If you are in the process of purchasing or selling your first home, the escrow process is something that might come across a foreign territory to you. It is definitely understandable, as the terminology and steps involved are often extremely detailed oriented and must be completed in a strategic fashion.

Knowing that you have an experienced escrow officer and real estate professional on your team will obviously be an extremely valuable asset for you during this process, so you’ll want to ensure that you have a reliable team on your side as you move throughout the transaction.

The Beginning Stage: Opening Escrow

The beginning stage of escrow deals with basic information that must be collected prior to delving into the processing of the escrow. Information collected during this phase entails conditions that pertain to the property, general details about all of the parties involved in the transaction, and the organization of assets. Once this information is collected, instructions are devised and are used as the roadmap in moving forward. The homebuyer, home seller, escrow offices and Realtors are involved in this stage and may be called upon to provide information.

The Middle Stage:  Processing Escrow

Additional information gathering normally takes place during this stage as well, although much of the information is more specifically related to specific parts of the escrow process, including obtaining signatures on important documents, determining funds needed to move forward and obtaining a preliminary Title Report. All of these tasks must be completed in a specific order and by a specific date. This is where your escrow officer and Realtors expertise will come into play.

The Final Stage: Closing Escrow

Closing escrow is may seem like the finish line, but there are various items that must be completed in order for the close to be successful. Paying off loans, the preparation of documents and ensuring that all of the instructions have been fulfilled are just several of the actions that take place during this time. Once these items are complete the property is transferred and the escrow closes.

If you are interested in learning more about the escrow process or are seeking an experience and expertise from an escrow officer, please feel free to contact us!

With the increased amount of foreclosures on the market today, escrow officers are often asked about the foreclosure process. The first thing to know is the foreclosure terminology, which we discussed in a prior post. What is important for homebuyers and sellers to understand is that foreclosures happen to loans not properties therefore it is a process that is handled between the lender and the lender’s trustee company. In an effort to answer the many foreclosure questions that we get following is a simplified breakdown of the steps that lead to and complete the foreclosure process.

• The borrower fails to make more than one monthly mortgage payment
• The lender would have their trustee company prepare, record and send the borrower a Notice of Default (NOD)
• The borrower now has 90 days to bring the loan current (reinstatement period)
• If the borrower is still unable to bring the loan current the trustee company will set a sale date approx. 4 weeks out
• The trustee will prepare, record and send to the lender and borrower a Notice of Trustee Sale (NTS)
• The NTS will also be posted at the property in a conspicuous place and published in a local newspaper (publication period)
• This Notice will contain the date, time and place where the Trustee Sale will take place
• During the publication period the borrower can still bring the loan current up to 5 days prior to the sale date
• The sale is held at the courthouse in the county where the property is located
• The lender sets an opening bid that would cover the loan balance, interest, attorney fees and any other accrued fees and costs
• The property is then sold to the person with the highest bid over the opening bid set by the lender
• If no one bids over the opening bid then the lender retains the property as a banked owned property (REO)- Real Estate Owned

During the foreclosure process there are several stages in which the homeowner has the opportunity to bring the loan current and avoid foreclosure. Foreclosures contain many nuances and affect each party involved differently. Don’t hesitate to ask your agent for information about foreclosures and your situation or for further information see the links below.

• http://www.biggerpockets.com/foreclosure-process.html
• http://www.realtytrac.com/foreclosure-laws/california-foreclosure-laws.asp

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When purchasing a home the escrow process can appear to be complex, especially for a first time home buyer. Following is an overview of the escrow process from the buyers perspective:

Escrow is officially “open” once the Escrow Holder receives a purchase contract signed by both the Buyer and Seller. Escrow holder then assigns an escrow number, opens a title order and follows up on the Buyer’s initial deposit. The initial deposit must be received by the Escrow Holder within 3 business days after acceptance. Now that escrow is open – what happens next?

Like anything else – things usually have a beginning, a middle and an ending. Escrow is no different and we will attempt to demystify the Buyer’s escrow process by breaking it down into three distinct parts:

1) Opening
2) Processing
3) Closing

Opening: The opening phase is the information gathering segment of the escrow. It allows the Escrow Holder to gather the necessary information from the Buyer and to communicate with all applicable parties. In order for the Escrow Holder to do this effectively, it is very important for the Buyer to complete and expediently return all documents in the initial escrow package.

Opening escrow packages for the Buyer will typically contain the following:

1) Escrow Instructions
2) Statement of Identity
3) Vesting Form
4) New Lender Info
5) Fire Insurance Info
6) PCOR
7) Buyer’s Affidavit

This may appear to be a mountain of paperwork, but it’s purpose is designed to let the Escrow Holder know who their Buyers are, which lender is in need of an escrow lender package, how the Buyer(s) are taking title and who will be insuring the subject property.

Processing: The second phase of escrow is commonly referred to as the processing phase. In this segment, the Escrow Holder gathers and distributes reports and disclosures to applicable parties. Depending on the specific terms of the purchase contract, reports and disclosures may include all or some of the following:

1) Preliminary Title Report / CC&Rs / Plotted Easements
2) Natural Hazard Disclosures
3) Termite Report – Inspection/Completion
4) Homeowner’s Association Documents
5) City Report
6) Rent Statement

These reports provide information regarding various aspects of the subject property such as title, taxes, liens, hazardous zone determinations, pest infestation assessment and rental amounts to name a few. These disclosures may be information overload but are necessary and mandatory to provide full disclosure to Buyers. Buyers are asked to review all reports/disclosures provided and acknowledge receipt of same via signature within the time frames specified in the purchase contract.

