Chapter 5 - Just the Facts
Types of deeds:
A deed is a written instrument which conveys title to real estate. Title by deed passes either: • voluntarily by agreement with the owner, as in a sale in the open market or foreclosure on a trust deed or assessment bond; or • involuntarily without agreement, such as the enforcement of a creditor's judgment or tax lien. No matter the form of writing, the individual conveying real estate is called the grantor. The individual acquiring title is called the grantee. Fee simple ownership is presumed to pass by a grant of real estate, unless a lesser possessory interest is stated, such as an easement, life estate or leasehold interest. To pass a fee simple interest in real estate, only the word "grant" needs to be used in the conveyance. No other precise words of conveyance are necessary in a deed to convey a fee simple ownership, such as between a seller to buyer, or parent to child. There are several deeds that can be used to transfer an interest in real estate. The types of deeds most commonly used to convey a real estate interest are: 1) grant deeds; The covenants, sometimes called warranties, implied in a grant deed include: • the interest conveyed in the real estate has not been previously conveyed to another, except as disclosed in the grant deed; and • the real estate has not been further encumbered by the grantor, except as disclosed in the grant deed. 2) quitclaim deeds. A quitclaim deed conveys only the grantor's interest in a property, if any exists. Thus, to convey real estate with covenants relating to the interest conveyed, a grant deed is used. To simply convey any interest in real estate without an assurance the individual holds that interest conveyed, a quitclaim deed is used. Quitclaim deeds are most commonly used in the event of divorces and inheritances.
Adverse possession and eminent domain:
An occupant may also establish title to a property through adverse possession. To establish title by adverse possession, an occupant needs to show: • their possession is based on a claim of right or color of title; • they have occupied the property in an open and notorious way which constitutes reasonable notice to the record owner; • their occupancy is hostile and inconsistent with the owner's title; • they have been in possession for a continuous and uninterrupted period of at least five years; and • they have paid all taxes assessed against the property during their occupancy. The government may also take title to private property for public use through eminent domain, a process called condemnation. [See Chapter 1]
Escrow concepts:
Escrow is a process employing an independent agent to manage and coordinate the closing of a real estate transaction through the exchange of documents and money between two parties such as a buyer and seller. Escrow activities are typically based on a primary agreement, such as a purchase agreement. The services rendered by an escrow agent typically include: • receiving funds and collecting necessary documents, such as property reports, disclosure statements and title reports called for in the escrow instructions; • preparing documents necessary for conveyancing and mortgaging a property required for escrow to close; • calculating prorations and adjustments; and • disbursing funds and transferring documents when all conditions for their release have been met. Both the purchase agreement and the escrow instructions are contracts regarding interests in real estate. Both documents must be in writing to be enforceable under the Statute of Frauds.
Title insurance
Insures against things that happened prior to the date of issuance and guarantees against those conditions forever. It is a one-time expense (not recurring) which is paid during escrow. The title company has no obligation under a policy to clear title of the unlisted encumbrance. Title insurance policies are issued on one of several general forms used by the entire title insurance industry in California. The policies are typically issued to: • buyers of real estate; • tenants acquiring long-term leases; and • lenders whose loans are secured by real estate. Several types of title coverage are available, including: 1) a California Land Title Association (CLTA) standard policy -- The CLTA standard policy is purchased solely by buyers, carryback sellers and private lenders. -- The CLTA standard policy insures against all encumbrances affecting title which can be discovered by a search of public records prior to issuance of the policy. Any encumbrance not recorded, whether or not observable by an inspection or survey, is not covered due to the CLTA policy exclusions and standard exceptions. -- The CLTA standard policy contains pre-printed exceptions listed in the policy as Schedule B, also called standard exceptions or regional exceptions. It is the inclusion of these pre-printed boilerplate exceptions which makes the CLTA policy a standard policy. 2) an American Land Title Association (ALTA) owner's extended coverage policy -- An ALTA owner's policy does not contain pre-printed exceptions, only the typewritten exceptions listing the encumbrances which are known to the title company and affect title to the property. -- The ALTA owner's policy provides greater coverage than the CLTA policy.
