chap10


1. Chapter 10

Escrow, Title Insurance, and Closings


2. Topics for the Day

Escrow

Purpose of escrow

Regulation of escrow agents

Escrow duties and procedures

Title insurance

Purpose of title insurance

Types of title insurance policies - risks covered

Closing (settlement) procedures


3. Definition of Escrow

The delivery of something of value by a party to a transaction to a third person, called an escrow holder, with instructions to deliver the thing of value to the other party to the transaction upon the occurrence of specific events or the performance of specific conditions.


4. Escrow: Why Escrow

Who goes first?


5. Deposits into Escrow

Each party deposits things into escrow with instructions to deliver to the other party upon satisfaction of conditions


6. Escrow: Disbursements at Closing

When all conditions to delivery have been satisfied, escrow holder distributes the items to the other party as instructed.


7. Requirements for a Valid Escrow

For an escrow to be valid, there must be:

1. a binding contract between the parties to a transaction, and

2. conditional delivery of transfer instruments (for example, a deed) or other things of value to the escrow holder


8. Regulation of Escrow Holders

Most escrow holders must be licensed by the California Department of Corporations

Exceptions (exempt from DOC licensing requirement):

- Title insurance companies

- Banks, savings banks, and trust companies

- Attorneys

- Real estate brokers (for some transactions)


9. Escrows by Real Estate Brokers

A real estate broker may act as an escrow holder without being licensed by the DOC only if the broker is:

- a party to the transaction, or

- performing an act for which a license is required (example, the selling broker or listing broker)

Brokers must still comply with all Dept. of Corporations escrow regulations.


10. Other Restrictions on Broker Escrows

If a broker conducts escrows without a separate DOC escrow license:

- Escrows must be an incidental part of the broker's business

- The broker cannot advertise escrow services separately from real estate brokerage

- Business name cannot contain word "escrow"

- Escrow trust funds subject to inspection by Department of Corporations


11. Agency Status of Escrow Holders

Escrow holders are limited agents of the parties to the transaction

Escrow holders' agency duties are typically described in the escrow instructions

- Prior to closing, escrow holder is a dual agent for both parties

- After closing, escrow holder is an individual agent for each party


12. General Escrow Services

Escrow holders usually:

Prepare escrow instructions

Order preliminary reports from title company

Order loan demand statements from the seller's lender

Accept reports and forward to parties

Get instructions from the borrower's lender on conditions for loan closing

Prepare closing statements

Order recording of documents

Distribute funds and documents to parties


13. What Escrow Holders Do Not Do

Escrow holders will not give legal or tax advice

Escrow holders cannot not carry out conflicting instructions

Dual agency rules apply

Escrow holders cannot pay a referral fee to anyone but employees of the escrow holder

Prohibited by RESPA and State law


14. When Escrow Holders Get Conflicting Instructions

Interpleader actions

Escrow holders may file a court action called interpleader if they receive conflicting instructions and the parties cannot resolve the conflict.

After filing the interpleader, escrow will deposit all funds and documents with the court and let the court decide the rights of the parties.


15. Escrow Instructions

Escrow instructions are prepared based on the parties' contract

The current CAR® Purchase Agreement includes joint escrow instructions, but the escrow holder may supplement the instructions

The instructions will state the duties of the parties and the duties of the escrow holder

Escrow instructions should be signed by the buyer and seller

Once signed, the instructions can be amended only if the buyer and seller both consent.


16. Differences in Escrow Practice in Northern and Southern California

In Southern California:

Buyers and sellers sign joint (bilateral) escrow instructions

Buyers and sellers usually sign escrow instructions shortly after they sign the purchase contract

Escrow holders are usually independent escrow companies.


17. Differences in Escrow Practice in Northern and Southern California

In Northern California:

Buyers and sellers sign separate (unilateral) escrow instructions

Buyers and sellers usually sign escrow instructions a day or two before the closing

Title companies usually act as the escrow holder


18. Real Estate Settlement Procedures Act (RESPA)

RESPA applies to most loans used to purchase owner-occupied homes

RESPA:

Requires lenders to give borrowers a good faith estimate of closing costs and a booklet on settlement (closing) costs at loan application

Requires escrow to use Uniform Settlement Statement (HUD-1) [example, pages 298-299]

Prohibits kickbacks or unearned fees to be paid or received by any service provider in the transaction (including real estate brokers and salespersons)


19. HUD-1 Uniform Settlement Statement


20. HUD-1 Uniform Settlement Statement


21. Termination of Escrow

Escrow can be terminated by:

Closing the transaction (most common)

Mutual instructions to cancel

Court decision in interpleader

Expiration of time for closing (maybe)

Escrow cannot be terminated by unilateral action (revocation) by one party


22. Title Insurance

Title insurance is a type of insurance policy

Title insurance covers the insured party against a loss if title is not in the condition insured in the policy


23. Purposes of Title Insurance

- Title insurance protects the insured party (owner or lender) against claims by third parties who claim to have a superior claim to title

- The title insurance company will defend insured party against claims by third parties claiming better title

- If title is not as insured, resulting in the insured party suffering a loss, the title company will pay insured party for the insured party's losses, up to the amount of the insurance policy


24. Searching Title

- Before issuing a title policy, the title company will search title

Title companies search title using their own "in-house" records called title plants

- Search involves reviewing the "chain of title" to determine the owner of record and any encumbrances that may affect the property


25. Chain of Title Example, part 1

- Title search will begin with the current owner and search backwards to determine who transferred the property to the current owner

- Search continues back until the first deed from a government


26. Chain of Title Example, part 2

- Title search will then begin with the first grant and work forward to determine if any owner granted any interests during that owner's ownership

- Forward search will include deeds, encumbrances, judgments, court records, etc.


