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ESCROW 190 (Escrow I) Spring Term 2016 Ready for Day 4? 

Escrow Instructions Supplement the primary instructions obtained by principal parties (Purchase and Sale Agreement) Written by the Escrow Agent to define what their role is in the transaction (what they do and do not do) What don’t they ever do……..??? The Escrow Instructions never supersede or change the terms in the Purchase and Sale Agreement Escrow Instructions may vary but follow a basic format and must contain specific elements.

Escrow Instructions and RCW 18:44 RCW 18.44 stipulates that the Escrow Agent must at a minimum do the following: Prepare or accept an instrument of escrow instruction from each principal and agent based on written agreement signed by the principals. No modifications unless by written agreement signed by principals and accepted by Escrow Agent Disclose in writing to the parties when the the Escrow Agent is making a profit, or the potential for a profit on fees and services. Justifiable costs for fees and services related to the transaction may include (but not limited to): Courier fees Credit reports Postage Fax or Copying of docs

Escrow Instructions and RCW 18:44 RCW 18.44 stipulates that the Escrow Agent must at a minimum do the following: Maintain copies of all disclosures in the transaction file at all times Provide the services and perform all acts pursuant to the Escrow Instructions Pay the net proceeds of the sale directly to the seller unless otherwise provided un writing by the seller or by court order

Where do Escrow Instructions come from? Escrow Agents may either prepare their own or accept Escrow Instructions from one of more of the principals involved in the escrow. Typically the Escrow Agent will prepare them. An Escrow Agent knows what tasks they are expected to perform in the transfer of property to conform to the Purchase and Sale Agreement. They recognize pitfalls in which an Escrow Agent can get caught and can use their own instructions to avoid those and/or greatly limit their liability for potential loss.

Unilateral vs. Bilateral Escrow Instructions Unilateral: Buyer and Seller sign their own set of instructions specific to their role Bilateral: Buyer and Seller sign the same set of instructions that covers both roles Its common practice to use Bilateral instructions Escrow Agent must remain neutral and unbiased Escrow Agent ensures neutrality by ensuring both parties receive and sign off on the same Escrow Instructions

Escrow Instructions are written to the Escrow Closer, by the Escrow Closer, for the Escrow Closer. Escrow agents must take instruction from buyers, sellers, real estate listing and selling agent, loan officer, mortgage broker, funding lender, etc. BUT….. the Escrow Instructions are the Escrow Agents’ They select what goes in the instructions Its good practice for the Escrow Agent to review their instructions once a year

Helpful Hint: Refer to your “Escrow I Manual” for definitions of terms Each chapter ends with a “Terminology” page

What do Escrow Instructions look like? Let’s examine the sample provided:

Lender Escrow Instructions Escrow Agents routinely received escrow instructions from people of business entities other than the principals to their transaction These are called “Third Party Escrow Instructions” These will include instructions from the mortgage broker and/or funding lender detailing requirements to be met prior to that lender funding the loan. Some contain requirements that a prudent Escrow Agent either cannot or should not guarantee or comply with; these should be lined out by the Escrow Agent and submitted for acceptance by the lender Most lenders require a signature of acceptance by the Escrow Agent prior to funding loan

Example: Some lender’s instructions require the Escrow Agent to guarantee delivery of the final Loan Policy of Title Insurance to the lender within 5 working days of closing. If the title policy is not delivered within the specified time frame, the Escrow Agent agrees to be subject to a per diem fine. If the Escrow Agent is not part of a title insurance company, the Escrow Agent should not sign such instructions. The Escrow Agent cannot guarantee something he or she has no control over

Other third party escrow instructions may include: Instructions from the real estate broker in the form of a Commission Disbursement Form Instructions from a Qualified Intermediary in an IRC (Internal Revenue Code) Section 1031 Tax-Deferred Exchange Instructions from relatives of the purchaser when loaning part of the down payment (with primary lender approval) Instructions from contractors when supplying mechanics’ lien releases prior to closing Payoff demand statements

If third party instructions conflict with the Purchase and Sale Agreement Resolution to the conflict must be obtained prior to closing Example: A Purchase and Sale Agreement specifies that the purchaser would be assuming the sellers’ leased water heater at closing, and third party instructions from the purchasers’ mortgage company specifies that the seller must pay off the lease and transfer title of the leased water heater to the purchaser at closing.

