Priniples - Unit 9 - Escrow
Prohibited Escrow Related Activities
A licensed escrow agent may not pay fees to real estate brokers or others for referral of business. Such prohibited "fees" would include gifts of merchandise or other things of value. An escrow agent cannot disburse a real estate broker's commission prior to closing of the escrow. Escrow licensees may not solicit or accept escrow instructions, or amended or supplemental instructions, containing any blank to be filled in after signing or initialing. They may not permit any person to make any addition to, deletion from, or alteration of an escrow instruction unless it is signed or initialed by all persons who had signed or initialed the instructions. As noted earlier, a real estate broker may not decide on an escrow holder as a condition of the transaction, but may suggest an escrow holder if requested to do so by the parties. Note that Civil Code Section 2995 prohibits any real estate developer from requiring, as a condition precedent to the transfer of real property containing a single-family residential dwelling, that escrow services effecting such transfer be provided by an escrow entity in which the developer has a "financial interest."
The North Vs South
As we noted earlier, the escrow regulations in Northern California differ from those in Southern California. Even if you never become a broker who works as an escrow holder, you should stay abreast of these differences. Keep in mind that these are traditional variations in the handling of escrow, and are not requirements of the law. Signed Escrow Instruction Delivery: In Southern California , the bilateral escrow instructions are signed by the buyer and seller shortly after they've signed their purchase agreement, just after the start of escrow, which is about 30 or 60 days prior to the actual close of escrow. In Northern California , the escrow instructions are usually not signed until one or two days just before the close of escrow. The Escrow Services : In Southern California , the escrow services are usually performed by independent escrow companies or financial institutions. While title insurance companies provide the title services, the escrow companies do the actual closing of the sale. In Northern California , the escrow services are usually performed by title insurance companies that have extensive escrow departments and many branch offices. Paying the Escrow Service Fees : In Southern California , the escrow service fees are usually split 50-50 between the buyer and the seller. In Northern California , the escrow service fees are usually paid by the buyer.
Escrow Holder
As we said earlier, an escrow is a limited agency. Therefore, the only obligations to be fulfilled by the escrow HOLDER are those instructions given in regard to the specific transaction. An escrow holder can be a corporation, an attorney, or a real estate broker who acts as a real estate agent in the transaction - NOT an individual. Escrow companies must be licensed by the State of California to act as such. However, banks, title insurance companies, and attorneys do not need to obtain special licenses to act as escrow holders. Any applicant for an escrow license must be financially solvent and furnish a surety bond in the amount of $25,000.00, or more, based upon yearly average trust fund obligations. All officers, directors, trustees, and employees having access to money or negotiable securities in the possession of the corporate licensee must furnish a bond of indemnification against loss. All money deposited in escrow must be placed in a trust account that is exempt from execution or attachment. Note that under Article 19, Section 2950 of the Regulations, a real estate broker cannot conduct escrows, unless that broker is acting as a real estate agent or principal within that specific real estate transaction. The buyer and seller must negotiate to choose which escrow company they wish to use. Keep in mind that this decision must not be made by either party's real estate agent. In addition, if one of the agents in the transaction has financial interest in an escrow company, this fact must be disclosed to both the buyer and seller prior to a final decision being made. After the escrow company is chosen, who should pay the fee? This decision, too, is negotiable between the buyer and seller. As with several escrow practices in California, the payment of the escrow fee varies depending on the geographical location within the state. In some areas, the buyer or the seller pays, and in other areas, both parties share the cost.
More
Here are a few additional facts regarding the escrow holder: 1. While an escrow holder can be held liable for violating written instructions, the escrow holder is really only a stakeholder, not legally concerned with any controversies between the buyer and seller. As such, an escrow holder is entitled to file an action of interpleader (a court action) to require litigation of controversies. 2. Remember that an escrow holder is prohibited from offering legal advice and must suggest that the disagreeing parties consult an attorney for legal matters. If the disagreement is not a legal matter, but one involving the transaction itself, the parties' real estate brokers should handle it. Regardless of who handles a disagreement, the escrow holder is a NEUTRAL and uninvolved third party - not a mediator or a lawyer. 3. The escrow holder must forward immediately to the title company any document that is to be recorded and furnish a copy to any concerned party, so that the document's sufficiency can be determined. This will help avoid delay in closing escrow.
