Chapter 11: Escrow and Closing

Slide 1: Chapter 11
Escrow and Closing

Slide 2: Closing
* Closing is the completion of a real estate transaction
- Purchase and sale closing: where seller and buyer exchange deed and purchase price
- Financial closing: where borrower and lender exchange funds and promissory note/deed of trust
* Closing date is when transfer documents will be delivered to the parties and documents recorded (deed, deeds of reconveyance, deeds of trust)

Slide 3: Escrow
The arrangement where the parties to a transaction deposit something of value to a third person, called an escrow holder, with instructions to deliver the things to the other party to the transaction upon the occurrence of a condition or conditions

Slide 4: Escrow: Why Escrow
* Escrow helps to resolve the dilemma of who goes first
* Each party makes conditional delivery into escrow
* When all conditions are satisfied, escrow holder closes transaction, distributing the transfer instruments to the proper parties

Slide 5: Typical Escrow Services
Escrow holders usually:
* Prepare escrow instructions
* Order preliminary [title] report
* Order loan demand statements
* Accept reports and forward to parties
* Get instructions from lenders
* Prepare closing statements
* Order recording of documents
* Distribute funds and documents to parties

Slide 6: Additional Escrow Services
* Act as custodian of funds and documents pending closing
* Act as a clearinghouse for payments
- Makes certain that funds on deposit have cleared
* Assure compliance by the parties with the escrow instructions

Slide 7: Requirements for a Valid Escrow
* A binding contract between the parties to a transaction
* Conditional delivery of transfer instruments (for example, a deed) or other things of value

Slide 8: Conditional Delivery
* Delivery of money or documents into escrow is irrevocable
- The escrow holder is authorized to make delivery to the other party when the conditions for delivery have been satisfied
* If the conditions are not timely satisfied, escrow may return items to party who deposited the item
- (unless timely performance is waived)

Slide 9: Regulation of Escrow Holders

* Escrow holders must be licensed by the California Department of Corporations
- Requirements include fidelity bond or equivalent, manager with 5 years experience, etc.
* Exceptions:
- Title insurance companies
- Banks, savings banks, and trust companies
- Attorneys (when acting for a client)
- Real estate brokers (for some transactions)

Slide 10: Real Estate Brokers
* A real estate broker may act as an escrow holder without holding a DOC escrow license if the broker is either:
- a party to the transaction (buyer or seller), or
- performing an act for which a license is required (listing broker or selling broker)
* Brokers who act as escrow holders without a DOC license must still comply with all DOC escrow regulations

Slide 11: DOC Escrow Regulations
* Escrow holders:
- cannot accept escrow instructions with blanks to be filled in after the instructions are signed
- cannot allow one party to alter instructions after instructions are signed
- cannot carry out conflicting instructions
- cannot pay referral fees to anyone except regular escrow company employees

Slide 12: Restrictions on Broker Escrows
Broker relying on DOC exemption cannot:
* Advertise escrow services except in connection with real estate brokerage
* Use the word escrow in the name of the brokerage
* Delegate escrow duties to a salesperson or other broker

Slide 13: Broker as Escrow Holder: Disciplinary Actions
Grounds for discipline by DRE:
* Accepting escrow instructions with blanks to be filled in after signing
* Allowing alterations to escrow instructions unless all parties agree
* Failing to deliver copies to parties
* Failing to maintain proper records
* Failing to deposit funds by the next business day (note different standard as escrow holder)
* Etc.

Slide 14: Escrow Holder’s Status
Escrow holder is a limited agent of the parties to the transaction
* Duties as agent are:
- those in the escrow instructions
- Good faith and reasonable skill
* Prior to closing, escrow holder is a dual agent for both parties
* After closing, escrow holder is an individual agent for each party

Slide 15: Escrow Instructions
* Written authorization and instructions to the escrow holder
* Typical provisions:
- State the duties of the parties and the duties of the escrow holder (based on the underlying contract)
- State who pays which costs
- Specify which documents are to be delivered to escrow and when
- Describe the disbursements to be made
- Give the escrow holder the right to file an interpleader action if there is a dispute between the parties

Slide 16: Conflict between Purchase Agreement and Escrow Instructions
* Escrow instructions should follow the purchase contract
* If the escrow instructions conflict with the purchase agreement, escrow instructions usually prevail because they are executed later
- Exception: if instructions state that the purchase agreement will govern, purchase agreement will prevail

Slide 17: Differences in Escrow Practice in Northern and Southern California
In Southern California:
* Buyers and sellers sign joint escrow instructions
* Buyers and sellers usually sign escrow instructions shortly after they sign the purchase contract
* Escrow holders are independent escrow companies

