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8Chapter Overview This chapter provides brokers instruction on
financial matters that brokers need to master to practice
competently. It is essential that brokers know, understand, and
fol-
low the laws and rules for financial matters relating to
providing brokerage services. A broker’s role in the financial
aspect of a transaction must always be to protect consumers and
their resources by unfailingly following the important consumer
protections built into the law.
Financial management is an area of a broker’s practice where
there is no tolerance for error. Brokers must be careful and
competent in all areas of practice but mismanagement of
transaction-related finances can cost a broker the broker’s entire
business. Failure to properly manage finances related to
transactions could result in the loss of a broker’s license. To
practice competently, brokers need to know the rules regulating
trust accounts, a broker’s role when parties want to escrow
transaction finances, and a broker’s role at closing. One of the
most common causes for broker discipline from the Department of
Safety and Professional Services
is mismanagement of trust accounts or failure to follow correct
trust account procedures. Brokers are responsible for the actions
of their agents, which includes broker-employees, salespeople, and
all other office personal. This means that a broker-employer must
make sure all of the broker’s agents understand the rules related
to transaction finances and every broker must implement systems and
procedures to ensure that all agents follow all of the rules all of
the time.
TRUST ACCOUNTS Trust accounts can be challenging, for new
brokers and seasoned brokers alike. New brokers may be concerned
with the basics of properly setting up one or more trust accounts,
filing the appropri-ate paperwork, and establishing bookkeeping and
accounting procedures. Seasoned brokers may occasionally encounter
questions about setting up an escrow for a transaction or
disbursing earnest money when the parties do not agree about who
should receive the money. Many of these answers are in the
Wisconsin Administrative Code at Chapter REEB 18, Trust Accounts.
REEB 18 Trust Ac-counts provide rules for brokers for managing and
supervising real estate trust accounts. The rules address how
brokers must hold money related to property management, trust
account deposits and signatories, disbursing from trust accounts,
and other rules for holding trust funds. The rules address
bookkeeping, including how a broker can use electronic records for
trust account bookkeeping.
Financial ManagementREEB 18
Important Terminologyclient fundsdepository institutioneffective
dateescrowescrow agreementfinancial managementinterest bearing real
estate trust account
(IBRETA)interest bearing trust account for non-client
fundsnon-interest bearing trust account for non-
client fundsowner’s accountreal estate trust accountreal estate
trust funds
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Violation of RulesAccording to REEB 18.14, a broker who fails to
comply with the trust account rules “shall be considered to have
demonstrated incompetency to act as a real estate broker in a
matter as to safeguard the interest of the public” and will be
subject to disciplinary action from the DSPS by the Real Estate
Examining Board.
Trust Account DefinitionsREEB 18.02 defines real estate trust
account.
There are three kinds of real estate trust accounts that a
broker might have. A broker’s trust account for holding client
funds will always be the interest-bearing real estate trust
account, also called an IBRETA. There are two other trust accounts
a broker might use but a broker will only use them for holding
non-client funds. One account is interest bearing and the other is
not. If a broker is holding client funds, there is only one kind of
account that broker may use to hold those funds and that is the
IBRETA account. It earns interest and only holds client funds. If a
broker is holding non-client funds, then the broker can put them in
a real estate trust account that earns interest or a real estate
trust account that does not earn interest. Whether the broker has
to use an account that does or does not earn interest to hold the
non-client funds will depend on the parties and the nature of the
non-client funds.
Broker Practice TipThree kinds of real estate trust accounts.1.
Client funds: always IBRETA account, interest bearing2. Non-client
funds: real estate trust account that earns interest.3. Non-client
funds: real estate trust account that does not earn interest.
A broker must hold real estate trust funds, which are made up of
client funds and non-client funds, at a depository institution. A
depository institution is defined in Wisconsin statutes at section
452.13(1)(b) as “a bank, savings bank, savings and loan association
or credit union that is autho-rized by federal or state law to do
business in this state and that is insured by the federal deposit
insurance corporation or by the national credit union share
insurance fund.” The federal deposit insurance corporation is more
commonly referred to as the FDIC and it provides insurance for
deposits consumers make in banks up to a limit. The national credit
union share insurance fund provides a similar protection for
customers of credit unions. Real estate trust funds refers to all
depositable items a broker receives from clients and non-clients in
the course of the broker’s real estate practice.
REEB 18.02(5) “Real estate trust account” means an account for
real estate trust funds maintained at a depository institution from
which withdrawals or transfers can be made without delay, subject
to any notice period that the depository institution is required to
observe by law, and includes:(a) Interest-bearing common trust
accounts established for client funds;(b) Non-interest bearing real
estate trust accounts maintained for real estate trust funds other
than client funds; and(c) Interest-bearing real estate trust
accounts maintained for real estate trust funds other than client
funds.
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REEB 18.02 (6) “Real estate trust funds” means any cash, checks,
share drafts, drafts or notes, other than promissory notes,
received by a broker or a broker’s salespersons or time-share
sales-persons on behalf of a principal or any other person
including, but not limited to:
(a) Payments on land contracts, mortgage payments and any other
receipts pertaining to mortgages;
(b) Tax and insurance payments held in escrow;
(c) Advance fees and finder’s fees, unless non-refundable;
(d) Rental application deposits and rents, but only when
received while acting as an agent for an-other;
(e) Payments received for subsequent repayment to a third
party;
(f) Security deposits on rental property, except as provided in
s. REEB 18.031 (4); and
(g) Initial and additional earnest money downpayments and other
monies received in connection with offers to purchase, options and
exchanges, even if the broker, salesperson or time-share
sales-person receives the downpayments or monies when negotiating
the sale of real estate or a business opportunity which the broker,
salesperson or time-share salesperson owns in whole or in part, or
when negotiating the purchase of real estate or a business
opportunity for ownership in whole or in part by the broker,
salesperson or time-share salesperson.
In addition to money or payments a broker receives related to a
transaction, real estate trust funds also includes all earnest
money and other sums paid or received with respect to a licens-ee’s
personal transactions. It does not matter whether the property is
listed with the licensee’s company. This means that if a broker is
selling a property without listing it, if a buyer includes earnest
money with an offer, that earnest money is real estate trust funds
that must be held in a real estate trust account. This rule applies
to a broker purchasing property as well. If when selling or
purchasing real estate as a principal, a broker receives payment of
some kind related to the transaction, that money is considered real
estate trust funds and must go into a real estate trust
account.
When a broker is selling personally owned property and not
listing the property with a broker, if the broker wants to hold
earnest money submitted with an offer, the broker must hold it in a
real estate trust account and the buyer’s offer should be modified
to show that the broker, as the principal in the transaction rather
than as a listing broker, is holding the earnest money in a real
estate trust account. A broker-employer may have policies
controlling how broker-employees and salespeople handle
transactions when buying or purchasing property as princi-pals.
Broker-employees and salespeople should always check the employing
broker’s policies regarding personal transactions. An employing
broker may require the broker-employee or salesperson to list
property with the employing broker to make sure the rules regarding
earnest money and trust accounts are followed. An employing broker
could require that broker-employ-ees or salespeople sign a buyer
agency agreement with the employing broker when purchasing property
as principals. These policies may help the broker-employer avoid
liability for actions of their agents when acting as principals in
transactions.
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Client funds are a part of the items that make up real estate
trust funds. REEB 18.02(1) “Client funds” refers to section
452.13(1) of the Wisconsin statutes for the definition of client
funds.
