Chapter 13 - Escrow and Title Insurance


1. Chapter 13

Escrow and Title Insurance


2. Definition of Escrow

The deposit of something of value

by one party to a transaction

to a third person, called an escrow holder,

to be delivered to the other party to the transaction upon the performance of a specific condition or conditions


3. Escrow: Why Escrow

Seller sells home for $300,000, has existing loan with balance of $165,000. Buyer has 10% down payment, needs to borrow 90%

Who goes first?


4. Deposits into Escrow

Each party deposits funds or documents with escrow with instructions to deliver to other party or parties upon satisfaction of conditions


5. Disbursements at Closing

When all conditions to delivery are satisfied, escrow closes transaction by delivering funds and documents to parties according to instructions


6. Essential Elements of Escrow

For an escrow to be valid, there must be:

a binding contract between the parties to a transaction, and

conditional delivery of transfer instruments (for example, a deed) or money to a third party (escrow holder)


7. Parties to an Escrow

In a typical real estate sale, there are two or more underlying transactions and two or more related escrows

Purchase transaction: escrow with buyer, seller, and escrow holder

Loan transactions: an escrow with buyer, buyer's lender, and escrow, an escrow with seller, seller's lender and escrow, or both

Listing broker and selling broker are not parties to the escrows


8. Escrow Holder's Status

Escrow holders are limited agents of the parties to the transaction

Duties as agent are:

those in the escrow instructions

duty to use 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


9. Regulation of Escrow Holders

Escrow holders must be licensed by the California Department of Corporations and must post a surety bond

Exceptions:

Title insurance companies

Banks, savings banks, and trust companies

Attorneys

Real estate brokers (for some transactions)


10. Real Estate Brokers

A real estate broker may act as an escrow holder without having a DOC license if the broker is:

a party to the transaction (buyer or seller), or

performing an act for which a license is required (listing or selling broker)

Brokers who act as escrow holders without a DOC license must still comply with all DOC regulations


11. Restrictions on Broker Escrows

Broker relying on DOC exemption cannot:

Advertise escrow services except in connection with real estate brokerage

Use a name that contains the word escrow


12. 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


13. 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

Escrow holders are usually title companies


14. 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


15. 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


16. General Escrow Services

Typical services provided by escrow holders:

Prepare escrow instructions

Order preliminary [title] report

Order loan demand statements for loans to be repaid through escrow

Or loan beneficiary statement if loan is to be assumed

Get instructions from lenders who will be providing new loans

Accept reports and forward to parties

Prepare closing statements

Order recording of documents

Distribute funds and documents to parties


17. Escrow Instructions

Escrow instructions are the written directions to the escrow holder which state the duties of the parties and the duties of the escrow holder

Current version of CAR® Residential Purchase Agreement includes joint escrow instructions

Escrow holders may supplement agreement with their own instructions

Agents and parties should review supplemental instructions to avoid an unintended change to the purchase agreement terms


18. Amending Escrow Instructions

Once signed by the buyer and seller, escrow instructions cannot be amended unless both buyer and seller agree to the amendment

Neither buyer or seller can unilaterally change the escrow instructions


19. What Escrow Holders Do Not Do

Escrow holders will not give legal advice

Escrow holders will 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


20. Closing a Real Estate Transaction

To close a transaction, the escrow holder:

Prepares settlement (closing) statements

RESPA requires HUD-1 Uniform Settlement Statement

Collects funds and documents

Confirms satisfaction or waiver of all conditions

Arranges for recording of documents

Disburses funds and documents

Arranges for title company to issue policies


21. 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


22. Closing Costs Typically Paid by Buyers

Loan origination fee (% of loan amount)

Appraisal fee

Credit report fee

Structural pest control report fee

Tax service fee

Recording fees for deed of trust

Title insurance premium for lender's policy

Escrow fee (part or all)


23. Other Typical Buyer's Closing Costs

Property insurance premiums

Tax and insurance impounds

Some lenders may not require impounds

Loan interest

From (and including) the closing date to the date interest accrues on the first payment

Loan interest is generally paid in arrears

Example: August payment pays July's interest


24. Closing Costs Typically Paid by Sellers

Documentary Transfer Tax

Interest on existing loan

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)


25. Prorated Expenses

Certain expenses related to ownership of real property cover a period of time before and after a closing date

Examples: property taxes, homeowner's association fees

Prorated expenses are divided between the buyer and seller based upon the time each owned the property


26. Prorations

Proration example:

Seller prepaid 1st ½ real property taxes


27. HUD-1 Uniform Settlement Statement

Total from Page 2, Buyer's Closing Costs, Seller's Closing Costs


28. HUD-1 Uniform Settlement Statement

Debits (charges) to Buyer, Credits to Seller, Credits to Buyer, Debits (charges) to Seller


29. Licensee's Escrow Responsibilities

Typical duties for the real estate licensees involved in the transaction:

deliver purchase agreement and information to escrow

review preliminary report

review escrow instructions

review and explain closing statements

work with lenders to satisfy lender requirements

review inspection reports

review reports on repairs


30. Title Insurance

Purposes of Title Insurance:

Defend insured party (owner or lender) against claims by third parties who claim to have superior title

Pay insured party for losses if title is not as insured


31. Role of Title Company

Search title

Title companies use in-house records called title plants to search title

Issue preliminary report (also referred to as a preliminary title report) before closing

Shows current ownership and encumbrances

Lists conditions to issuance of title policy

Lists exceptions and exclusions from coverage


32. Standard Coverage Policies of Title Insurance: Insured Risks

Standard coverage (CLTA) title insurance policies insure against loss from:

Forged deeds

Deeds signed by incompetent grantors

Matters disclosed by public records

Unless the title company lists the matter as an exception


33. Extended Coverage Policies of Title Insurance: Insured Risks

Extended coverage (ALTA) title insurance policies insure against loss from all risks covered by a CLTA policy, plus loss from:

Unperfected mechanic's liens

Unrecorded physical easements

Matters that a survey would show

Rights of parties in possession

Certain mining and water rights claims


34. Title Insurance: Uninsured Risks

Title policies do not insure against risks:

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


35. Other Forms of Title Insurance

ALTA-Residential Policy

Provides extended coverage for residential properties for standard policy premium

Title Company may not require survey

CLTA-Lender's Policy

provides insurance to lender

insures priority of deed of trust

ALTA-Lender's Policy

extended coverage policy insuring lender

required by most institutional lenders