Closing: In the final phase of the escrow process, the Escrow Holder gathers information in the opening and processing segments and incorporates same with terms of either lender financing or an all cash closing.

In the case of lender financing, Escrow Holder will contact Buyers as soon as loan documents have been received and schedule a time for signing with a notary public. Signing of loan documents will take approximately 30-45 minutes and ideally should occur several business days prior to the scheduled close of escrow to allow ample time for the following:

1) Signing of Loan Documents
2) Lender Review of Loan Documents
3) Lender Release of Loan Funds

Upon signing of loan documents, Buyers will review an estimated closing statement prepared by the Escrow Holder. The estimated closing statement provides an accounting of all applicable fees, closing costs, credits and prorations pertinent and particular to the transaction such as lender fees, title and escrow fees, property taxes, HOA dues, and Seller credits etc. The estimated closing statement also provides Buyers with the dollar amount required to close the transaction. Note: all closing funds must be certified and received by Escrow Holder via wire transfer or cashier’s check 2 business days prior to close of escrow.

In an all cash closing, the estimated closing statement and final escrow amendments are also be presented to Buyers for review and signatures. Funds will then be requested from Buyers and the escrow will be considered “funded” upon Escrow Holder’s receipt of Buyer’s certified closing funds.

Upon Escrow Holder’s confirmation that loan funds have been released, Buyer’s certified closing funds received, receipt of signed documents from both Buyer and Seller, and all terms of the purchase contract fulfilled – the transaction is now ready to close/record. Recording typically takes place 1 business day after all of the above has occurred. The term “close” refers to the day on which the transfer deed (grant deed) is stamped and recorded by the County Recorder’s Office. This is the official date on which transfer of ownership occurs and the Buyer becomes the new owner of the subject property.

Upon Escrow Holder’s notification from the title company that the recording has been confirmed – escrow has officially “closed”. The Escrow Holder will then prepare the final accounting of the file and disburse funds and documents accordingly, normally by the next business day.

Escrow is closed – congratulations!

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Short sales and foreclosures are the current hot topic in real estate with many of these types of transactions coming across the Escrow Officers desk. Foreclosures and short sales are often confused but they are two distinct processes supported by their own individual terminology. Following is a summary of many of the most common terms that a buyer and seller will experience in purchasing/selling either a foreclosure or short sale property.

Foreclosures

• Pre-foreclosure: The period beginning with initial mortgage default up to when the distressed property is sold
• Notice of Default (NOD): official notice from the lender that the Borrower has defaulted. The NOD formally starts the foreclosure process and it outlines the reinstatement period.
• Reinstatement Period: The time frame stipulated in the NOD that the borrower has to reinstate the loan by making payments and bringing account back to good standing.
• Trustee Sale: if after the reinstatement period has expired the loan is still in default the lender can then sell the property as soon as 21 days after the Notice of Trustee Sale is recorded.
• Publication Period: begins once the redemption period has expired and must be at least 21 Days prior to trustee Sale. A notice is published once a week for three weeks in the local newspaper.
• Notice of Trustee Sale (NTS): Recorded document explaining when and where the foreclose sale will be held.
• Redemption Period: The time period that the distressed borrower has to redeem the loan after the NOD is recorded. In California, that time period is 90 days. (not to be confused with statutory right of redemption)
• Statutory Right of Redemption: One year after the Trustee Sale the borrower can make payment of loan in full plus costs to redeem.
• Real Estate Owned (REO): the status of the property when the ownership is transferred involuntarily from the homeowner to the bank.

Short Sales

• Short Sale: When a lender agrees to accept less then what is owed on the mortgage and release its lien on the property.
• The Property is “upside down”: This phrase is commonly used to describe a situation where the amount due on the existing loan is higher than what the property is appraised for or will sell for.
• Loss Mitigation Department: The department at the lender that is responsible for reviewing all short sale documentation, ordering a BPO, and approving or denying short sale.
• BPO: Brokers Price Opinion (BPO), typically ordered by lender, is a property valuation report to help determine what the property might sell for.

This list of terms serves as a foundation for future posts where we will further describe the process of a foreclosure and short sale as well as compare and contrast the differences between the two. Stay tuned!

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What is the Statement of Information?

Upon the opening of escrow, Buyers and Sellers receive their initial escrow package – the Statement of Information (also known as the Statement of Identity) is included in this package for completion and return to the escrow holder.

The statement of information is a one page document which requests the party’s name, date of birth, social security number, current and previous addresses etc.

Who requires the Statement of Information?

The Title Company of record requires this completed form to ensure successful and expedient transfer of title. This document assists in eliminating untimely delays in closing of real estate transactions.

How does the Statement of Information work?

The Statement of Identity establishes and confirms identity. Confirming identity will assist the Title Company to eliminate/resolve matters that affect real property such as child support liens, judgments, bankruptcies etc., filed against persons who have the same or similar names.

This is important as such liens and judgments are recorded against real property and against individuals on a daily basis.

Why Should Buyers/Sellers Complete the Statement of Information?

Consider these scenarios:

Scenario #1: Seller is Robert Smith. The title company runs a name check on Robert Smith. Title company finds recorded liens and judgments filed against a Robert Smith that must be paid.