452.13 Trust accounts. (1)(a) “Client funds” means all
downpayments, earnest money deposits or other money related to a
conveyance of real estate that is received by a broker, salesperson
or time-share salesperson on behalf of the broker’s, salesperson’s
or time-share salesperson’s principal or any other person. “Cli-ent
funds” does not include promissory notes.
Conveyance refers to a transfer of real estate, such as a sale,
purchase, option, or exchange, and to leases over 1 year. Leases
less than one year are not governed by the law of conveyances so
funds related to leases for less than one year are not client
funds. All funds that a broker, or a bro-ker’s employee, receives
from a client or any other person that are related to a conveyance
are client funds. For funds received by a broker to be considered
client funds, they must be received related to a transaction that
is governed by the law of conveyance. Everything else that a broker
or a broker’s employee receives that is related to a transaction
that is not governed by the law of conveyances are still real
estate trust funds but not client funds.
Broker Practice TipEarnest money with an offer = real estate
trust fund and client fundsSecurity or rent for a lease longer than
1 year = real estate trust fund and client fundRents received on a
lease less than one year = real estate trust fund, not client
fundSecurity deposits received for a lease less than one year =
real estate trust fund, not client fund
Whether the non-client funds need to be deposited in an interest
bearing or a non-interest bearing trust ac-count depend on the
terms of the transaction and whether the parties or any other
requirement dictates that the funds must earn interest while in the
broker’s possession.
Number of Trust AccountsA broker may have as many trust accounts
as the broker needs to operate the real estate business. If a
broker only receives client funds in the normal course of the
broker’s business, the broker may only need an IBRETA account. If,
however, the broker handles transactions that involve non-client
funds, such as rents or security deposits held by a property
manager, the broker may also need other real estate trust accounts
for non-client funds. REEB 18.032 “Number of real estate trust
accounts” permits a broker to “maintain more than one real estate
trust account, including more than one interest-bearing common
trust account for client funds, if the broker notifies the
department of these accounts, as required in REEB 18.035.”
Opening and Closing a Trust AccountA broker must open a trust
account if the broker receives real estate trust funds. If a broker
does not regularly engage in sales transactions, the broker may not
need to open a trust account as long as the broker modifies any
offers to purchase to provide that someone else holds the earnest
money. For example, a buyer could modify an offer to purchase to
provide that another broker, an attorney, the title company, or
even one of the parties will hold the money. When a broker does not
hold earnest money for parties in a transaction, the parties may
need to hire an attorney to draft an escrow agreement designating
an escrow agent to hold the funds. REEB 18.06 “Escrow agreement for
earnest money not held by the broker” prohibits brokers from
drafting escrow agreements or holding escrowed funds, either in the
broker’s trust account or in some other manner as the custodian of
the funds.
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REEB 18.033 Time when real estate trust account shall be opened
or may be closed. (1) Opening an account. A broker shall open a
real estate trust account if the broker receives real estate trust
funds.
(2) Closing an account. A broker may close a real estate trust
account if no real estate trust funds remain in the account.
Account Designation REEB 18.034 “Account designation” instructs
a broker to “name the broker’s real estate trust account with the
name appearing on the broker’s license or with a trade name
submitted to the department under REEB 23.03 and shall include the
words “trust account” in the name of the account.” A broker must
also “imprint the name of the real estate trust account on real
estate trust account checks, share drafts or drafts.” A listing
broker operating as a sole-proprietor may name the trust account
“Listing Broker’s Trust Account” and a broker operating as an LLC
may name the trust account “Lucky Listings, LLC. Trust Account.”
The broker satisfies the require-ments of REEB 18.034 as long as
the account bears the broker’s name as it appears on the license or
with a registered trade name and the words “trust account.”
Broker Practice TipCompetent banking practices require a broker
to make sure checks, drafts, and share drafts and the stubs of
those documents are numbered consecutively. A broker should also
retain any spoiled or voided checks, drafts, and share drafts and
file them with the cancelled, checks, drafts, and share drafts.
Good bookkeep-ing procedures will help a broker observe trust
account rules.
Duty to Notify DepartmentBrokers have a duty to notify the
Department of Safety and Professional Services when open-ing,
closing, or changing an a real estate trust account. A broker
provides certification of the account and consent to examination
and audits of the account by the DSPS or the Department of
Administration if it is an IBRETA account. The forms a broker must
use to notify the depart-ment and provide certification and
authorization are on the Department’s website.
REEB 18.035 Duty to notify the department. (1) Opening an
account. No later than 10 days after opening any real estate trust
account a broker shall provide the department with the name and
number of the account, with the name of the de-pository institution
in which the broker holds the account and with information
concerning whether the account is for client funds or for real
estate trust funds other than client funds. The information shall
be provided on a form, as required in REEB 18.037. (2) Changing or
closing an account. A broker shall notify the department no later
than 10 days after a broker changes a real estate trust account
name or number, changes the real estate trust account from one
depository institution to another, closes a real estate trust
account or changes a real estate trust account to or from an
interest-bearing common trust account established for client’s
funds. The notification shall be provided on a form, as required in
REEB 18.037.
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Authorization to Sign Trust Account Checks REEB 18.04
“Authorization to sign trust account checks” permits brokers to
designate signing authority on trust account checks to any other
person as long as the person is at least 18 years old. The person
does not have to be a real estate licensee, which means that a
broker could hire a bookkeeper, an accountant, or another
professional to handle the broker’s trust accounts. Hiring another
party to administer a broker’s trust account or giving another
person signing authority on the broker’s trust account checks does
not alleviate a broker’s responsibility for ensuring full
com-pliance with trust account rules.
Personal Funds in Trust AccountsA broker can only deposit real
estate trust funds in real estate trust accounts and cannot
com-mingle the broker’s personal funds or any other funds in the
trust account except that REEB 18.10 “Commingling prohibited”
permits a broker to deposit up to $300 of the broker’s personal
funds in the real estate trust account. The broker’s personal funds
must be specifically identified and can only be used to cover
service charges relating to the trust account. If a depository
institution notifies a broker that they have made a service charge
against the account for which there were not sufficient broker
personal funds to cover the charge, the broker has 10 business days
to deposit sufficient personal funds to cover the service charge.
This “10 days to pay” concept was included in the rules to avoid an
affirmative duty on the part of the bro-ker to fund the account
with an amount sufficient to ensure that service charges never
exceed the personal funds in the account.If a broker does not want
to keep personal funds in the trust account, the broker could
arrange with the depository institution to withdraw service charges
from a broker’s business account. Examples of charges against a
real estate trust account for which a broker would be responsible
include check printing charges, stop payment fees, or insufficient
funds fees.
REEB 18.036 Authorization to examine real estate trust accounts
and records. (1) Broker’s authorization. No later than 10 days
after opening a real estate trust account a broker shall furnish
the department authorization for the department to examine and
audit all of the broker’s real estate trust account records and
authorization for the department of administration to examine all
of the broker’s interest-bearing common trust accounts maintained
for client funds. The authori-zation shall be provided on a form,
as required in s. REEB 18.037.(2) Depository institution’s
certification. No later than 10 days after opening a real estate
trust ac-count a broker shall obtain the certification of every
depository institution in which the broker main-tains a real estate
trust account attesting to the existence of the account and
consenting to the examination and audit of the account by a duly
authorized representative of the department or, in the case of
interest-bearing common trust accounts maintained for client funds,
the department of administration. The certification shall be
provided to the department on a form, as required in s. REEB
18.037.