Transfer through court action:
Probate transfers happen in a probate court. Probate refers to the process in which the court supervises the transfer of legal title of property from the estate of the deceased person to the decedent's heirs. A tax deed is given to someone who purchases a property through a tax deed sale. The purpose of a tax deed sale is to collect unpaid property taxes due on a property and convey title to the purchaser. During a tax deed sale, the property is usually sold for the unpaid tax amount plus any fees, interest charges and court costs.
Taxes related to real estate:
The documentary transfer tax is imposed on a recorded document when real estate is transferred. The transfer tax is based on the consideration paid in the transaction (the selling price minus existing loans assumed by the buyer). The county transfer tax rate is $0.55 per $500 of transferred value, though some cities impose an additional transfer tax as well. All transfer tax calculations are based on multiples of this amount. The manner in which a transfer is accomplished affects the income tax reporting for both principals. Property taxes are paid on real property, though not personal property. Property taxes are an ad valorem tax based on the value of the thing taxed. The original basis of valuation is the price paid for the property. Over the years, this amount is adjusted upwards based on improvements made to the property, and downward based on depreciation. This adjusted basis is then balanced against the net sales proceeds (sales price minus the costs of sale) to arrive at a capital gain or loss. No loss can be reported on a personal residence, and any gain on a personal residence can be offset up to $250,000 for an individual or $500,000 for a couple filing jointly when reporting the sale to the Internal Revenue Service (IRS). Property taxes in California are affected by Proposition 13 (Prop 13). Prop 13 establishes a maximum rate of 1% of the transferred value as a basis for annual state taxes. This amount is adjusted upward by a maximum of 2% annually, plus special service area charges by local authorities, as is the case with Mello Roos districts.
More concepts related to escrow:
The escrow agent can be an independent corporation (foreign or domestic), a lawyer or real estate broker under certain conditions. An independent escrow's activities are overseen by the Department of Business Oversight, while non-independent escrows are regulated by the regulatory authority that they operate under. Escrow agents cannot do anything without instructions from the principals, and they are equally responsible to both parties during the escrow process. Most modern real estate sales transactions depend on both the purchase agreement and the escrow instructions working in tandem to close a transaction. On the close of escrow, buyers and sellers receive a credit or a charge for their proportionate share of income or expenses involved in the ownership or operations of the property being conveyed, called prorations. Prorations are usually calculated based on the date escrow closes. However, they may be set based on any date agreed to by the buyer and seller. For calculating prorations based on the date of closing, the entire day of closing is the first day of the buyer's ownership, unless the escrow instructions specify otherwise. Prorations are based on a 30-day month or a 360-day year.
Title search/title report
The title search reviews the chain of title of a property, covering all documents of record affecting title since the original patent was issued in 1870. The summary of this search is called an abstract of title. From this summary, a preliminary title report is produced, and the eventual policy will be written subject to any changes that might be made. A preliminary title report, also called a prelim, is intended to disclose the current vesting and encumbrances which may be reflected on the public record affecting a property's title. A prelim is not a representation of the condition of title or a policy of title insurance. Unlike an abstract of title, a prelim cannot be relied on by anyone and imposes no liability on the title company. Alternatively, an abstract of title is an accurate, factual representation of title to the property being acquired, encumbered or leased collected from the public records. Thus, an abstract of title may be relied on by those who order them as an absolute representation of the condition of title. A claim, encumbrance or condition which impairs the title to real property until disproved or eliminated is known as a cloud on title.