How will title eliminate our Seller, Robert Smith against these potential liens? Title will compare social security numbers, previous address, etc. (as per Statement of Identity) to determine which Robert Smith is liable for payment of said liens/judgments.

As result, our Seller Robert Smith has been eliminated as the potential party owing thousands of dollars due to liens.

Scenario #2: Buyer/Borrower is John Williams. Once again, title runs a name check and discovers that a John Williams has defaulted on his child support payments. Upon further investigation it has been determined that YES this is our Buyer/Borrower. Now escrow has the heads up to advise their Buyer/Borrower to bring his account current and also escrow can then secure an updated statement that will be sufficient for title transfer.

In conclusion:

The title company requires that buyers/borrowers and sellers fill out the Statement of Information to be able to complete their fiduciary duty to return clear title for the real estate transaction. The documents the title company requires comes from the escrow company after it has been completed by the Buyer or Seller, so your Escrow Officer can discuss the Statement of Information with you. Each transaction is case specific. Your Escrow Officer can clarify the points that are needed to finalize the transaction.

If the Statement of Information requirements give you cause for discomfort, talk to your Escrow Officer about the specific needs of your escrow. Your Escrow Officer will be able to explain the Privacy Act Notice with which CV Escrow is in compliance.

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The escrow process can be a complicated and often technical necessity of buying and selling real estate.  The escrow company and its officer have many duties to juggle on behalf of the Realtor, Seller, and Buyer during the real estate transaction.  Understanding the various duties and functions of the escrow can assist all parties in ensuring a successful and timely transaction, as everyone involved has a part to play.

The escrow officer’s main duty is to remain as a neutral third party between buyer and seller in a real estate purchase transaction at all times.  The escrow officer is not to be involved in negotiations between buyer, seller and/or lender.

Additional escrow officer duties and responsibilities are as follows:

1.   Receive and hold buyer’s funds in a non interest paying trust account during escrow

2.   Read and comply with all agreements as detailed in the Purchase Contract and Joint Escrow Instructions as it pertains to the escrow process

3.   Follow mutually signed, written instructions agreed upon by buyer and seller during escrow

4.   Prepare Escrow Instructions/General Provisions, Amendments, Grant Deed (for seller’s signature), Estimated Closing Statement and any additional documents required to clear title or as required by the new lender

5.  Although in many cases reports are ordered by the buyer, seller or agents outside of escrow in some cases the escrow officer will obtain reports as required by the purchase contract and provide same to the buyer during escrow for their review

6.   Make sure escrow is in receipt of buyer and seller signatures on Purchase Agreement and Joint Escrow Instructions, Escrow Instructions/General Provisions, Grant Deed, any Amendments, Estimated Closing Statements and any other documents required during escrow

7.  Receive loan documents from the buyer’s new lender (IF APPLICABLE) and prepare amendments and estimated closing statements as required by the lender on their lender’s instructions

8.  Order the evidence of insurance from the buyer insurance agent as per the requirement of the new lender

9.  Send the signed loan documents and all lender required items to the new lender for funding

10.  Send original recordable documents along with any releases required to clear title to the title company for recording at the close of escrow

11.  Make sure that escrow is in receipt of all funds necessary to pay the seller their proceeds as well as all invoices agreed upon by buyer and seller during escrow

12.  Make sure the seller has sufficient equity in the property to cover all costs, payoff of liens and any invoices agreed upon by buyer and seller during the escrow

13.  Make sure that all the proper paperwork is in escrow to provide the buyer with clear title to the property

14.  Make sure that all the conditions agreed upon by the buyer and seller on the purchase agreement and in writing through escrow have been satisfied prior to closing the escrow and transferring the property into the buyer’s name

The Buyer and Seller should also be aware that they will be receiving many additional items that may require their signatures from their agents and lenders directly.

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How would you react if you had a limited amount of funds in the bank to pay for closing costs and then were hit with hundreds of dollars in extra “unexpected” closing costs? This is a problem that the Real Estate Settlement Procedures Act (RESPA) was enacted to eliminate. The goal of RESPA is stop hidden fees and charges by settlement service providers and to stop kickbacks to ensure the integrity of the real estate transaction for the consumer.

In 1974, RESPA was enacted by Congress. Its intent was consumer protection by regulating the disclosure of all costs and business arrangements in a real estate transaction settlement process.

Enforced by the U.S. Department of Housing and Urban Development (HUD), RESPA requires that consumers receive disclosures at various times in the transaction and outlaws “kickbacks” that increase the cost of settlement services.

Specifically, Section 8 of RESPA prohibits a person from giving or accepting a referral fee, kickback, or anything of value in exchange for the referral of settlement-service business.
An example of an illegal “kickback” was when title companies would pay for rounds of golf, provide free administrative services, or sponsor educational classes for Realtors and lenders to encourage referral business.

A common RESPA violation, with direct impediment to consumers, occurred with lenders during the housing boom. Consumers would apply for a loan, receive a Good Faith Estimate providing the cost to obtain that loan, and then, they would go search for a new home. After making an offer on the home, they would get the final loan documents to sign at close of escrow. When they sat down to sign the final loan documents (HUD 1 settlement statement), they were oftentimes surprised to find extra and ambiguous closing costs and fees that had come up during the escrow process, sometimes along with higher interest rates.  These fees were added by lenders who lured consumers with promises of low cost loans.

RESPA has done away with many of these types of unsavory business practices, as well as leveled the playing field between lenders and others in the real estate industry.