REEB 18.037 Form for notification and authorization. A broker
shall provide the infor-mation and authorization in ss. REEB 18.035
and 18.036 on a form provided by the department. This form shall be
designated “consent to examine and audit trust account.” However,
when closing a real estate trust account, a broker may inform the
board by letter only.
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Non-Depositable Items This regulation clarifies the conditions
under which a broker may receive and hold promissory notes as
earnest money, as well as what the broker should do if the parties
want to pledge other collateral, such as stock certificates,
vehicle titles or other assets, for earnest money.
Branch Office Trust Account Administrative rules used to require
an on-site supervising broker at any branch office apart from the
broker’s main office. The rules were amended to remove references
to branch offices when the rules gave supervising authority to a
supervising broker rather requiring an on-site supervising broker
for each branch office. The rules now permit a single broker to
supervise more than one physical location. REEB 18.12 “Branch
office trust account” is reminiscent of the old requirement that
branch offices operated as satellites of a broker’s main office,
each with an on-site supervising broker. In the event that a broker
maintains a branch office that has one or more separate real estate
trust accounts that are separate from the supervising broker’s main
trust account, the broker must maintain a separate bookkeeping
system for each branch office that has a separate real estate trust
account.
Interest Earned on Client FundsA broker must deposit all client
funds in an interest bearing common trust account (IBRETA)
according to REEB 18.031 “Deposits and types of accounts.” The
Department of Administration is the beneficial owner of any
interest earned on the account, minus any service charges. The
interest from these accounts is calculated by the depository
institution and annually remitted, no later than February 1st, to
the Department of Administration for use in homeless assistance
programs. At no time may the broker or any party remove or use the
interest earned on inter-est-bearing common trust account.
HANDLING TRUST FUNDSA broker must deposit all real estate trust
funds within 48 hours of receipt. If the broker receives funds on a
day before a holiday or another day when the broker’s depository
institution is closed, the broker must deposit the funds within the
next two business days of the depository institution. If a broker
receives trust funds that the broker cannot deposit, the broker has
one business day to forward the funds to the payee or return the
funds to the payor. For example, if a listing broker receives an
earnest money check made out to the seller, the broker has one
business day to return it to the buyer or forward it on to the
seller. If a listing broker receives an offer to purchase with
REEB 18.11 Non-depositable items. (1) Other than promissory
notes. With the exception of promissory notes, a broker shall not
hold any instrument, equity or thing of value which is not
depositable in a real estate trust account. Non-depositable items
other than promissory notes shall be held by one of the parties to
a transaction or some other party, subject to an escrow agreement
prepared by the parties or an attorney.(2) Promissory notes. A
broker may accept and hold earnest money downpayments in the form
of promissory notes received from the parties to a transaction, if
the broker, the parties or the parties’ attorney or attorneys:(a)
Delete or modify the earnest money provisions in a form approved
pursuant to s. REEB 16.03 to show receipt of a promissory note;(b)
Grant the broker the authority to hold the note; and(c) Provide
appropriate disbursement directions for the broker.
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earnest money and the seller rejects the offer soon enough to
permit the listing broker to return it to the buyer within the 48
hours following receipt of the check, the broker does not have to
deposit it in the broker’s trust account but can return it to the
rejected buyer. In this situation, a broker should make a photocopy
of the returned check and obtain documentation from the buyer
acknowledging receipt of the returned earnest money.
Receipt for Earnest Money Received by Broker A broker should
issue a receipt when a buyer includes earnest money with an offer
and REEB 18.05 “Receipt for earnest money received by the broker”
requires a broker to “indicate on the offer to purchase the receipt
of earnest money received from a buyer at the time the offer is
drafted.” If a buyer pays earnest money at a later time, for
example, as earnest money paid following acceptance, the broker
should not sign the receipt on the offer but should instead, give a
sepa-rate receipt to the buyer. The original receipt may be given
to the buyer and the broker can retain a duplicate in the
transaction file. A broker should never issue a receipt for funds
unless the broker actually receives them. Insufficient Funds Checks
If a broker deposits a check in the broker’s trust account that is
returned due to insufficient funds, the broker should immediately
notify the client. Unless otherwise directed by the client, the
broker may attempt to collect the funds by resubmitting the check
to the bank. If these efforts are unsuccessful, the client should
be notified so that the client can decide what action should be
taken with respect to the contract. The client could, for example,
give the other party an extension or give the other party written
notice of a default. The client may also decide whether to hold the
other party for the payment of the check.
Transfer of Trust Funds Between Brokers REEB 18.08 requires
cooperating brokers to transfer the earnest money or other trust
funds to the listing broker within 24 hours of the transfer
deadline stated in the offer, option, exchange agreement or lease.
This rule, however, has little relevance because the earnest money
pay-ment provisions in the department-approved offers to purchase
and other forms now provide for earnest money checks to be payable
to, and held in the trust account of the listing broker. Upon
receipt of an earnest money check payable to the listing broker,
the cooperating agent may deliver the check with the offer. If the
cooperating agent is faxing the offer, the agent can send a
photocopy of the check and follow up by mailing the check or
otherwise promptly deliv-ering the check to the listing broker.
Upon receipt of an earnest money check, payable to the listing
broker with an offer, a cooperating agent may acknowledge receipt
of the earnest money check on the offer.
REEB 18.031(1) Deposits and types of accounts.(1) Time of
deposit. A broker shall deposit all real estate trust funds
received by the broker or broker’s salespersons or time-share
salespersons in a real estate trust account within 48 hours of
receipt of the trust funds. If funds are received on a day prior to
a holiday or other day when the de-pository institution is closed,
the broker shall deposit the funds within the next 2 business days
of the depository institution. If a broker receives funds which
cannot be deposited by the broker, the broker shall, no later than
one business day after receipt, either:(a) Forward the funds to the
payee, if someone other than the broker; or
(b) Return the funds to the payor.
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If the check was made payable to the cooperating broker and the
buyer is not available to rewrite the check, the cooperating agent
may make a photocopy of the earnest money check and send the
photocopy to the listing broker. If the cooperating agent’s
employing broker per-mits it, the cooperating agent could endorse
the check over to the listing broker. There can be risks to this
practice and employing brokers should consult with an attorney to
develop a policy on endorsing checks over to listing brokers.
ESCROW Wisconsin brokers cannot draft escrow agreements and are
not part of the escrow process but a basic understanding of escrow,
when parties use it, and a broker’s role related to escrow are
impor-tant for a broker to know. Escrow is property or a document
delivered to a third party by a person making some sort of promise
to be held for the party who is to benefit from the promise. Escrow
can also refer to the process of holding a document or property
until it is delivered to the person to whom it was promised. An
escrow agreement is the instructions parties give to a third party
who is holding the escrow items or document. Generally, in
Wisconsin, real estate transactions do not involve escrow but most
transactions in the Western United States use escrow for closing
rather than settlement that Wisconsin buyers and sellers typically
use. Many consumers know the word “escrow” but may not know what it
actually means and, especially first-time buyers may be confused
about escrow and whether it will be a part of the real estate
transaction. Having a general understanding of escrow will permit a
broker to educate parties who are familiar with escrow in a
transaction but unfamiliar with closing by settle-ment or parties
who have never participated in a transaction and assume that escrow
is part of the process when it may not be. When a transaction
closes in escrow, a third party, often a title company will hold
the deed and the funds for the purchase and arrange for the
transfer. A typical closing in Wisconsin involves the parties
actually meeting together and trading funds for the deed to the
property. Wisconsin home buyers may also be familiar with escrow if
the transaction is financed by a mortgage. The lender will often
require the borrower to pay property taxes and homeowner’s
insurance in escrow, which is held by the lender and used to pay
the tax and insurance bills when they are due.
