Transcript
Chapter 10Escrow
How to Navigate the Journey
I. The Escrow Procedure
The Escrow Procedure An escrow is the processing, by a neutral party, of the
paperwork and money involved in a sale or other real estate transaction
The purpose of an escrow is to assure that the appropriate parties perform the terms of the contract
An ESCROW is created when a new written agreement instructs a neutral third party to hold funds and proceeds only when all the agreed to conditions have been performed
A. Requirements For a Valid Escrow
The Escrow Act is found in the Financial Code
The three requirements for a valid escrow are: Signed escrow instructions, forming a binding contract
between two or more parties: usually a buyer and seller A neutral party, which is the escrow company, acting as
a dual agent of the buyers and seller Conditional delivery of funds and documents, after all
the conditions in the escrow are met
When escrow closes, dual agency changes to separate agency
B. Escrow Holder An escrow holder can be:
A corporation An attorney A real estate broker acting as a real estate agent in the
transaction
A NEUTRAL DEPOSITORY is an escrow business conducted by a licensed escrow holder
An ESROW OFFICER, HOLDER, or AGENT, though not licensed by the state, is an employee of a licensed escrow company who acts as the agent
Requirements (cont.)
In Northern California, the majority of escrows are handled by escrow departments of title insurance companies which are governed by the Insurance Commissioner
In Southern California, many escrows are handled by independent escrow companies which, by law, must be incorporated and are governed by the Commissioner of Corporations
The complete sequence of events in a escrow is:
Preliminary title search and report Lender’s demand Request for new loan documents Completion of conditions and depositing of funds Adjustments and prorations Transfer of existing policies, or creation of new ones Recording and issuing of title policy Disbursement of funds Escrow statement sent to each party
C. Real Estate Brokers Can Conduct Escrows
A broker can handle escrows for a fee only if the broker is acting as a real estate agent or principal in that transaction
All written escrow instructions executed by a buyer or seller must contain a statement, in not less than 10-point type, that includes the licensee’s name and the fact that he or she is licensed by the Department of Real Estate
II. How Escrows Work
A. Fax Purchase Agreement to Escrow
The last page of the Purchase Agreement contains an acknowledgement for receipt of the completed agreement
Once the California Residential Purchase Agreement and Joint Escrow Instructions form has been filled out and executed, you will fax or deliver it to the escrow company
B. Follow-through Checklist
Always follow-up on your escrows
To keep track of the escrow process, you’ll want to use an agent/broker escrow checklist
C. Opening Escrow When opening escrow, always double-check the
spelling of names and the addresses
If it’s available, provide escrow with the property profile, obtained from the title company, when you open escrow
D. Escrow Rules Once the escrow instructions have been drawn, neither
party may change them without written agreement of the other party
If a dispute should arise and the parties cannot agree to terms, an escrow company will bring an INTERPLEADER ACTION to let the courts determine where the money or consideration goes
E. Who Selects the Escrow Company?
A real estate licensee is prohibited by law from receiving any “kickback” for solicitation of escrow business
Either the buyer or seller can choose the escrow company
Death does not cancel an escrow; it is binding on the heirs because of the prior, agreed-to contract
F. Escrow Instructions
ESCROW INSTRUCTIONS are formal instructions drawn from the information contained in the original agreement, usually the signed purchase contract
All parties to the escrow should read the escrow instructions very carefully, and should sign them only after every detail is absolutely correct and the terms meet with their approval
G. Financing is An Important Aspect of Escrow
Most escrows for the sale of a home include obtaining a new loan and the payoff or assumption of the old loan
The PAYOFF DEMAND STATEMENT is a formal demand statement from the lender that details the amounts owed, as calculated by the lender, for the purpose of paying off the loan in full
A BENEFICIARY’S STATEMENT is a demand statement by a lender, under a deed of trust, that provides information, such as the unpaid balance, monthly payments, and interest rate, necessary if the loan is to be assumed
H. Escrow Example
I. Closing Date is the Date of Recordation
Closing is the process of signing, transferring of documents, and distribution of funds
When time is not specified, the escrow will close by mutual consent or within a reasonable period
The CLOSING DATE is the date that the documents are recorded
III. Proration
Proration Property taxes, interest, fire insurance, and rents are
prorated, but not title insurance or non-recurring fees