To help consumers more easily understand settlement costs and prevent big price discrepancies between the preliminary Good Faith Estimate and the HUD-1 settlement statement, HUD has created stricter RESPA laws, which take effect in January 2010. HUD has published a Frequently Asked Questions about RESPA which is a good resource for further information.

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A title binder, also known as an interim binder, is not a title insurance policy, but is, instead, a commitment to issue a title policy. The key to the title binder is asking yourself, “How long do I plan to keep this property?” The title binder is a cost saving tool for people (i.e. investors) who intend to “flip” a home or for those who are subject to frequent relocation or who just find themselves not wishing to remain in a specific home for more than two years.

Every time you sell and buy a home, you incur costs to have the title searched. Title insurance protects the buyer of a property or the lender for the property against unknown defects in the title. For a one-time premium, the title insurance company, which is in the business of examining public records, preparing title abstracts, and selling title insurance, issues the insurance after doing a title search on the property. By purchasing a title binder up front, you can save hundreds of dollars in title fees because it allows the purchaser of real property to resell the same property and have a policy of title issued to his/her buyer at fraction of the cost.

For example, if an investor purchases a “fixer upper” they would purchase a title binder as soon as they bought the property, knowing they plan on fixing up the property and selling it within a year. When they go to sell the property, they use the same title company they originally used and avoid having to incur the costs of having the title searched again for the new buyer.

The binder was designed for a special purpose and cannot be used in every real estate transaction. The standard term for a title binder is two years. However, some title companies do offer an extension for another year at an additional cost of another 10% of the Owners Policy Cost. It is very important to note, the same title company that issued the title binder must be used when the property is sold. Sometimes, the listing agent for the former buyer (now the seller) was not aware of the title binder purchased at the time the property was purchased.

Under normal circumstances in California, the seller of real property pays for the buyer’s title insurance. The interim binder provides a method to avoid duplicative costs. An Interim Binder gives its holder the option to obtain coverage during the period set forth in the Interim Binder, sell the property, and provide a title insurance policy for the new buyer, all at the cost of a single owner’s policy plus a “binder fee”, usually 10% of the premium for the owner’s policy. Accordingly, where a buyer or developer intends to resell the property within a defined time period (usually two years), an interim binder may constitute a useful and cost effective alternative.

It is important to repeat, however, that an interim binder is not insurance, it is a commitment to issue an insurance policy. However, if a claim arises during the interim binder period, the person to whom the interim binder was issued may convert the interim binder to an owner’s policy of title insurance naming him as insured and tender that claim pursuant to the policy. Title binders are only for buyers, not lenders and are issued in lieu of an Owner’s Policy.

More information about the legalities of title binders can be found here

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In these tough economic times, many homes have been languishing on the market, making it difficult for Sellers to move on to other homes and locations.  In order to make a sale, a Seller can offer to do a “carryback”.  A carryback loan, also known as a “seller carryback” or “seller’s second”, is a loan which is financed by the Seller of a property to help a Buyer purchase the house. Normally, this aids in the completion of the sale of the property. It could also refer to the part of the purchase price the Seller is able and willing to finance for the buyer.

For instance, the typical seller carry back situation is 10% down, 10% seller carry back and 80% first mortgage. This is a percentage of the purchase price. An example is a $1,000,000 house would have a $100,000 down payment, a $100,000 seller carry back and a $800,000 conventional first mortgage deed. Another scenario for a seller carry back is if the seller owns the property free and clear and the seller carries a first mortgage or trust deed. Sometimes there is a first trust deed which the buyer can take over and the seller carries a second mortgage.

Utilizing a seller carryback works well when the Buyer cannot come up with a big down payment or they may not fit into the “conventional” loan process because of their career or past credit history. Understanding the potential pitfalls of doing a seller carryback, but also knowing the rewards, is crucial to this type of sale.  In a seller carryback scenario, both parties need to exucute an All Inclusive Trust Deed.

An “All Inclusive Trust Deed” or AITD is a “Seller Carry” that “wraps” or includes an underlying loan or loans of record. It is usually recorded at the close of escrow with a Grant Deed conveying full to title to Buyer and Title Insurance is issued.  The AITD’s face amount includes the unpaid balance(s) on underlying encumbrances, plus the remaining unpaid balance of the Sellers equity.

Sellers remain responsible for the payment on the underlying loan(s) or until they are paid in full. The Sellers equity position in the note is always the difference between what is owed to the Seller and what the Seller owes the underlying lender.

The AITD becomes a junior trust deed, subordinate to the underlying trust deed(s).  The inputed interest rate (9% or applicable Federal securities rate, which ever is lower) is the minimum interest rate allowed for Seller financed transactions. The Documentary Transfer Tax on the grant deed is based on the purchase price LESS the liens of record.

Advantages:
The Buyer does not need to qualify for a loan with a lender and closing costs are minimal.  The Seller has advantage of installment sales income tax recording method, so long as payments are received in more than one tax year. The Seller, by agreement in writing with buyer, may prohibit prepayment of up to a 12 month period following the sale.

Because the underlying loan(s) may have a lower interest rate, or may have been paid down considerably, the Seller’s effective interest rate yield may be higher than the actual note rate.  The Seller benefits from the “Interest Override” which is the difference between the interest rate on the existing loans of record and the rate negotiated on the AITD.