Types of vesting in CA:
Title to real estate in California is held in one of four basic vestings: 1. joint tenancy — Ownership of fractional interests in real estate by two or more individuals each holding an equal share with the right of survivorship. Using one deed, any number of co-owners can take title to real estate as joint tenants. When a joint tenant dies, their interest is eliminated and the surviving joint tenants share the remaining ownership equally free of any debt obligations. Thus, other potential heirs to the deceased's estate and creditors cannot make claims regarding the property. Joint tenants take title together on the same deed, at the same time, hold equal shares in the ownership of the property, and each has the right to possess the entire property, known as the four unities. • unity of title - the joint tenants take title to the real estate through the same instrument, such as a single grant deed or court order; • unity of time - the joint tenants receive their interest in title at the same time; • unity of interest - the joint tenants own equal shares in the ownership of the property; and • unity of possession - each joint tenant has the right to possess the entire property. 2. tenancy in common — Tenants in common may have varying percentages of ownership in a property, may take title at different times, and have centralized rights of possession. If a joint tenant conveys their interest in the property to another person, that person takes title as a tenant in common. A tenant in common may will their interest in the property to others on their death since a tenancy in common interest carries no right of survivorship with it. 3. community property — All property acquired by a married couple in California during a marriage is presumed to be community property, unless acquired as the separate property of either spouse. Under the community property vesting, the ownership interests are equal. 4. community property with right of survivorship — Identical to the community property vesting but with the inclusion of words creating the right of survivorship. On the death of a spouse, the surviving spouse automatically becomes the sole owner of the property. Although most joint tenancies are created between a married couple, a joint tenancy can exist between non-married persons. Conversely, community property vestings are only available to married couples or registered domestic partners. Severalty ownership refers to property owned by one person only. Owners may also hold property as general or limited partners or corporations. Couples may also take title as revocable or irrevocable trusts for estate planning purposes.
Concepts related to deed:
To be valid, a deed needs to: • be in writing; • identify the grantor and the grantee; • contain a granting clause stating the grantor's intention to convey; • adequately describe the real estate involved; • be signed by the grantor; and • be delivered to and accepted by the grantee. The signing of a deed by the grantor naming another person as the grantee is not enough to divest the owner of their title to the real estate. Delivery of the signed deed is required to transfer ownership. Delivery refers to two separate acts: • the grantor's present intent to convey title, not just the act of physically handing the deed to the grantee; and • the grantee's acceptance of the grant deed as an immediately effective conveyance. A deed does not need to be recorded to convey real estate. A deed that is delivered conveys an interest in real estate even when the deed is incapable of being recorded. Recording is the process of placing a document on file with a designated public official known as the County Recorder. All documents filed with the County Recorder put the general public of that county on notice of the contents of the document. Claims against a property are generally given a priority on the basis of the time and the date they are recorded. This type of notice is referred to as constructive notice. Actual notice is the express or implied knowledge of a fact. Documents which need to be recorded include: • homestead exemptions; • abandonment of homesteads; • lis pendens (notices of pending legal action); and • mechanic's liens. A deed needs to be acknowledged in order to be recorded. Acknowledgement is a formal declaration made before a notary public by the person executing an instrument confirming they are the person signing the document and the execution is made of their free will. Another alternative means of transferring property is through a land sales contract. Under a land sales contract, the seller retains title to the property until all or a prescribed part of the purchase price has been paid.
Home mortgages and taxes:
Two categories of mortgages exist to control the deduction of interest paid on any mortgages secured by the principal residence or second home, which include: • interest on the balances of purchase or improvement mortgages up to a combined principal amount of $1,000,000; and • interest on all other mortgage amounts up to an additional $100,000 in principal, called home equity mortgages. As a tax loophole for personal use expenditures, the home mortgage interest deduction (MID) rule for income tax reporting allows mortgaged homeowners to deduct from their adjusted gross income (AGI) the interest paid on first and second homes to reduce their taxable income. The mortgage interest is reported as an itemized deduction, if: • the mortgages funded the purchase price or paid for the cost of improvements for the owner's principal residence or second home; • the mortgages are secured by either the owner's principal residence or second home.