PRORATION is the process of proportionately dividing expenses or income to the precise date that escrow closes, or any other date previously agreed upon
All escrow companies use 30 days as a base month
The two rules of prorations are: Date escrow closes Date item is paid
IV. Termites and Other Problems
A. Structural Pest Control Certification Report
A Structural Pest Control Certification Report is usually a condition of the escrow
Pest control reports are NOT required by law, but many lenders will require them
The best time for a seller to have a termite report issued is before putting the home on the market
B. Broker Maintains Pest Control Documentation
The Civil Code requires that the broker shall deliver a copy of the Structural Pest Control Certification Report and Notice of Work Completed to the buyer if such a report is a condition of the deposit receipt
If more than one broker is acting as an agent, the selling broker shall deliver the required documents to the buyer, who needs to sign them
V. Fire Insurance
A. Fire Insurance…A Must! Fire insurance is very inexpensive compared to the possible
dollar loss due to fire
The CALIFORNIA STANDARD FORM FIRE INSURANCE POLICY insures the dwelling against: Fire Lightning
Additional coverage can be obtained to cover: Perils of windstorm Explosion Hail Aircraft Smoke Riot Vehicles not attributed to a strike or civil commotion
B. Fire Insurance Proration When purchasing property, a buyer usually obtains a
new policy
If the seller has filed an insurance claim during the previous five years, he must disclose this to the buyer in writing
VI. Title Insurance
A. Chain of Title
• This is the recorded public history of a property
• TITLE PLANT is all information about people and their real property which is stored in computers at the county recorder’s office
B. Title Insurance Because many things outside the public record can
affect the legality of title, title insurance functions to protect the insured
Title insurance also insures the lender against losses that result from imperfections in title
C. Preliminary Title Report The first step in a title search is the ordering of the
preliminary title report
A PRELIMINARY TITLE REPORT is a report showing the condition of title before a sale or loan transaction
State law requires that buyers acknowledge receipt of the preliminary title report
The report consists of: The name of the owner and description of the property A list of any outstanding taxes, bonds, or other
assessments The identity of any covenants, conditions, or restrictions Any recorded liens or other encumbrances that must be
eliminated before an loan is made
VII. Types of Title Insurance Policies
A. California Land Title Association
In California, the standard title insurance policy is the CLTA
This standard policy protects against: someone else who owns a recorded interest in your
title a document not properly signed forgery, fraud, duress, incompetency defective recording of a document unmarketability of title restrictive covenants lack of a right of access to and from the land
B. American Land Title Association
Most lenders require extended coverage or an ALTA policy
This ALTA policy is an extended coverage policy that insures against many exclusions in the standard cover policy
An ALTA policy is a lender’s policy
C. ALTA-R The ALTA-R POLICY is recommended by title
companies for one-to-four unit owner-occupied residential dwellings
This policy does NOT require a survey of property lines and gives the buyer more coverage for the same price
D. Who Pays Title Insurance Fees?
The title insurance fees are part of the escrow closing costs
In Southern California, it is customary for the seller to pay the fees
In Northern California, it is usually paid for by the buyer
E. Title Insurance Disclosure
In any escrow transactions for the purchase of real property where a title insurance policy will NOT be issued to the buyer, the buyer MUST sign and acknowledge a disclosure statement stating that it may be advisable to obtain title insurance
VIII. Real Estate Settlement Procedures Act
RESPA RESPA allows borrowers to shop for settlement
services
The law covers first loans on one-to-four unit residential dwellings
RESPA is a law that states that the closing settlement costs of a real estate transaction MUST be made known to the borrower, on or before the settlement date
IX. California Escrow Association
California Escrow Association
The California Escrow Association has developed a statewide program to promote professional service and educational opportunities for its members
Chapter Summary• Escrow Procedure• Requirements of a Valid Escrow• Escrow Holder• Real Estate Brokers Can Conduct
Escrows
• How Escrow Works• Fax Purchase Agreement• Follow-through Checklist• Opening Escrow• Escrow Rules• Who Selects the Escrow Company?• Escrow Instructions• Financing• Closing Date
• Proration• 30 day months
• Termites and Other Problems• Structural Pest Control Certification
Report
• Fire Insurance• Prorated
• Title Insurance• Chain of Title• 4 functions• Prelim Report
• Types of Title Insurance• CLTA• ALTA• ALTA-R
• RESPA
• California Escrow Association
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