Parties may also use escrow to hold earnest money. If the
parties to a real estate transaction want to keep interest earned
from their real estate trust funds, the broker cannot hold the
funds and the broker cannot help the parties set up this account.
Brokers must deposit all client funds they receive from sales
transactions, such as earnest money and down payments, in an
interest-bearing com-mon trust account (IBRETA) for the benefit of
the Wisconsin Department of Administration and the homeless. If
parties want the interest, the parties can have a third party hold
the funds and use an escrow agreement to address custody of the
funds.
REEB 18.06 Escrow agreement for earnest money not held by the
broker. If the parties to a transaction do not desire that the
broker hold the earnest money in the broker’s real estate trust
account, and wish to designate an escrow agent other than the
broker, the broker may not draft the escrow agreement. The escrow
agreement shall be drafted by the parties or an attorney. The
broker may not hold the funds in the broker’s real estate trust
account, nor may the broker act in any way as custodian of the
funds for the parties. The funds, pursuant to the escrow agreement,
shall be held by some other party, such as a bank, a savings and
loan association, a credit union or an attorney.
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After-closing Escrow Agreements If parties to a contract want to
or need to set up an escrow account to hold after closing funds,
REEB 18.07 “After closing escrow agreements” permits a broker to
draft the agreement “if a form for this purpose has been approved
by the department for use by licensees pursuant to REEB 16.03.” The
department has not approved a form for drafting after closing
escrow agreements, which means that a broker cannot draft after
closing escrow agreements. If the parties need to escrow funds for
after-closing obligations, the parties or an attorney must draft
the agreement.
TRUST FUND DISBURSEMENTS The rules for disbursing trust funds
from a broker’s trust account apply to all funds but they are most
often applied to disbursements of earnest money. The rules in REEB
18.09 correspond with the earnest money disbursement provisions in
the department-approved offer to purchase forms.
Written Disbursement AgreementThe parties may produce and sign a
written disbursement agreement directing the broker to dis-burse
the earnest money according to the agreement. Parties can use the
WB-45 Cancellation Agreement and Mutual Release or some other
written instruction to the broker, drafted by the parties or an
attorney, and signed by both parties. When a transaction fails to
close and the parties do not produce a signed, written disbursement
agreement, the broker holding the ear-nest money should not do
anything for at least 60 days after the scheduled closing date. The
broker holding the earnest money can notify the parties that the
broker must have a written disbursement agreement signed by the
parties and that if the parties do not produce an agree-ment, the
broker can seek a court order or an attorney’s opinion on
disbursement and disburse accordingly. After the 60-day deadline,
the broker holding the earnest money can initiate a small claims
action or seek an impartial attorney’s written opinion as to who
should receive the earnest money. The broker may deduct up to $250
from the earnest money for the legal fees involved in either of
these alternatives. The broker also may continue to do nothing and
allow the parties to find a way to resolve the earnest money
dispute themselves or through their attorneys. Party’s Court Action
A broker may disburse the earnest money as directed by a court
order from a court hearing the parties’ earnest money dispute.
Under REEB 18.09(1)(d) disbursement rule, the parties may go to
court at any time and the broker can disburse the earnest money
according to a court order. For the court to have proper
jurisdiction to order the broker to disburse, the broker will be
made a party to the lawsuit as a defendant.
REEB 18.07 After closing escrow agreements. (1) By separate
agreement. If the parties to a contract wish, or are required, to
place funds in es-crow which are to be held after closing by the
broker in the broker’s trust account or by another per-son until
some future occurrence, an agreement to that effect shall be
prepared by the parties or an attorney. If the broker holds these
funds, the broker shall place them in the broker’s real estate
trust account. The broker may draft the escrow agreement if a form
for this purpose has been approved by the department for use by
licensees pursuant to s. REEB 16.03. (2) On closing statement. A
broker may hold in the broker’s trust account without a separate
escrow agreement occupancy or possession escrows, escrows for final
proration of taxes, and escrows for charges incurred by a seller
but not yet billed, provided that the closing statement shows that
the broker is holding the funds.
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Disbursement By Law A broker may also disburse earnest money
pursuant to law. This refers to the statutory require-ments such as
the condominium law or the seller disclosure law for the return of
the buyer’s earnest money. Wis. Stat. §703.33(4) provides that if a
condominium unit purchaser rescinds an offer within five business
days of receiving the condominium disclosure materials, the
pur-chaser is entitled to the return of any earnest money deposits.
Similarly, Wis. Stat. § 709.05 provides that if a buyer rescinds an
offer within two business day after a seller’s failure to pro-vide
the report within ten days of acceptance, the buyer is entitled to
the return of any earnest money deposits. In the case of a
disbursement made as required by law, the broker must give the
parties a 30-day prior written notice by certified mail of the
broker’s intent to disburse if the broker has knowledge that either
party disagrees with the disbursement.
Attorney Opinion After the 60-day deadline, a broker does not
have to take any steps to promote disbursement and can continue to
hold the funds and wait for a written disbursement agreement signed
by the parties. A broker can also obtain an attorney opinion
directing the broker’s disbursement. The attorney cannot represent
any of the parties to the contract and the opinion should be in
writing. The broker also must give the parties at least 30 days
written notice by certified mail of the broker’s intent to disburse
if the broker has knowledge that either party disagrees with the
disbursement. A copy of the attorney’s written opinion can be sent
with this notice. For a disbursement pursuant to an attorney’s
opinion, the broker shouldn’t return the earnest money to a party
until after the 60 days have passed unless specifically ordered by
the court to do so at an earlier time. The broker may, however,
prepare for these measures by securing an attorney’s disbursement
opinion before the 60 days has passed. The 30-day prior notice by
certified mail may be given before the 60 days have elapsed.
InterpleaderA broker can also seek the assistance of a neutral
attorney and file an interpleader action. An interpleader action is
a lawsuit brought by the custodian of money or property when the
custo-dian is not certain who is rightfully entitled to the funds
or property. In the earnest money situ-ation, the suit is filed by
the broker who is not qualified to render the legal judgment on
entitle-ment to the earnest money. The interpleader action names
the competing parties, usually the seller and the buyer, and forces
them to litigate their respective claims. The broker normally
participates in the action only to the extent of starting the
action and paying the earnest money into the court or as the court
directs. The broker should not initiate an interpleader action
until after the 60 days have passed unless specifically ordered by
the court to do so at an earlier time. Specific Contract Provision
If the parties have included a specific provision in the contract
or an addendum, which specifi-cally directs the broker to make a
disbursement at a certain point or under particular conditions, the
broker may disburse provided that the broker’s authority is clear.
The broker must first give the parties at least 30 days prior
written notice by certified mail of the broker’s intent to disburse
if the broker has knowledge that either party disagrees with the
disbursement.