Disadvantages:
Recording may alert an underlying lender to enforce the “Acceleration Clause” or “Due on Sale Clause” and require the underlying loan to paid in full.  At this time, the underlying loan would be considered in default and said lender could start foreclosure proceedings.

Paying off an AITD:

There are two types of AITD payoffs:  Equity Payoff and Full Payoff.

The AITD should not be reconveyed until such time as any equity of the seller and the existing deed(s) of trust have been paid in full. At all times the seller is responsible for the underlying loan(s) of record, since there has been no release of liability given by the existing lien holder(s). Any late payments and/or default, will reflect on the Seller’s credit accordingly.

Being able to sell a house quickly by not having to wait for a mortgage company to approve a buyer or having to rely upon an appraiser to come in with the “right” price can sometimes make this type of an arrangement attractive. However, be sure to consult a real estate attorney and professional tax advisor on the implications (or benefits) before entering into a transaction.

If you are either in the process of buying or selling a foreclosure property, understanding the basic terms will help you ask appropriate questions of your REALTOR, the escrow officer, the lender or other parties involved in the transaction. This can expedite the timeframe of the process for everyone involved.

Below are the most common terms used in connection with the foreclosure process:

A Deed of Trust:
A Deed of Trust is the security for your loan. It is the document that is recorded in the public records.
A deed of trust contains three parties:

• The Trustor, which is the borrower
• The Trustee, which is an entity that holds “bare or legal” title
• The Beneficiary, which is the lender

The deed of trust is an instrument that identifies the following:

• Original loan amount
• Legal description of the property being used as security for the mortgage
• The parties
• Inception and maturity date of the loan
• Provisions of the mortgage and requirements
• Late fees
• Legal procedures
• Acceleration and alienation clauses
• Riders, if any, regarding such clauses as prepayment penalties or terms of an adjustable rate mortgage

Notice of Default:
Lenders file in the public records where the property is located a public notice called the Notice of Default. It states that the borrower is in default, behind in the mortgage payments, and if the payments are not paid up, the lender will seize the home. In California, lenders typically do not file a Notice of Default until the borrower is at least 60 days behind in making payments. Lenders must then wait 90 days. During that 90-day period, the borrower has the right to make up the back payments and reinstate the loan. After 90 days, the lender is required to publish a notice in the newspaper for 20 days and then may sell the property to the highest acceptable bidder on the courthouse steps. If no acceptable bid is received, the trustee then conveys the property to the lender.

Deed-in-Lieu of Foreclosure :
A potential option taken by a mortgagor (a borrower) to avoid foreclosure under which the mortgagor deeds the collateral property (the home) back to the mortgagee (the lender) in exchange for the release of all obligations under the mortgage.

Foreclosure:
Legal proceeding by which a borrower’s rights to a mortgaged property may be extinguished if the borrower fails to live up to the obligations agreed to in the loan contract. The lender may then declare the entire debt due and owing and may seek to satisfy it by foreclosing. Foreclosure is commonly by a court-decreed sale of the property to the highest bidder, who is often the lender.

As we all know, foreclosures continue to be in the news and continue to dominate the market. This means that REALTORS, struggling homeowners, and potential buyers need to have information about the process and terms of foreclosure in order to make important decisions about the sale or purchase of a property.

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This is the second article (see the first one here) in our series on the specific terms and phrases you can encounter during a real estate transaction. The language of escrow and the real estate transaction doesn’t need to be a stumbling block; once you know the terms, these words become what they are meant to be – valuable tools to help smooth the road to a successful transaction.

Contingency

This is a clause in the sales contract that says something must happen before the sale goes through. The sale is contingent on this event, in other words. Common contingencies are the arrangement of financing, a successful home inspection or wood pest inspection, or a roofing or sewer report. Negotiate contingencies carefully, as they can cause the failure of a deal.

FIRPTA

The Foreign Investment in Real Property Tax Act of 1980 is important if you are buying a property from a person or corporation that is not US-resident. It is up to you to find out if the seller is a foreigner. FIRPTA rules state that the buyer must withhold 10% of the realized sale price for tax purposes. A common exception is if you are buying a personal residence for under $300,000. Talk to your broker or escrow officer, who will know all the details.

Cal-FIRPTA

The California version of FIRPTA, this legislation requires the withholding of a percentage of the sales price for most California real estate transactions. Talk to your realtor or escrow officer to get a full explanation of how this law affects your transaction.

Easement

An easement is an allowance, written into the property’s title, for another person or company to have access to a portion of the land for some purpose. Often an easement allows access to power lines or utilities running through the property. A registered easement gives the other party legal access, and restricts what the owner can do on that piece of the property.

Encroachment

An encroachment is any structure or physical thing that intrudes on somebody else’s space. This could be a neighbour’s building or fence encroaching on your land, your building or other structure encroaching on your neighbour, or your structure encroaching on city or state property. Encroachments must be agreed upon before building, resolved if discovered, or removed if objected to.

Watch for more terminology posts in the months ahead.

One of an escrow officer’s simpler jobs is calculating the amount of property tax that is payable by the buyer and the seller on any given real estate transaction. One of the agent’s tougher jobs can be explaining to the buyer why they may get an official property tax adjustment bill months after the sale is done. Let’s wade into the arithmetic and explain the situation.

Property Tax Defined

Every property gets assessed by the county assessment office every year, establishing the amount of tax due on that property. At the time of a sale, it’s a simple matter for the escrow agent to find out the property’s tax for the full year, and apportion the correct amount to the seller for the year to that date, and the right amount to the buyer for the remainder of the year.