Escrow necessary
In California, escrow has become a prominent mechanism for the consummation of real property transfers and other transactions such as exchanges, leases, sales of personal property, sales of securities, loans, and mobile home sales. An escrow in California is usually a requirement for the sale of a home or other real estate. Even within the state itself, differences exist in the escrow practices, depending on whether the escrow is taking place in Southern or Northern California.
Escrow Instructions
Keep in mind that escrow instructions are CONFIDENTIAL. As long as the instructions relate to mutual items in the transaction, then both principals and their agents in the transaction may see these instructions. (If the instructions are unilateral, only concerning one party to the transaction, then these may only be known to the involved party and his agent.) No one else, with the exception of the escrow holder, may view these confidential instructions. There are two forms of escrow instructions employed: 1.Bilateral, which binds both the buyer and the seller; and 2.Unilateral, which are the separate instructions of buyer and seller. Note that because these escrow instructions implement and may also supplement the original contract, both are interpreted together if possible. If, however, the instructions contain terms in conflict with the original contract, then the escrow instructions, acting as the later contract, usually control. Properly drawn and executed escrow instructions become an enforceable contract. Once all the terms of the instructions have been met, the escrow is termed "complete." Once the instructions have been signed by both parties to the escrow, neither party may unilaterally change those instructions. However, if both parties agree to change the instructions at any time, the instructions may be so altered. If one of the parties wishes to change the instructions in order to waive his performance of certain conditions, this is permitted by mutual agreement IF that waiver is not detrimental to the other party to the transaction. When all parties to the escrow have signed mutual (identically conforming) instructions, the escrow becomes effective. If only one party has signed, that party may terminate the proposed escrow at any time prior to the other party's signing
Escrow Procedures
Prepare the escrow instructions, including the signatures of all parties to the transaction. For a home purchase, these instructions must include the following: the purchase price and terms; agreements as to mortgages; how buyer's title is to vest; matters of record subject to which buyer is to acquire title; inspection reports to be delivered into escrow; proration adjustments; the date of buyer's possession of the property; the documents to be signed by the parties, delivered into escrow, and recorded; the disbursements to be made, including costs, charges, and who is to pay for them; and the date of closing. 2. Order the preliminary title search and report. 3. Request the lender's demand, including any amount owed, and the pay-off statement. 4. Request for new loan instructions and documents (if the buyer is obtaining new financing). 5. Accept Structural Pest Control Report and Other Reports (such as plumbing or roofing inspections) into escrow and obtain, as instructed, any necessary approvals from the parties in connection with the reports/inspections. 6. Accept Fire Insurance Policies and Complete Settlement by accepting and delivering any fire insurance policy and transferring the insurance if so instructed by the parties; making all prorations (e.g., property taxes and insurance) as instructed by the parties; completing the accounting (settlement) details and informing the principals that escrow is ready to proceed. 7. Request Closing Funds. 8. Audit File. 9. Order Recording by authorizing the title company to run the seller's title to date and record the necessary documents, provided no change has occurred in the seller's title since the issuance of the preliminary title report. 10. Close Escrow, after confirming recording, by: • Preparing settlement statements for buyer and seller; • Disbursing all funds; and • Delivering documents to the appropriate party or parties
Proration and Termination
Proration is the process in which expenses, such as property taxes, interest, rent and/or assessments are divided proportionately between the buyer and seller. This applies both to expenses that are prepaid by the seller, such as fire insurance, or that will be paid after closing by the buyer, such as property taxes. All escrow companies use 30 days as a base month in figuring out proration. Remember that the date used in figuring out the proration is based on the date the escrow closes (This date is not the same as the possession date.), but any date may be used if all parties to the transaction agree. California Fiscal Year: In California, the county fiscal year begins on July 1, and ends on June 30. Regarding tax prorations in California real estate, taxes are prorated either from July 1, at the beginning of the fiscal year, or January 1, which marks the middle of the fiscal year. Termination: Escrows are voluntarily completed by full performance and closing OR they are terminated by mutual consent and cancellation. Compliance with escrow instructions must be achieved within the allotted time limit set forth in the escrow agreement. If not, the escrow holder has no authority to enforce or accept performance after the time limit provided in the instructions. This means that once that time limit provided in the escrow instructions has expired and either party to the escrow has not performed in accordance with the terms of the escrow agreement, the parties may cancel escrow and are entitled to the return of their respective property and documents. The escrow holder does not have authority to determine that a principal has not performed. Escrow cannot be terminated by death. It can only be terminated by one of the following three means: 1.Completion of escrow; 2.Mutual agreement to terminate; or 3.Court action ("interpleader").