Unclaimed Funds The other option that the broker has, absent any
court orders or legal requirements for dis-bursement, is to do
nothing. The broker may hold the earnest money indefinitely. After
five years, the earnest money becomes abandoned property under
Chapter 177 of the Wisconsin Statutes.
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Commission Disbursement After a transaction is consummated or
terminated, the broker has 24 hours in which to remove the earned
commission or fees according to REEB 18.09 (3). This general rule
applies to commissions earned under sales or lease transaction.
However, there is an exception for fees a broker earns as a
property manager. A broker who holds property management funds in a
trust account must disburse any earned property management fees on
a regular monthly basis unless it is otherwise agreed in a written
property management agreement.
PROPERTY MANAGEMENT AND TRUST FUNDSProperty Management and
Rental Accounts If a broker receives non-client real estate trust
funds, such as funds from rental and property management
activities, the broker can deposit them in one of three types of
accounts:1. Non-interest bearing real estate trust account for
non-client funds. Non-client funds such
as security deposits and rent may be deposited in a non-interest
bearing real estate trust account.
2. Interest-bearing real estate trust account for non-client
funds. Non-client real estate trust funds from rental transactions
may also be deposited in an interest bearing trust account. A
broker must obtain written direction for disbursement of interest
from the party or parties for whom the broker is holding the funds.
The authorization must specify how and to whom
REEB 18.09 Disbursement of trust funds. (1) Proper disbursement.
A broker who disburses trust funds from his or her real estate
trust account under the following circumstances shall not be deemed
to have violated s. 452.14 (3) (i), Stats.:(a) To the payor upon
the rejection, expiration or withdrawal prior to binding acceptance
of an offer to purchase, lease, exchange agreement or option on
real estate or a business opportunity;REEB 18.09(1)(b) (b) As
directed in a written earnest money disbursement agreement signed
by all parties having an interest in the trust funds. A closing
statement is a written earnest money dis-bursement agreement for
the purposes of this subsection. An offer to purchase, lease,
exchange agreement or option is not a written earnest money
disbursement agreement for the purpose of this subsection.(c) To a
court having jurisdiction over a civil action involving all parties
having an interest in the trust funds;(d) As directed by order of a
court;(e) Upon a good faith decision based upon advice of an
attorney not representing any party to the contract;(f) Upon
authorization granted within the contract; or(g) As otherwise
provided by law.(2) Notification of disbursement. Prior to making a
disbursement of trust funds under sub. (1) (a) where the broker has
knowledge that not all parties agree that the rejection or
withdrawal occurred prior to binding acceptance, and prior to
making a disbursement under sub. (1) (e), (f) and (g) where the
broker has knowledge that either party disagrees with the
disbursement, the broker shall attempt to notify all parties in
writing of the intent to disburse. The notice shall be delivered by
certified mail to the parties’ last known addresses and shall state
to whom and when the disbursement will be made. The disbursement
may not occur until 30 days after the date on which the notice is
sent.
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the broker is to disburse interest earned on the real estate
trust funds. The broker cannot receive the interest from this
account and it cannot be used for the benefit of the broker. The
interest is usually payable to one or both parties to the contract.
For example, in the case of a property owner and tenant, the tenant
will pay a security deposit and the parties can direct the broker
to hold it in an interest-bearing real estate trust account for
non-client funds with the interest to be paid to the tenant when
the property owner returns the tenant’s security deposit.
3. Rental owner’s account. A broker can also deposit non-client
funds from property manage-ment and leasing activities into the
rental property owner’s account. An owner’s account is an account
maintained by the rental property owner for the deposit and
disbursement of the owner’s funds. A broker may deposit rental
application deposits, security deposits, and rent into the owner’s
account if the checks are payable to the owner or to the owner’s
account. The application form, lease, and other tenant paperwork
should direct the tenant to make payments payable to the owner and
not the broker or property management company. The rental property
owner can designate the broker as a signatory on the owner’s
account and make disbursements to the extent authorized by the
owner in writing.
The administrative rules do not expressly authorize or prohibit
brokers placing non-client funds in an interest-bearing common
trust account (IBRETA). Because the law is not clear, most brokers
avoid using an IBRETA for non-client real estate trust funds and
use a real estate trust account for non-client funds, which may be
interest-bearing or not, or an rental property owner’s account.
When a real estate licensee owns a rental property, REEB 18.031(4)
requires the licensee/property owners to “either place security
deposits related to that property in a real estate trust account or
shall provide in the lease for security deposits to be held in an
account maintained in the name of the owner or owners.”
TRUST ACCOUNTINGBookkeeping SystemParties conduct real estate
transactions using documents such as offers to purchase, leases,
options, receipts for earnest money or additional down payments,
invoices, closing statement, deposit slips, and checks. These
documents serve as the basis of the parties’ and the broker’s
accounting records. The trust account bookkeeping system accounts
for details such as when a broker receives, deposits, or disburses
funds, who owns the funds and to whom and how a broker should
disburse funds. REEB 18.13 requires each broker to maintain a
bookkeeping system in the office to record the receipt, deposit,
and disbursement of real estate trust funds. A broker’s bookkeeping
system consists of the forms and records a broker uses with the
bro-ker’s real estate trust account. These documents will include
deposit slips, monthly statements, and trust account checks. The
bank or other depository institution where a broker maintains a
real estate trust account will normally send out a monthly
statement showing deposits received and disbursements made. A
broker will rely on the monthly statements when completing the
broker’s statutorily required monthly reconciliation of the
account. A broker’s deposit slips will be imprinted with the
broker’s trust account number and submitted with deposits to the
real estate trust account. The administrative rules require that a
broker’s trust account bookkeeping system implement certain
procedures and records to ensure that the broker is holding the
proper amount of funds, and that the broker can identify the
individual owners of the funds, and the amount being held on behalf
of the owner.
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A broker’s real estate trust account bookkeeping system must
consist of the following four activities:
1. Posting daily entries in the journal;2. Posting journal
entries to the ledgers;3. Preparing a monthly trial balance and
account reconciliation; and4. Broker review of the reconciliation
and other records.
A broker keeps a journal like a personal checkbook by entering
all receipts and disbursements in the cash journal in chronological
order as they occur. A broker only makes an entry when there has
been a receipt or disbursement of funds. Each entry must be
accurate, precise, and complete because these are permanent
records, subject to the review at any time by the Department of
Safety and Professional Services, and comprise the foundation for
the broker’s other accounting records.
REEB 18.13 Bookkeeping system.(1) Cash Journal. A broker shall
maintain a record, called a journal, which shall show the
chrono-logical sequence in which real estate trust funds are
received and disbursed as follows:(a) For funds received, the
journal shall include the date, the name of the party who is giving
the money, and the amount. (b) For disbursements, the journal shall
include the date, the payee, the number of the check, share draft
or draft, and the amount. (c) The journal shall identify each
transaction by including the name of the principal, an
identification number or other means of identification which will
link the journal to the transactions and the ledger described in
sub. (2).(d) The journal shall show a running balance for each day
on which receipts or disbursements are entered.
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The ledger separately shows the receipts and the disbursements
for each particular transaction. A broker records each entry from
the journal on the ledger page representing the specific
trans-action to which the entry pertains. A broker uses a ledger to
sort out the chronological entries from the journal and record each
entry according to the transaction. Each sale, rental, or other
kind of real estate transaction will have a separate ledger page
showing the receipts and dis-bursements pertaining to that
transaction. The ledger also contains a separate page showing the
personal funds the broker deposits in the trust account to cover
any service charges.