Slide 18: Differences in Escrow Practice in Northern and Southern California
In Northern California:
* Buyers and sellers sign separate escrow instructions
* Buyers and sellers usually sign escrow instructions a day or two before the closing
* Escrow holders are title companies

Slide 19: What Escrow Holders Should Not Do
* Escrow holders should not give legal advice or tax advice
* Escrow holders should not carry out conflicting instructions
- Escrow holders may file court action called interpleader if they receive conflicting instructions
- Escrow deposits all funds and documents with the court and lets the court decide the rights of the parties

Slide 20: Risk of Loss During Escrow
* If the property is damaged or destroyed during escrow, the seller bears the risk of loss unless the buyer has either
- Possession of the property, or
- Legal title to the property
* If buyer takes possession prior to close of escrow, buyer should insure property

Slide 21: Doctrine of Relation Back
* Title to the property generally does not pass from seller to buyer until all escrow conditions have been satisfied
* If a seller died after depositing deed but before escrow conditions were satisfied, courts hold that the transfer of title will relate back to the date that the deed was deposited

Slide 22: Termination of Escrow
Escrow can be terminated by:
* Closing the transaction
* Mutual instructions to cancel
- Escrow cannot be terminated by unilateral action (revocation)
* Expiration of time for closing (maybe)
* Default by a party
NOTE: Terminating escrow does not terminate underlying agreement

Slide 23: Real Estate Settlement Procedures Act (RESPA)
* Applies to “federally related loans”
- secured by deed of trust on residential property up to 4 units (residential 1-4 family)
-- first or subordinate lien (change text)
- when lender has federal connection
-- federally regulated
-- federally insured accounts
-- sells to FNMA, FHLMC
-- makes more than $1 million in loans per year
- include purchase loans, assumptions, refinances, property improvement loans, and equity lines of credit
-- Not just purchase loans (change text)

Slide 24: RESPA Requirements
* At or within 3 days after loan application
- Lender must give borrower a good faith estimate of closing costs
- Lender must give borrower HUD Settlement Procedures booklet
* At closing:
- Lender must itemize closing costs using a Uniform Settlement Statement
* Lender may not pay referral or unearned fee or kickbacks to anyone (including real estate licensees)

Slide 25: RESPA Kickback Settlement Agreement
* Coldwell Banker owned an affiliated title company, Regency Title
* HUD alleged Coldwell Banker violated RESPA by:
- Giving higher commission splits to sales associates who referred business to Regency
- Requiring referrals to Regency as a condition of getting leads
- Paying referring agents earlier than non-referring agents
- Giving prizes to referring agents
* HUD and Coldwell Banker settled with Coldwell agreeing to pay $250,000 fine and agreeing to comply with RESPA

Slide 26: RESPA and Title Insurance
* Section 9 of RESPA prohibits a seller from requiring the home buyer to use a particular title insurance company as a condition of sale
* Buyers may sue a seller who violates this provision for an amount equal to three times all charges made for the title insurance

Slide 27: Closing Costs
* Closing costs are fees and expenses that sellers and buyers pay in connection with the sale and financing of real property
* By custom, certain closing costs may be considered “buyer’s” or “seller’s” costs
- But, who pays which costs can be negotiated between seller and buyer

Slide 28: Typical Buyer’s Costs (Debits)
* Purchase Price
* Loan costs
- Loan origination fee or “points” (1 point = 1% of loan amount)
- Appraisal fee
- Credit report fee
- Tax service fee
- Title insurance premium for lender’s policy
- Prepaid interest
- Tax or insurance impounds
- Recording fees for deed of trust
* Structural pest control report fee
* Hazard insurance policy premium
* Escrow fee (part or all)

Slide 29: Typical Buyer Credits
* Loan amount
* Deposit held at escrow
* Closing costs paid by seller

Slide 30: Typical Charges Paid by Sellers (Debits)
* Broker’s commission
* Loan costs associated with Seller’s existing loan
- Loan payoff amount
- Loan prepayment penalty
- Interest on loan to date of closing
* Documentary Transfer Tax
- County tax = $0.55 per $500 of sales price
-- If buyer assumes seller’s existing loan, tax does not apply to loan amount assumed
* Title insurance for owner’s policy
* Discount points on FHA or VA loans
* Recording Fees: Deed, Reconveyances
* Escrow Fee (part or all)
* Repairs

Slide 31: Closing Costs Prorated between the Seller and Buyer
* Certain property ownership expenses and income items cover a period of time before and after a closing date
* Expense or income item may be:
- already paid to a date past the closing date
- due for a period prior to the closing date
* Prorated expenses and income are divided between the buyer and seller based upon the time each owned the property

Slide 32: Prorations
* Items that are prorated include:
- Property taxes
- Interest on loans assumed by the buyer
- Rents on income property
- Homeowner association fees
* Example:
- Seller prepaid real property taxes