What Escrow is
The California Civil Code Section 1057 defines escrow as the following: "A grant may be deposited by the grantor with a third person, to be delivered on the performance of a condition, and, on delivery by the depositary, it will take effect. While in the possession of the third person, and subject to condition, it is called an escrow." The California Reference Book sums escrow up as "essentially a small and short-lived trust arrangement." Although escrows can be used for various business transactions, this type of limited agency is most commonly used for the sale and transfer of real estate. In a real estate sales transaction, escrow is the process in which a neutral third party, for a fee, acts as the closing agent for the buyer and seller. This neutral party is the escrow holder. Under the California Financial Code Section 17004, an "escrow agent" is a person engaged in the business of receiving escrows for deposit or delivery. The escrow holder makes sure that all parties to the transaction comply with the terms and conditions of the agreement as set forth in the escrow instructions. The escrow holder may also coordinate the activities and professional services involved in the transaction, such as the activities of the lender and the title company, as well as those between the buyer, seller, and broker. The escrow officer not only takes care of the proper paperwork, but he also handles the fund disbursement at the property sale closing/settlement. The escrow holder performs these duties for a fee.
What Makes an Escrow Valid
The Escrow Act is found in the California Financial Code. There are two essential mandates for an escrow to be valid: 1. There must be a binding contract between buyer (grantee) and the seller (grantor); AND 2. There must be the conditional delivery of transfer instruments and funds to a neutral third party. Note that the "binding contract" listed above can appear in any legal form, including a deposit receipt, an agreement for sale, mutual escrow instructions of the buyer and the seller, or an exchange agreement.
More Escrow
The cancellation of escrow may not also cancel a purchase contract. Legal precedent for this regulation was set forth in Cohen v. Shearer (1980) 108 C.A. 3d 939, when a Court of Appeal decided that cancellation of an escrow by mutual agreement of the parties did not rescind the purchase contract between them. (A real estate broker seeking to carry out the principal's decision to cancel a contract of purchase or sale should be sure the other party to the contract agrees in writing to do precisely that, and not simply settle for written advice to cancel the escrow.) A broker cannot advertise that he conducts escrows without specifying in the advertisement that such services are only in connection with the broker's real estate brokerage business. A broker may not use a fictitious name or a corporate name containing the word "escrow," or advertise in any other manner that would tend to be misleading to the public. A real estate broker who conducts an escrow under the exemption must maintain all escrowed funds in a trust account and keep proper records. The broker must follow the provisions of Commissioner's Regulations 2950 and 2951. An escrow agent is required to keep accurate accounts and records that are subject to examination by the Commissioner of Corporations. The corporation must also, at its own expense, submit annually an independent audit prepared by a Certified Public Accountant or Public Accountant.
Regulations for the Escrow Instructions
Under California regulations, the escrow holder must maintain an escrow account with extreme care. This means maintaining records and files on a daily basis, providing excellent and efficient customer service, and ensuring that the account is NEVER overdrawn, since an overdrawn account is strictly forbidden. The escrow holder must be sure that not a single procedure in maintaining such an account is overlooked. The escrow holder should not accept any documents or funds that have not been addressed by the escrow instructions, unless specifically authorized to do so by the principals. Once the escrow closes, the dual agency, in which both parties (usually the buyer and seller) are represented, changes to separate agency, in which each party's separate paperwork is handled. When it comes time for the closing, the escrow holder should use forms that are simple and clear, and handle the closing in a timely manner. Before closing an escrow, the escrow holder must audit the file, accounting for all items to be handled, recorded, and delivered, including cleared funds. The escrow holder must not disburse any funds from an escrow account until all items such as checks, drafts, etc., have cleared, and so have become available for withdrawal. This "holding period" may range from 1 to 10 days, depending on the type and location of lender.