If the broker receives a promissory note, the broker does not
make a journal entry for the note but records it in the appropriate
ledger page for that transaction. The running balance does not show
reflect the amount of the promissory note because the broker did
not receive actual funds but rather a promise by a party to provide
funds at some point.
REEB 18.13 Bookkeeping system.(2) Ledger. A broker shall
maintain a record which shows the receipts and the disbursements as
they affect each particular transaction e.g., transactions between
buyer and seller, landlord and ten-ant, etc. The ledger entry shall
include the names of both parties to a transaction, the dates and
the amounts received and the name of the party giving the money if
different from the buyer. The ledger entry shall include the date,
payee, number of the check, share draft or draft and amount when
funds are disbursed. The ledger shall show a running balance and
segregate each transaction. The broker shall maintain a separate
ledger or separate section of the ledger for each of the various
kinds of real estate transactions, e.g., sales, rental collections
or mortgage and land contract collections.
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The trust account reconciliation process is similar to the
process an individual uses to balance a personal checkbook each
month. Each month, the broker receives an account statement from
the bank, credit union, or savings and loan where the broker has
the real estate trust account. Using that statement, the broker
must reconcile the statement balance with the book-keeping records.
Banks or other depository institutions often provide a
reconciliation form on the back of the monthly account statement. A
broker’s written reconciliation shall include the ending account
statement balance, the date and amounts of the deposits in transit,
the check numbers and amounts of checks written but not paid by the
bank or other depository institution as of the ending date shown on
the account statement to be reconciled, and the reconciled account
statement ending balance. The reconciliation will list all
outstanding deposits and checks. The broker must reconcile the
account statement with both the journal and the led-ger.
Reconciliation is a function that should be performed by the
broker. If someone else in the broker’s office is doing the
bookkeeping and the monthly reconciliation, the broker remains
responsible for the account and any errors in the bookkeeping. The
DSPS permits a broker to delegate the authority to conduct the
bookkeeping but the broker may not delegate responsibil-ity for the
account.
When reviewing an account, a broker should pay attention to
outstanding items in the trust account such as funds retained
beyond the agreed-upon release date or checks disbursed to parties
that have not yet cleared a broker’s account. If necessary, a
broker should take action to remedy the outstanding items.
REEB 18.13 Bookkeeping system.(3) Account reconciliation. The
broker or a person designated by the broker shall reconcile the
real estate trust account in writing each month except in the case
where there has been no activity during the month. The written
reconciliation shall include the ending account statement balance,
the date and amounts of the deposits in transit, the number of the
check, share draft or draft and amount of checks, share drafts or
drafts written but not paid by the depository institution as of the
ending date shown on the account statement to be reconciled, and
the reconciled account statement ending balance.
REEB 18.13 Bookkeeping system.(4) Trial balance. The broker
shall prepare or have prepared, in conjunction with sub. (3), a
written listing, “trial balance”, of all open items in the real
estate trust account. The list must show the names of the parties
to the transaction and the amount held in trust for the parties at
the time corresponding to the account reconciliation. The broker
may in lieu of the names of the parties to the transaction
substitute the ledger page number or other means of identification
from the ledger to label the funds in the trial balance.
REEB 18.13 Bookkeeping system.(5) Validation. The broker or a
person designated by the broker shall review the reconciled account
statement balance, the open ledger account listing, and the journal
running balance to ensure that all of these records are valid and
in agreement as of the date the account statement has been
rec-onciled.
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Most brokers use some sort of bookkeeping software to maintain
trust account records. To find a program that complies with the
requirements of the trust account rules, a broker should consult
with a technical service provider to be sure that all of the
required elements of REEB 18.13 (6) will be met by the program.
Ultimately, whether a broker does bookkeeping with an old-fashioned
ledger or the most sophisticated software and technology available,
the broker’s records must be in a form that the Department can
review and inspect at any time.
PREPARING FOR CLOSINGThe closing of the transaction is the time
when the parties complete the performance of their con-tractual
duties. In an offer to purchase, a buyer has agreed to pay to the
seller the purchase price of the property, minus any amounts
specified for credits, prorations and money already paid. The
seller has agreed to convey ownership of the property, both real
and personal, to the buyer, free and clear of any liens and
encumbrances other than those agreed to in the offer. The role of
the broker in the closing of the transaction is to assist the
parties in meeting their contractual responsibilities. The broker
or brokers participating in the transaction will work with the
seller and the buyer and settlement service providers such as the
title insurance company to coordinate the closing details.
Deadlines and Contingencies of the OfferA buyer’s offer to
purchase will contain many deadlines. The buyer may agree to pay
earnest money with some days of acceptance and have deadlines for
completion of contingencies, such as inspections, financing, and
testing. The date set for closing is another deadline a buyer will
have in an offer. Sellers will also have deadlines in an offer such
as providing a real estate condition report, curing defects, or
complying with other contingencies. A broker needs to be aware of
these deadlines and help parties comply with them, or, if
necessary, attempting to extend the deadlines through the use of an
amendment.
REEB 18.13 Bookkeeping system.Use of computers. A computerized
system may be used to maintain the broker’s bookkeeping sys-tem
if:(a) The system complies fully with subs. (1) to (5).(b) All
bookkeeping entries required by this chapter are made in the
computerized system, even if other records are being simultaneously
maintained.(c) A backup copy of the bookkeeping records required
under subs. (1) to (2) is made on any day on which entries are made
in the computerized bookkeeping system. The backup copy shall be
made on a disk or other medium which is separate and distinct from
that on which the source documents reside.(d) After complying with
subs. (3) to (5), the document which records the account
reconciliation, trial balance and validation is immediately copied
to a backup medium and maintained by the broker.(e) All records
which are not maintained as written paper records are capable of
being immediately converted to written paper records and
immediately made available without charge to the depart-ment for
the purposes of department audit or investigation.(f) All
computerized trust account records are retained pursuant to s. REEB
15.04.
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Evidence of TitleOne of the deadlines a seller will have to meet
is the deadline to provide evidence of merchant-able title to the
buyer. Merchantable title is title that is acceptable to the buyer.
The standard terms in a Wisconsin offer require a seller to provide
evidence of merchantable title to the buyer by providing a title
insurance policy. There are two primary methods for the seller to
provide evidence of merchantable title to the buyer. Historically,
a seller could provide a buyer with an abstract of title. The
abstract would show a summary of all recorded documents and court
actions affecting the title to the real estate. The attorney for
the buyer or the lender would review the abstract to provide an
opinion of title, stating the identity of the current owners and a
summary of the pertinent outstanding items affecting the title,
such as mortgages, easements, unpaid taxes, and others.A much more
common way for a seller to provide evidence of merchantable title
is by providing a title insurance policy. The Wisconsin offers
require a seller to provide evidence of merchant-able title with
title insurance though a buyer and a seller could modify the offer
if the parties chose to use an abstract. If a buyer is financing
the purchase with a mortgage, the lender will require a title
insurance policy. An offer will contain the requirements for the
insurance. For example, it may state that the title insurance
commitment shall be provided to the buyer or buyer’s attorney not
less than three business days before closing, with the effective
date of the commitment not more than 15 days old at the time of
delivery. The title insurance commitment shall show the seller’s
title to the property to be merchantable subject only to liens that
will be paid out of the closing proceeds.The broker typically
orders the title insurance, and should do so early enough to allow
the above deadlines to be met. If the buyer’s copy of the title
insurance commitment is delivered to the cooperating broker, that
broker should ensure that it is timely forwarded to the buyer or
buyer’s attorney.