Say, for example, the property tax of the year is $1200, and the transaction closes on May 1. The seller pays $400 for the first 4 months, and the buyer pays $800 for the last 8 months. These numbers show up on the closing statements.

Sale Triggers Assessment

The complication arises because a property sale triggers a new assessment. This assessment happens according to the schedule and timetable of the county assessment office; this means it could happen months after the transaction has closed, when the buyer has long since thought the sale over and done with.

When it eventually occurs, the property has a new assessed value – and a new tax burden – retroactive to the date of the sale. It might be more or less than what the buyer paid on the closing statement, but chances are good that it will be different. Therefore, the assessment office will issue an adjustment notice. If it’s a tax increase, the buyer needs to pay more. If it’s a decrease, each county handles the situation differently. Check with the links below for your own area’s procedures.

Escrow Works With The Numbers

The escrow officer’s job with prorating property tax is just to work with the existing numbers. They use the property tax amount provided to them by title at the time of the escrow (the current property tax amount).  They take this current tax information and allocate the charges to the parties accordingly.

That’s why, in an appreciating market, a buyer can get an additional tax bill, months after the sale, when they thought it had already been covered. And that is why, in a depreciating market, the potentially reduced taxes on the home cannot be determined and applied at escrow.  For specific tax questions related to a particular parcel, further information can be gained by contacting your county’s tax recorders office:

• Riverside County
• Orange County
• Los Angeles County
• San Diego County

Real estate transactions, and the escrow processes that make then happen, sometimes have a level of industry jargon that can be confusing or intimidating to buyers and sellers who aren’t familiar with the meaning behind the words.

This is the first in a series of definitional posts designed to better inform buyers and sellers about the escrow process and the terminology used during the course of a transaction.

Escrow

The escrow procedure, at its core, is where a neutral, trusted third party holds onto an item for sale until something happens, usually until the buyer pays the seller. As real estate transactions have grown in complexity, so has the business of escrow. Now an escrow agent watches over all the details of the sales agreement, facilitates the transaction paperwork, and coordinates the interests of many different parties with an interest in the sale. They also make sure that the seller gets their proceeds, and the buyer gets their title, when all is said and done. For a detailed explanation of escrow, see this earlier post.

Deed of Trust

In many states, including California, this document takes the place of a mortgage. The Deed of Trust places a property’s title in the hands of a Trustee, usually a title company, along with the specifics of the buyer’s loan and repayment provisions. If the owner defaults on the loan, the Trustee has the legal right to foreclose, and give the lender the proceeds. When the loan is paid off, the Trustee reconveys the title to the owner.

Lien

This is a legal claim on a property by someone the owner owes money to. In real estate transactions, the lender will attach a lien to the property title, saying any money from sale of the property will first be used to pay off the loan.

Prorations

In a real estate deal, the escrow agent will need to figure out the buyer’s and seller’s portions of expenses that get paid according to a certain date – eg taxes, interest or utility bills. The agent will pro-rate the expense, doing the arithmetic based on the transaction’s closing date.

Grant Deed

This is the actual document of the real estate sale. It states that the seller, or Grantor, is selling the property to the buyer, or Grantee. It states the specifics of the property, and that the seller has revealed any liens or encumbrances. The Grant Deed is usually notarized and recorded.

HUD-1 Statement

This is the Department of Housing and Urban Development’s official settlement form, used in most real estate transactions to detail exactly what settlement costs occur in the sale, and whether the buyer or the seller is paying them. You get this form at or shortly before the closing. It represents a complete accounting of every cost of the transaction.

Title Insurance

This is an insurance policy for buyers that protects them against unanticipated defects in the property title. These could be anything from hidden liens, ex-spouses, unrevealed heirs, or recording errors, to forgery. Title insurance policies carry different specifics and exceptions, so examine yours carefully.

Additional terminology will be defined in future posts.  If you have a term you would like clarified or definied, leave us a note in the comments section of this post.

Escrow fees are part of a deal’s closing costs. Let’s explore the typical fees that can show up on a buyer’s closing statement, and help to avoid future cases of sticker shock.

Buyer’s Escrow Costs

Escrow Fees

This is the fee for the escrow service itself, usually a certain amount per $1000 of the sale price. With the escrow fee you are paying to make sure:

• The escrow agent is properly licensed in your state
• They have the knowledge, training and expertise to handle supplemental and unusual escrow situations
• Your escrow process follows all applicable laws, and the sale will be legal and valid
• The escrow agent is an independent third party, competent and trustworthy to caretake and disburse your money.

Loan Tie-in Fee

This fee provides for the escrow company’s time and supplies to print out lender documentation, comply with various lender requirements, and fill out and submit the forms and applications requested by lenders to facilitate the transaction.

E-Document Fee

More and more documents are being sent to escrow companies over the Internet, however they still need to be printed out in order to be archiveable and useful. This fee helps to defray document printing costs.

Processing Fee

Very few escrow situations come without any supplemental or unusual needs. Spouses, ex-spouses, grantees, trustees, business partners, extra government agencies or authorities, all may need to be dealt with in order to facilitate the escrow. All of these contacts take time and documentation. Most escrow companies include one or two added contacts in their escrow fee; a significant number of added contacts will result in a processing fee.

Archive Fee

Legal escrow documents need to be stored by the escrow company for a minimum of five years. This fee helps with the storage and retrieval of the large volume of paperwork involved.

