Prac pp chp 10

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