The basic function of title insurance is to guarantee marketable
title. An owner’s title insur-ance policy insures the owner or
other named insured against loss or damage up to the stated amount
of the policy. Title insurance helps protect against things such as
errors in public records, hidden defects not disclosed by the
public records, or title examination errors. In addi-tion, the
policy also covers costs and attorney’s fees that a party would
have to spend defending a claim against the title.
The title insurance policy protects against: • Title to the
described real estate interest being vested in another;• Any
defect, lie, or encumbrance other than those listed as exceptions
in Schedule B or else-
where in the policy;• Lack of access rights; and• Unmarketable
title.
Schedule ASchedule A shows the basic information about the
property and transaction. It names the proposed insured, the
current title holders, the amount of the title insurance to be
issued and the legal description of the property involved in the
transaction, often with the street address. It also states an
effective date, the date up to which the title insurance company
was able to examine recorded documents. This date will often be
several weeks or more prior to the date that the title insurance
commitment is delivered to the parties.
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A broker does not have to be able to analyze a title insurance
commitment to determine the state of the title being transferred
but the broker should review the policy to assist the parties. The
broker should review Schedule A to determine that the following
information is correct:1. Is the amount of the insurance equal to
the final purchase price?2. Is the proposed insured’s name
correct?3. Is the current title holder the seller who has signed
the offer to purchase?4. Is the address showing with the legal
description the correct property address?5. Is the effective date
recent enough to comply with the offer requirements?
Often, the title company will deliver all of the title insurance
commitment copies to the broker facilitating the transaction. The
broker should deliver copies to the parties in a timely manner.
Schedule B-1 - Requirements for ClosingSchedule B-1 of the title
commitment lists the title company’s requirements to issue the
owner’s or lender’s title insurance policy. Typical requirements
include:
1) Payment of the policy premiums;2) A deed from the seller of
record to the buyer, who is the proposed insured;3) A mortgage from
the buyer to the lender;4) Payment and release of any outstanding
mortgages held by the seller of record; and5) Satisfaction of any
tax liens, judgments, or other claims against the seller of
record.
Schedule B-2 - Standard Title Insurance Commitment ExceptionsThe
exceptions contained in Schedule B-2 include the standard,
boilerplate exceptions that appear in virtually every commitment
issued by a title company. A party can usually clear and remove one
or more of the standard title exceptions from any given title
commitment by tendering adequate documentation to the title
insurance provider.
Construction Lien Exception - Owner’s Affidavit as to Liens and
PossessionThis title commitment exception refers to “Any lien or
right to lien for services, labor, or material imposed by law and
not shown by public record.” A party can remove a construc-tion
lien exception if the seller completes an owner’s affidavit. The
title insurance provider will usually mail an owner’s affidavit
with the title commitment. The affidavit asks the owner to indicate
either that no work has been done on the subject property during
the six months prior to closing, or work has been done by named
contractors who have furnished lien waiv-ers that are attached to
the affidavit. If work has been completed on the subject property
in the six months prior to closing, the seller should furnish lien
waivers from the general contractor and all subcontractors.
Cancelled checks and paid receipts are not sufficient evidence of a
contractor’s waiver of a lien. The title insurance provider will
also require lien waiver forms from any company that provided
materials directly to the construction site. Parties in Possession
Exception - Owner’s Affidavit as to Liens and PossessionThe title
insurance commitment also has a standard exception for “Rights and
claims of parties in possession not shown by the public records.”
This exception is for possessory interests arising from unrecorded
land contracts, leases, adverse possession, or other sources that
are not of record. If the owner’s affidavit indicates that there
are no parties in possession, this insurance provider may remove
this exception.
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Exception for Easements - Owner’s Affidavit as to Liens and
Possession, SurveyAnother standard title exception addresses
unrecorded easements or claims that are not shown by the public
record. For example, an adverse possession claim would fall within
this exception. The title company will remove this exception if the
owner’s affidavit shows that no other party is using of any portion
of the property without a recorded interest and if a current survey
map reveals no apparent easements in the field. Exception for
Encroachments, Boundary Disputes, Etc. - Survey MapAnother standard
exception is for encroachments, overlaps, boundary line disputes,
and any other matters which would be disclosed by an accurate
survey and inspection of the premises. The title insurance provider
may remove this exception if the party provides a current survey
that shows no boundary issues. If the survey shows, for example,
that the garage encroaches, the provider will remove the general
exception and replace it with a specific exception for the garage
encroachment only. A current survey means a survey prepared no more
than six to 12 months prior to closing. The provider may accept an
older survey depending on the circumstances of the transaction.
Exception for Post-Effective Date Liens and Encumbrances - Gap
EndorsementsThis standard exception excludes title insurance
coverage for title issues such as defects, liens, encumbrances,
adverse claims or other matters first appearing in the public
records or attaching subsequent to the effective date of the title
commitment but before the date the insured records the deed. The
period of time from the effective date of the title insurance
commitment shown on Schedule A to the date that the new deed is
recorded is known as the “gap.” The standard exception means that
the title insurance company will not insure against any claims that
arise during the gap period. To clear the gap exception, a buyer
can have the seller purchase a “gap endorsement” from the insurance
provider. A seller does not have to pay for this endorsement unless
the buyer includes it as part of the offer. Special Assessments
Exception - Special Assessments LettersThis standard exception
excludes coverage for special taxes or assessments, if any, payable
with the taxes levied or to be levied for the current and
subsequent years. Assessments, such as those for water and sewer
installations, may not appear in the county treasurer’s records. A
buyer can clear this exception by providing special assessment
letters from the municipality. Special assessment letters are
letters from a municipality stating that there are not currently
any special assessments on the subject property. Additional
ExceptionsDepending upon the property, the insurer may also include
exceptions for: easements affecting the property; mortgages
affecting the property; the rights of the public relating to roads,
highways and rights-of-way; title and public rights to filled-in
lands, submerged lands and lands below the ordinary high water
mark; riparian rights; other liens and encumbranc-es not otherwise
eliminated; and lack of authorized ingress and egress.
Anticipating Title DefectsThe parties to an offer often
wrongfully assume that any title problems will be covered by the
title insurance policy. In addition to the exceptions in the
seller’s warranty deed, the title insurance policy will have
standard policy exceptions unless the parties have removed the
standard exceptions with appropriate documentation. These liens and
claims might include construction liens, occupants in possession,
adverse possession, easements, and claims not of record. The seller
should except any such potential claims from the seller’s deed
war-ranties section of an offer to purchase if a seller cannot
eliminate the exception before or at closing.
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When taking a listing, a listing broker can ask a seller to
respond to questions that a title insur-ance provider will include
in a standard owner’s affidavit. By doing this early in the
process, the seller and the listing broker can identify potential
issues with title and begin to gather the documentation necessary
to address the standard exceptions or other potential title issues.
The seller and the listing broker can identify the title issues
that the seller can resolve before closing and the issues that the
seller will list as exceptions to the seller’s warranty of title
evidenced by the seller’s warranty deed. To simplify this process,
the listing broker can use a brief questionnaire when listing
properties that will trigger the seller to identify potential title
issues that would not be evident from simply examining recorded
documents. The listing bro-ker should also obtain a listing report
from the title insurance company.