Seller’s Escrow Costs

The seller’s closing statement contains escrow costs as well. The seller will have the same Escrow fee as the buyer, the same Processing and E-Document fees, and an Archive fee.

Closing costs from the escrow company are not a mystery, and don’t need to be a surprise, either. With a little bit of preparation and a phone call or two, both buyers and sellers can know in advance what their closing costs will be, and clear a potential obstruction on the way to a completed sale.

The typical real estate escrow requires the buyer to sign 70 – 120 pages of documents, several of which require notarization.  The seller also will have to notarize, at the minimum, the grant deed.  Notarization, or the act of an uninvolved witness (the Notary) verifying that the signor (the buyer or seller) is indeed who they say they are, is an essential part of the escrow process.  And, if notarization is not properly done, it can cause delays which can impact the closing of the escrow.  When it comes to notarizing documents during escrow, clients can choose to go to the escrow office or hire an outside notary.

Option 1:  Notarize and sign at the escrow office

Escrow offices all have a notary on staff.  Therefore, a common option for notarizing documents is to have the parties go to the escrow office to sign documents.  With customer satisfaction as our highest priority, at CV Escrow we prefer that our clients physically come to our office to sign closing documents. This not only ensures that buyers and sellers feel they are receiving the highest level of service, but also we can personally correct any errors that may have been overlooked by the many parties involved in the transaction as well as answer any questions that may arise.

However, circumstances do not always allow for clients to sign at the escrow office (for example, in the case of an out of town buyer).  When this occurs, working with an outside notary is the alternate solution.

Option 2.  Notarize and sign with an outside notary

If you are to hire an outside notary, you have two options:  A Certified Document Signor or a Mobile Notary.

Both Certified Document Signors and Mobile Notaries are certified by the State of California to verify signatures.  However, a Certified Document Signor also undergoes regular continuing education training specific to real estate transactions.  They are familiar with the documents that are signed in the transaction.  Mobile Notaries are not required to have this specific training and as a result, are not always familiar with the documents that are being signed.

A Certified Document Signor will cost more, but clients should be aware that our most common reason for the delay of a transaction is due to the incorrect signing of closing documents. With the amount of paperwork that needs to be signed and notarized, it is easy to see how someone without the proper training could overlook a detail here or there.  As a result, Certified Document Signors are our preferred option if the client is not able to sign in person at the escrow office.  That said, it is possible to have an accurate and successful closing with a mobile notary.  The choice is really up to the client and will be impacted by many factors specific to the transaction.

So when choosing, ask yourself what is more valuable in a real estate transaction, your time or your money?  If time is not of paramount concern, a mobile notary may be a great choice for you.  If it is imperative you close on time, your risk of signing issues will decrease by going with a certified document signor.  And, if you have the ability to sign at your escrow office, you will run the lowest risk of delays.

Situation #1 – The Deceased Left a Will:

From the standpoint of escrow and most buyers, this situation is a far preferable probate sale due to the predictable time frames this situation provides.  When the deceased leaves a will, the property falls under the Independent Testamentary Act and the court designates an Administrator or Executor of with full authority over the estate.  Typically this person will be a close remaining relative.  It then becomes the responsibility of this person to decide the future of the property.  Because this person has full authority, the process from an escrow perspective is very similar to that of a standard sale.  However, there is one additional document that will be required by title in order to close the transaction.  They will need certified copy of the “Decree of Distribution of Letters of Testamentary”.  This is official paperwork issued by the court that designates the Administrator of Executor and is required by title in order to insure the transfer of the property.  CV Escrow also will want to receive a copy of this document in order to proactively review it for potential hiccups in the transaction.

Situation #2 – The Deceased Did Not Leave a Will:

In the event that the deceased did not leave a will, the property sale will have to go through the court probate process.  The court will approve and assign an Executor or Administrator for the Estate of the Deceased.  This Executor will be an independent court representative.  The court will also issue an Order Confirming Sale which basically stating that the listing price is at fair market value and it authorizes the sale of the property.  A certified copy of this document will be required by title in order to close the transaction.

The challenge for escrows on Probate Sale listings in this situation where the deceased did not leave a will is that the time frame for the court probate process can vary from 60 days to 6 months or beyond.  This creates a challenge in negotiating escrow times.  Agents should be prepared to properly set buyer expectations about the time it can take to close a court appointed probate sale.  It is not uncommon to require an extension of escrow.  And, unfortunately, sometimes the extended escrow duration can become a deal breaker.

If you’re ever in a probate property sale transaction, understanding the process and what you must do to transfer the property can affect the success you have in closing the deal.  Your escrow officer can be an excellent resource to inform you of the paperwork and time frames that will be required to complete the transaction.  In addition, consulting your family attorney or estate planner is your best course for answering specific and legal questions in these types of transactions.

There are many implications of loans that are either “Assumptive,” or “Subject To.” Here is a general overview of some of the definitional differences between the two and how the differences affect the escrow process.

Let’s define Assumption Loans:

The term “assumption” is used when a buyer incurs personal liability for an existing deed of trust.  If the buyer were to default on their future mortgage payments, the seller would no longer have any responsibility as the buyer has “assumed” the loan.

When a buyer “assumes” a loan it is with the lender’s knowledge and approval. An assumption agreement is prepared by the existing lender of record and signed by the buyer as part of the escrow process. The seller may also be required to sign the assumption agreement and the terms may release the seller from responsibility. The lender usually requires a credit history from the buyer before approving the assumption and the payment of assumption fee(s). The loan will be brought current (if it is delinquent) and interest will be pro-rated through escrow and charged to the seller.