27. Preliminary Reports

After searching title, the title company will issue a preliminary report (also referred to as a preliminary title report), which:

Shows current ownership and encumbrances

Lists conditions that must be satisfied before the title company will issue a title policy

Lists exceptions and exclusions from coverage that will be included in the title policy, when issued

- The buyer may require the seller to clear some exceptions before closing (for example, the lien of the seller's existing loan or unpaid taxes)


28. Forms of Title Policies

There are two basic forms of title insurance policies in California:

Standard Coverage title policies

Also known as CLTA policies

CLTA = California Land Title Association

Extended Coverage title policies

Also known as ALTA policies

ALTA = American Land Title Association

Extended Coverage policies include coverage against risks not covered in Standard Coverage policies


29. Standard Coverage: Insured Risks

Standard coverage title insurance insures against loss resulting from:

A forged deed in the chain of title

A deed in the chain of title signed by an incompetent grantor

Matters disclosed by public records

- Unless the title company lists the matter as an exception


30. Extended Coverage: Insured Risks

Extended coverage policies cover against all risks covered by Standard coverage policies, plus coverage from:

Unperfected Mechanic's Liens

Unrecorded Easements

Matters that a Survey Would Show

Rights of Parties in Possession


31. Title Insurance: Uninsured Risks

Title policies do not insure against:

Defects in title that are known by the insured and not known by the title insurance company

Example: Insured knows a deed was forged

Governmental laws that affect use, not title

Examples: zoning, environmental laws

See page 306, Exclusions #1


32. Other Forms of Title Insurance

Residential Policy

Provides extended coverage for residential properties [Example, pages 305-307]

Title Company may not require survey

CLTA-Lender's Policy

provides standard insurance coverage to lender

insures priority of deed of trust

ALTA-Lender's Policy

extended coverage policy insuring lender

most lenders insist on an ALTA policy


33. Closing Costs

Closing costs are fees and expenses that sellers and buyers pay in connection with the sale and financing of real property

Who Pays?

Who pays which costs can be negotiated between seller and buyer

By custom, certain closing costs may be considered "buyer's" or "seller's" costs

Custom often differs by county


34. Closing Costs Typically Paid by Buyers: Non-Recurring (One-Time) Costs

Costs associated with the buyer's new loan:

Loan origination fee or points

1 point = 1% of loan amount

Appraisal fee

Credit report fee

Tax service fee

Recording fees for deed of trust

Title insurance premium for lender's policy

Structural pest control report fee

Escrow fee (part or all)


35. Closing Costs Typically Paid by Buyers: Recurring Costs

Costs which the buyer will pay at closing and during the buyer's ownership include:

Property insurance premiums

Property taxes

Chapter 11

Tax and insurance impounds

Loan interest


36. Closing Costs Typically Paid by Sellers

- Documentary Transfer Tax

- Prepayment penalty on existing loan

- Broker's commission

- Title insurance for owner's policy

- Discount points on FHA or VA loans

- Recording Fees: Deed, Reconveyances

- Escrow Fee (part or all)


37. Loan Interest Calculations

On most real estate loans, interest is calculated in arrears:

Each month's payment pays interest due for the previous month

Example: Payment due August 1 pays interest for the period from July 1 through July 31


38. Loan Interest at Closing

Lenders collect interest at closing to the date that interest from the first payment will be paid

Interest is due for the date of closing

Example:

Closing date is July 17

First payment due September 1

First payment pays interest August 1 through August 31

Interest at closing: July 17 through July 31


39. Loan Interest at Closing: Example

Loan Amount: $204,000; Interest Rate: 8%

Closing Date: July 17; First payment due: Sept. 1

Calculate interest based upon a 30 day month and a 360 day year.

Determine number of days of interest due:

14 days, including date of closing

Determine daily interest amount:

$204,000 x 8% [.08] = $16,320

$16,320 ? 360 = $45.33

Multiply daily interest amount x number of days:

$45.33 x 14 = $634.62


40. Prorations

Prorate: to allocate or divide

Escrow prorates certain property expenses or income items that "bridge" the closing date

Items that are typically prorated include:

Property taxes

Interest on loans assumed by the buyer

Rents on income property

Homeowner association dues

Seller is responsible for days prior to closing date

Buyer is responsible for date of closing and after


41. Proration Example

Homeowner's association dues are $150 per month

Closing date is March 7, seller has not paid the March HOA dues

Using a 30-day month for prorations:

Determine the daily amount: $150 ÷ 30 = $5

Seller is responsible for days up to, but not including, the closing date = 6 days

At closing, the seller is charged, and buyer is credited for 6 days of dues = 6 times $5 = $30

Buyer will pay the $150 after closing