Third party instructions can expose the Escrow Agent to potential liability Example: In many refinances, title to the property is currently held in the name of one spouse. The lender third party instructions may require as a condition of funding that the Escrow Agent prepare a Quit Claim Deed to vest the property in the martial community and require both spouses to execute the Note and Deed of Trust. A subsequent divorce could potentially name the Escrow Agent in the action for “giving away” a portion of one parties’ interest in the property

Points to Remember By law, Escrow Agents are required to prepare or accept Escrow Instructions Escrow Instructions are a written agreement and must be signed by the principals: Purchaser and Seller They contain boilerplate language and are customizable They can be used to further define unclear or confusing terminology in the Purchase and Sale Agreement when the intent of the parties is known by the Escrow Agent. They are an effective risk management tool for the Escrow Agent If conflict, confusion or disputes arise after closing, good escrow instructions will save the Escrow Agent possible litigation

Title Insurance The act reviewing and clearing title to comply with terms of the Purchase and Sale Agreement and conveying clear title to the Purchaser is the responsibility of the Escrow Agent. To properly place an order for a preliminary title commitment, the Escrow Agent must be furnished with: Seller’s complete legal name The present title holder’s complete legal name (if different from seller) How the purchaser will take title (i.e. vesting) Complete legal description of the property

Why would someone need title insurance? Title refers to legal evidence of ownership in property Determining the condition of title is very important because any encumbrances effect ownership: Encumbrance: A right or interest in the property by someone other than the property owner By law, once a person pays (or agrees to pay) for property, and takes possession of it, the seller has no responsibility to correct problems which were not apparent at the time of the sale. It is the purchaser’s responsibility to find any problems in the condition of title

How would a purchaser determine the condition of title? Back in the day, a purchaser could enlist the aid of an abstractor or attorney The abstractor would search public records and obtain a complete history of all the recorded interests in a parcel of land. This was called an “Abstract of title” The attorney would review the abstract and offer a “Statement of ownership”, or legal opinion as to the condition of title. This method offered zero protection to the purchaser from negligence on the part of the abstractor or incorrect interpretation of recorded documents on the part of the attorney. Additionally, the purchaser had no recourse in cases of forgery or fraud. In 1876 the first title company was organized in Philadelphia to address this issue Case reserves were set aside in case of loss, and the first “title insurance policy” was issued

What is title insurance? Title insurance is an opinion by the title company of the ownership and marketability of the title to a parcel of real estate Once issued, the policy insures the holder against losses which might be sustained in an event of a flaw or defect in the title, other than those specifically mentioned in the policy

Common title insurance policies A Standard Title Insurance Policy basically insures against defects that are ascertainable from an examination of the public records, plus certain off-record risks such as forgery, competency or capacity An Extended Title Insurance Policy includes all of the protection of the standard plus additional coverage, such as defects that are ascertainable not only from public records, but also from an inspection of the property, or from a correct survey By eliminating some of the general exceptions in the extended coverage, the title company is taking a higher risk, therefore the premium for extended coverage is higher than standard coverage

What makes title insurance different than other insurance Other forms of insurance insure against loss caused by some unforeseen event in the future. Title insurance protects against the possibility of loss resulting from an interest in title that may have occurred in the past A one-time premium is charged at the time of issuance and the policy (or protection) continues until the interest of the insured is transferred or eliminated Example: In the case of an Owner’s Policy, when the owner sells the property Example: In the case of a Lender’s Policy, when the lender is paid off

What does a title insurance company do? When the order is placed, the title insurance company performs a title search The search is an examination of public records, laws and court decisions to determine the current ownership of, and encumbrances on, a parcel of land. After the search is complete, the title company compiles their findings in a “Preliminary Title Commitment”. This is the document that the Escrow Agent reviews and works from

Reviewing the preliminary title commitment (the “prelim”) The purpose of the review is to compare the current condition of title against the Purchase and Sale Agreement. Are the vested owners on title matching to who signed the Purchase and Sale Agreement? Does the legal description match what’s reflected on the Purchased and Sale Agreement? What encumbrances are of record? Are there any liens or judgments against the purchaser or seller? Is there anything of record that would prevent the seller from delivering title to the property they are selling, in the condition agreed upon?

Reviewing the preliminary title commitment (the “prelim”) The preliminary title commitment will disclose all defects and encumbrances of record Unless otherwise addressed prior to closing, these items will be excluded from coverage under the title insurance policy Items excluded from coverage are called “exceptions” The Escrow Agent, in cooperation with the principals, is responsible to determine which exceptions are to be removed and what will be required to remove them This is why the Escrow Agent must be able to read, understand and explain the exceptions to the principals.

Exceptions to title Excise Tax Property Taxes Tax Exemptions or Deferrals Municipal Liens (Assessments) Special Districts Easements Covenants, Conditions and Restrictions (CC&Rs) Homeowner Associations Deeds of Trust, Mortgages, Real Estate Contracts, and Financing Statements

Red Flags Court Proceedings Federal Tax Liens State Tax Liens Labor/Material Liens (Mechanics Liens) Judgments Housing Code Violation Leases Encroachments