association (ALTA) is an extended coverage policy that insures against many of the items excluded in the CLTA standard policy.
True