Let’s define Subject To Loans:

In contrast to an Assumption Loan, the term “taking subject to” is when the buyer incurs no liability to repay the loan. The loan stays in the seller’s name, but the buyer gets the deed and therefore controls the property.  Although the buyer makes the mortgage payments, the seller remains responsible for the loan.

When a buyer takes title to property “Subject To” the loan of record, the lender is not notified of the transaction or asked for their approval. The Lender has not approved the transfer of title; therefore the seller is not released from responsibility. In this case, the buyer is simply making the payments instead of the seller. The seller will be asked to provide escrow with their last payment record which will be used to calculate the exact principal balance at close of escrow. The lender may have the right to accelerate their due date or call the loan all due and payable when (and if) they receive notification of a transfer of ownership.

If you have additional questions about assumption vs. subject to loans, please don’t hesitate to one of our knowledgeable escrow officers here at CV Escrow.

REO properties are a hot commodity right now as roughly half of the foreclosures going to auction are reverting to REOs. More and more people are seeing that they can get a great price on an REO property and still enjoy a buying process that is very similar to buying a home in the traditional fashion.  However, because the property is owned by the bank or lender, in an REO purchase transaction, there are a few differences in the escrow process from a traditional home purchase transaction.

REO listings offer viewings and inspections just like traditional home buying; the big difference is really in the often rock bottom price and the closing procedures. This is because banks are not in the business of owning Real Estate; their interest is to resell the property as quickly as possible to avoid further risk exposure.  As a result, REOs come with a very strict and tight escrow timeline. Most REOs have a 30 day closing, in some states it can be 45 days, and either way banks are not willing to be flexible.

There are a lot of REO properties available right now so if you’re ready to buy and looking for a deal, now is a great time to consider an REO purchase. Your Realtor can advise you on the opportunities and your CV Escrow officer can walk you through a detailed explanation of the REO escrow process.  To learn more about the REO buying process and its Escrow implications check out, Bargain Shopping at the Bank-An REO Purchase Overview.

The vesting of a title should be given special consideration because it specifies who is responsible for the costs, benefits, and transferability of a property. The value of real property is significant and with a little forethought, conflict can be avoided down the road with partners, creditors, spouses and/or heirs, as well as the Internal Revenue Service.

The most common forms of holding title include:

1. Sole Ownership

   1. As a single man or woman
   2. As a Married man or woman
   3. As a registered domestic partner, man or woman.

2. Co-ownership

   1. Community property, which is the presumed form for married couples. This entitles each party to equal parts of the property.
   2. Community property with rights of survivorship, which automatically transfers the property to the survivor in the face of a death.

3. Joint Tenancy

   1. This includes equal interests with rights of survivorship, but where the partners aren’t necessarily married.

4. Tenancy in Common

   1. In this form, the parties’ interests are broken up, and the costs and benefits are then divided as such.

It’s important to remember that the form of title that you choose has inheritance and/or tax implications. Your escrow officer at CV Escrow is more than happy to explain the differences between the various manners in which title can be held. However, it is beyond our scope to actually recommend what would be best for a buyer. For that, the buyer should consult an attorney, CPA or estate planner who is more familiar with the buyer’s specific situation.  Research and clear communication with one of these resources will help make the transaction a smooth success.

Within 48 hours of receiving a contract, CV Escrow mails out an opening package to both the buyer and seller. These packages contain “homework”, i.e. paperwork that escrow needs back promptly in order to move forward and ensure that a transaction closes on schedule. It is integral to all deals that the buyers and sellers expect to receive these packages and understand the importance of returning them to escrow as quickly as possible.

Some of the information that the packet requests from the buyer includes:

• the vesting form describing how title to the new property will be held
• contact information for the lender or mortgage broker
• insurance details

From the seller, our opening package forms prompt for details such as:

• contact information for the HOA
• contact information for the lender on the first and, if applicable, second loan
• any applicable tax withholding details like the 1099 form
• directions on how to distribute the proceeds from the sale

Much of our work at CV Escrow can’t begin until we have these documents completed, so in order to ensure an on-time escrow process, return your opening package documents within 3-4 days of receipt. For sellers who want their proceeds promptly at the close of escrow, and for buyers who want the keys to their new property, completing the opening package promptly is the best way to ensure that everyone gets what they want, when they want it.

Whether it is the buying and selling of a home, or the transfer of a business, the amount of legal documentation and financial liabilities can easily create confusion or differences of opinion amongst the buyer, seller and/or their representatives. This is why an impartial, third-party representative becomes essential to focusing on the facts and responsibilities that must be fulfilled.

With so many parties obligated to fulfill so many responsibilities in any given real estate transaction, it quickly becomes apparent why a neutral third party (escrow) is essential to a smooth process.

Escrow is the one who facilitates (just to name a few):

• drawing of escrow instructions which reflect the negotiated points of the contract and act as basis for execution of the property transfer.
• confirmation of clear title from the Title Company
• the recording the deed with the County Office
• filing paperwork with the proper municipalities
• the receiving of wires and funds to be disbursed

In addition to the above responsibilities, CV Escrow views our most valuable function as acting as a personal liaison and resource for Realtors, buyers and sellers as they tread through the complicated and often technical world of buying and selling real estate.