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California Real Estate Principles, 10.1 Edition
Chapter 11 The Role of Escrow and Title Insurance Companies
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Chapter 11 Define escrow and list the legal requirements for a valid escrow. Describe the basic services provided by title insurance companies. Explain the differences between a CLTA standard and an ALTA extended coverage title insurance policy. Explain various closing costs and indicate who normally pays for each closing cost.
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LEGAL REQUIREMENTS FOR VALID SALE ESCROW
Binding contract between Buyer and Seller Conditional Delivery of Money: Deposit funds and monies Documents: Transfer instruments Remember that . . . Escrow instructions are confidential The escrow agent must be strictly impartial agent for both buyer & seller The escrow agent may not give tax, law or real estate advice to either party
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Escrow Disagreements Escrow agent cannot give legal advice.
Halt until mutual agreement. Interpleader: Legal court action to resolve dispute between the parties.
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Who May Act Escrow Laws Corporation Independent* Bank** Saving &**
Loan Attorney** Title** Insurance Company Real** Estate Broker Corporation Commissioner (Office of Business Oversight) FSLIC Commissioner Insurance Commissioner Bank Commissioner Bar Association Real Estate Commissioner *License by Corp. Commissioner **Exempt from escrow licensing law. Only if Broker is involved in the Transaction
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Different Practices Northern California Escrow handled by
Title insurance Co Southern California Independent escrow co. or Title co. or Broker-owned escrow co.
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TYPES OF ESCROWS Residential Sales Liquor License Bulk Sale Re-Finance
Income Property Business Opportunity Exchange Probate Commercial Industrial Land Sales
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ESCROW Neutral Third Party – Stakeholder
We'Close'M Escrow Neutral Third Party – Stakeholder Closing costs are usually negotiable Provides custodian for funds and documents Provides Clearing House for Payments Acts as an Agent for Prorations
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LIFE OF AN ESCROW Continued . . .
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LIFE OF AN ESCROW continuation
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LIFE OF AN ESCROW (cont)
Title Financing
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LIFE OF AN ESCROW (cont)
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ESCROW FUNCTIONS A depository for funds and documents.
Clearinghouse for documents and funds Calculate and compute closing costs Prepare escrow instructions Order status of loans and beneficiary demands Process termite, home inspection & pest control reports Prepares financing instruments Order title search and buyer preliminary title report Transfer impounds Requests hazard insurance policies Computes prorations Obtains documents and prepares Deeds to be recorded Disclose Appraisal
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Escrow Functions Collects monies needed to close Request new loans
Prepare closing statements File Non-Foreign Status certificate Execute Bill of Sale for inventory and/or personal property Disburses monies and documents after close Disclose Appraisal File Change of Ownership Tax Assessor Data Report Funds to IRS
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TERMINATION OF ESCROW Full Performance of the sale, exchange or refinance Mutually agreed - Cancellation Revocation or Refusal by one party; Legal problems
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Non-Recurring CLOSING COSTS
Non-Recurring = One Time Costs Loan Fees Appraisal Report Credit Report Pest Control Escrow Fee Tax Service Fee Drawing, Notary, Recording Fees Title Insurance Policy Fee Broker Commission Transfer Tax $ Note: ALL costs are negotiable between the parties unless restricted by the loan.
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Recurring CLOSING COSTS
Recurring = Continue repeated costs Insurance : Hazard, Flood, Mortgage (MIP, PMI) Property Taxes Interest on Loans Impound Deposits $ Note: ALL costs are negotiable between the parties unless restricted by the loan.
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PRORATIONS Equitable division of costs
Every month = 30 Days Every Year = 360 Days # of Days x Rate Per Day = Share of Expense Common items prorated: association dues, interest, taxes, insurance & prepaid rent Credit is an Entry Made in Favor of the Party Debit is an Entry to be Paid by the Party Deeds typically record at 8:00 a.m.
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TYPICAL CLOSING STATEMENT
BUYER Debit BUYER Credit SELLER Debit SELLER Credit Prepaid Rents X Documentary Transfer Tax Prepayment Penalties Termite Inspection Seller’s CLTA Title Insurance Policy Brokerage Commission Recording Fees Payoff of Existing Loan Discount Points Any “Seller Pays” fees Seller’s Net Proceeds
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TYPICAL CLOSING STATEMENT
BUYER Debit BUYER Credit SELLER Debit SELLER Credit Sales Price X Buyer’s Initial Deposit Buyer’s New Loan Balance of Buyer’s Deposit Appraisal Loan Origination Fee New Fire Insurance Policy Credit Report Drawing Fee/Notary Lender’s ALTA Title Any “Buyer Pays” Fees Tax Service and Impounds
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TITLE INSURANCE PROCESS
Search Examine Chain of Title Preliminary Title Report Escrow Title Policy
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TITLE COMPANY BASIC FUNCTIONS To assure marketable title
Search and Gather Title Records Courthouse search Title Plant search Examine and Interpret Title Records Compile a Chain of title Identifies existing encumbrances Issue a Preliminary Title Report with encumbrances Issues insurance policies Insured against defects in title Additional assurance over seller’s representations Escrow the Real Estate Transaction Collect all instruments of transfer Close transaction
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TITLE INSURANCE COVERAGE CLTA Standard Coverage
Types: Owner’s * Lender’s * Joint Protection Risks Insured against Undisclosed public record Forgery Incompetence of Parties Marketable Title Street Access NOT Insured: Matter not of public record Zoning and use of the property Mining and water claims Undisclosed KNOWN defects not revealed to title company
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TITLE INSURANCE COVERAGE ALTA Extended Coverage
Types: ALTA Lender’s * ALTA-R Homeowner's Risks Insured against All Items under standard coverage, plus Unrecorded liens & encumbrances not shown in the courthouse Potential mechanic’s liens Easement by prescription Encroachments and adverse possession Parties in possession, other than the property owner(s) Mining claims & water rights NOT insured: Zoning and property use Known defects not disclosed to title company
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