Document Preparation for ClosingParties execute and transfer
many documents at closing. A seller usually provides a deed, a
transfer return form, special assessment letters, a certificate of
compliance for rental weath-erization, lien waivers, affidavits,
payoff statements, and other items. A buyer will have many
documents to sign from lenders, insurers, and other settlement
service providers. A broker can prepare many of these documents but
it is customary in Wisconsin closings to have a title insurance
company or an attorney prepare these items for the parties. Brokers
still need to be familiar enough with the documents to give general
explanations to the parties.
The seller is responsible for providing the documents necessary
to convey title to the buyer. For the typical transaction the
following documents will be necessary to accomplish this trans-fer
of ownership:1. Deed. This document transfers ownership of the real
estate from the seller to the buyer.
It is ordinarily a warranty deed, although some transactions may
call for another type of deed, such as a personal representative’s
deed or a trustee’s deed. The exceptions to warranties section of
the deed should list those exceptions that were enumerated in the
offer to purchase. The deed should be signed by all owners of
record. In addition, the signature of a non-titled spouse may be
necessary if the property being conveyed is the homestead of either
spouse. The deed must be properly signed and either authenticated
or acknowledged.
2. Transfer Tax Return. This document shows the sale price of
the property and the amount of the transfer fee which will be due,
together with other information about the transaction. The seller
is responsible for the payment of the transfer fee, which will be
deducted from the seller’s proceeds.
3. Affidavit of Liens and Possession. This is a sworn statement
from the seller, indicating whether any work has been done on the
property by contractors within the preceding six month period. It
also provides information about any tenants who may be renting the
property. If work has been done, the seller must itemize what type
of work was done, and provide the contractor information. As
previously mentioned, lien waivers should be obtained from any such
contractors, as well as the material providers if applicable.
4. Bill of Sale. This document transfers ownership of any
personal property included in the transaction from the seller to
the buyer. It is similar to the deed in that the seller not only
conveys ownership to the buyer, but also warrants that the seller
actually owns the per-sonal property being conveyed and that it is
not subject to any liens or encumbrances.
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CLOSING STATEMENTSSome brokers prepare closing statements for
their transactions and others have an attorney or the title company
prepare them. Regardless of the who prepares the documents, brokers
need to understand the steps to preparing a closing statement. When
presenting an offer to a seller, the seller often wants the broker
to provide an estimation of what the seller will net if the seller
accepts the offer. To provide the estimation, the broker must have
a fundamental understanding of closing statements. The closing
statement shows the financial details of the transaction. In an
offer to purchase, a buyer agreed to pay a purchase price and maybe
other amounts for other items such as personal property. The seller
agreed to give credits to the buyer, such as for earnest money, to
prorate taxes and other expenses and income. A seller may have also
agreed to pay other items such as a buyer’s financing cost,
commissions, and repairs. A closing statement usually consists of
two parts. The first part shows the details of the amount that a
buyer needs to bring to closing to pay what the buyer owes the
seller. The amount is determined by subtracting credits and
prorations from the purchase price. The amount the buyer brings to
clos-ing plus earnest money already paid represent the seller’s
proceeds. The second part of the closing statement lists
disbursements from a seller’s proceeds. Disbursements may
include:
• Title insurance premium:• Broker’s commission;• Wisconsin Real
Estate Transfer Fee;• Mortgage and judgement payoff amounts; •
Recording fees to record documents to release liens; • Special
Assessments;• Delinquent taxes; and • Unpaid utility and repair
bills, which could result in liens on the property if unpaid.
Income and Expense Proration: Taxes, Municipal Utility Bills,
Fuel, Rents, and InsuranceProration is how sellers and buyer
allocated the responsibility for income and expenses of a property.
For example, a property owners receives a real estate tax bill in
December for the property’s annual tax liability. The buyer will
receive the bill and will have to pay it but the seller may have
lived in the property for part of the billing period. The seller is
responsible for some of that tax liability because the seller owned
the property for party of the billing period. The parties do not
know the actual tax liability at closing so they select a formula
to use to estimate and prorate tax responsibility. In a residential
transaction, the parties often use the past year’s tax amount to
prorate current tax responsibility.
To prorate taxes, parties take the last know bill and divide it
by the number of days in the billing period. The resulting daily
amount is multiplied by the number of days that have elapsed from
the prior bill to the date prior to closing. The typical tax
proration will divide last year’s tax bill by 365, or 366 if it was
a leap year, and then multiply the daily amount by the number of
days in the year prior to closing. The proration amount is then
given as a credit to the party who will end up paying the entire
bill. In the case of real estate taxes, the buyer receives a credit
for this amount.Parties use this same method to prorate final
readings on utility services, rents in the case of pre-paid rents
received by the seller, or insurance premiums for insurance assumed
by the buyer.
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Mortgage PayoffsIf the seller has a mortgage on the property,
the seller will need to obtain mortgage payoff figures from the
lender. The payoff statement may include the principal balance owed
by the seller as well as interest to a given date, other fees, such
a fee for calculating the payoff, and a “per diem,” which is a
daily interest amount due if the seller does not pay the lender by
a given deadline.
Transfer FeeA seller must pay the Wisconsin Real Estate Transfer
Fee, unless the parties agree to a differ-ent arrangement. The fee
is .3% of the sale price rounded up to the nearest $100. For
exam-ple, to calculate a transfer fee on a property that sold for
$123,675.00, round the sales price up to $123,700.00 before
calculating the fee. For a property with a sales price of $222,220,
round the sales price up to the nearest $100, which is $222,300,
before calculating the fee.
Title EvidenceThe standard provisions in a offer to purchase
assign responsibility for cost of the title insur-ance policy as
title evidence to the seller. The cost of a title insurance policy
depends on the purchase price.
Recording FeesA seller is responsible for the cost of recording
any documents necessary to clear title, such as a satisfaction of
mortgage. The seller’s lender will often include the recording fee
in the payoff statement amount. If not, it must be charged
separately on the closing statement. It is the buyer’s
responsibility to pay the cost of recording the deed, as well as
any documents for the buyer’s mortgage.
Attorney FeesIf the seller has agreed to have the broker retain
an attorney to prepare the closing documents and to pay for this
service, the fee is typically deducted from the seller’s proceeds
on the clos-ing statement.
CommissionThe standard listing contract calls for payment of the
commission upon closing. This amount is typically deducted from the
seller’s proceeds on the closing statement.The closing statement
should be prepared as far in advance of the closing as possible so
that copies of the closing statement can be sent to all parties for
review prior to closing. If the seller plans to pre-sign documents
and have the agent attend closing on the seller’s behalf, the agent
should confirm this with the lender, and should obtain written
authorization from the seller to sign any necessary documents at
the closing, such as the HUD-1 Settlement Statement, on behalf of
the seller.Governmental Requirements for Closing AgentsMost brokers
do not serve as closing agents. A closing attorney, title company,
or representa-tive from the lender may serve as a closing agent. If
the broker is going to be the closing agent and handle the
paperwork and funds, the broker must be aware of any government
require-ments that may apply. The requirements change periodically
and may include a duty to file a Form 1099-S with the IRS, or to
compare the names of the buyers and sellers with governmen-tal
lists of known or suspected terrorists or money-laundering
organizations.
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