by Marti Kilby
Seller Concessions
Despite what is usual and customary regarding allocation of costs, it is not unusual for the seller to pay some of the buyer’s closing costs. This is especially true if the buyer is using a VA loan, where he or she may not be allowed to pay for certain items. The seller may also provide a closing cost concession if the buyer agrees to pay a slightly higher price. This is advantageous if you, as the buyer, are short on immediate funds but well qualified for a higher loan amount. You are basically just financing some of your closing costs (like we saw in the opening story of this chapter).
Savvy Shopper Tips: Who pays for what is largely negotiable. Make sure that you discuss allocation of costs with your real estate agent when writing your offer. They can also provide you with a cost estimate before you even write an offer. Escrow and title insurance fees do not vary widely from one company to another, but depending on which party selects the service providers, it may be worthwhile to get a quote from at least two companies. Loan fees are definitely worth shopping, and be sure to ask your lender if you can wrap certain fees into the loan. Some credit unions have very low costs, and some banks may have reduced fees for banking customers. Most important: Ask your escrow officer or lawyer for an explanation of any fees you don’t understand.
Chapter 12
All about Escrow
and Why It’s Important
As I sat down to write this chapter, I realized that I don’t have any dramatic stories about escrows, and that’s likely because I’ve worked with the same escrow officer for over 10 years. Whenever I’m the listing agent, I always encourage my clients to work with her. I’ve followed her to three different companies and will continue to follow her should she move again. The degree of responsibility and detail required in her position would make most people crazy. But I know that I can always count on her to be accurate and on time. She is patient and caring and always ready to explain items to my clients. If your real estate agent has a favorite escrow officer, work with them. It is likely that they too will provide great service.
You and the seller have finally come to agreement on the terms under which you’ll purchase your dream home, but now what? How can both parties be sure that everything in the purchase contract actually happens? Assuring that all terms of the written agreement are fulfilled is the job of a neutral third party referred to as the escrow holder. In some states, this job is handled by an attorney, but in California, it is customary for the escrow to be handled by an escrow or title company.
About Escrow Companies
Companies providing escrow services are regulated by state law and are broken into two categories of regulation: independent or non-independent. Non-independent escrow providers include attorneys, savings and loan institutions, real estate brokers, and title companies—all of which are governed by specific regulatory organizations. Independent escrow companies have no other business interests other than supplying escrow services, and they are licensed by the California Department of Business Oversight.
Deciding which escrow provider to use is part of the negotiation process. In today’s competitive market, the buyer will often include in the offer that selection of escrow and title services are “seller’s choice,” thus appearing to grant a concession to the seller right up front. In reality, prices charged by the various companies for escrow services do not vary tremendously and are negotiable to a certain extent, so selecting the escrow provider is usually more important to the agents than the buyers and sellers. As it is against the law for a real estate agent to accept any type of gift or fee for referring an escrow company, or any other service provider for that matter, it really comes down to quality of service. Most agents, when given the opportunity, will encourage their clients to use a particular company and escrow officer based on their prior positive experience in working with that company and officer.
Opening Escrow
Escrow is generally opened by the listing agent, who will email the selected escrow officer a copy of the fully executed Residential Purchase Agreement and any other documents that are incorporated into the agreement, such as counteroffers and any addenda. The listing agent will also indicate which title insurance company is selected and provide the following information:
Phone numbers and postal and email addresses for the sellers.
Contact information for the buyer’s agent.
A copy of the pre-approval letter if the purchase is to be financed. The letter will have contact information for the lender.
HOA contact information if applicable.
Commission information as stated in the listing agreement and MLS.
If the buyer has provided an earnest money deposit check payable to the listing broker, the listing broker will write a check from his or her trust account payable to the escrow company.
The escrow period is stipulated in the Residential Purchase Agreement and is generally 30 days for a transaction involving a new first mortgage; longer in the case of a short sale or probate sale, and often much shorter in an all-cash transaction. In certain circumstances, with the agreement of both parties, the escrow period can be extended beyond the agreed upon date of closing.
Generally, within the first three days, the buyer will deposit their earnest money by check or wire transfer. During this time period, the escrow officer will also send draft escrow instructions to both agents, who will review the key terms of the transaction. Upon approval from the agents, the escrow officer will send escrow instructions to both the buyers and sellers, including several forms that must be completed and returned.
One of the most important forms is the Statement of Information or Statement of Identity. This questionnaire asks for very complete personal information about marital, job, and residence history, which may seem a bit intrusive. However, it is very important to provide complete information to make certain that your identity is not confused with someone else who might have a similar name or lived at the same location. You do not want to be confused with someone who has tax liens, bankruptcies, or other issues that could stall or totally derail the sale.
How to Take Title?
As part of the escrow process, you will also be asked how you want to take title, or how title should be vested. There are several different ways to hold title to real property, and they vary from state to state. I suggest that, if you have any questions, you consult an attorney and/or an accountant, as the manner in which you hold title impacts what happens to the property in the event one of the owners passes away. I’m not an attorney and can not advise you, but here is a guide to help you understand the options here in California.
Real property in California can be owned by one person, sole ownership, or more than one, co-ownership. Here are the most common ways in which title is held:
Sole Ownership
A Single Man or Woman. A man or woman who is not legally married.
An Unmarried Man or Woman. A man or woman who was married but is now divorced or widowed.
A Married Man/Woman as His/Her Sole and Separate Property. In order for a married person to take title as sole owner, the spouse must relinquish all rights, title, and interest to the property. This is usually done with a quitclaim deed that is recorded concurrently with the property deed.
Co-Ownership
Community Property. This is for a married couple who equally share title and right to control, manage, and sell their half. Either may will their share of the property to someone other than their spouse, but that transfer will be subject to administration of the estate. If they do not have a will or leave it specifically for their spouse, it passes to the spouse without probate.
Joint Tenancy. In a joint tenancy, two or more people hold title in equal shares. The chief characteristic of a joint tenancy is right of survivorship. When one of the joint tenants passes away, their share passes directly to the remaining owners and is not subject to probate. In a joint tenancy, an owner may not will their share to anyone inside or outside the joint tenancy.
Tenancy in Common. Under tenancy in common, two or more co-owners own undivided interests; but unlike joint tenancy, their interests in the property are not necessarily equal in quantity or duration, and may arise at different times. There is no right of survivorship, and, at death, the percent of ownership passes to the deceased’s heirs.
Living Trust. A living trust is a popular way to hold title because when someone passes away, the public probate process is avoided. Like a will, a living trust outlines the details of who will inherit the property. Stocks and other items of value may also be included in the trust.
Community Property with Rights of Survivorship. This is an option for a married couple that combines the features of holding title as community property with the benefits of the rights of survivorship. At the death of one spouse, their interest in the property will automatically pass to the other.
More about the Escrow Process
The escrow officer will also review the Preliminary Title Report that is issued prior to the actual title insurance policy, making sure there are no potential “red flags,” such as tax or mechanics liens, encroachments, easements, local violations, or judgments that have to be cleared or disclosed in order to transfer clear title to the buyers. Owner’s title insurance will not be issued until title to the property can be transferred without defect. (More about title insurance in the following chapter.)
If you are financing the purchase, your escrow officer will also be responsible for coordinating with your lender to meet their closing instructions, including ordering payoff demands for any existing loans and liens, and making sure that new hazard insurance and lender’s title insurance policies are in place prior to closing. He or she will also coordinate with you the signing of the new loan documents before a notary, the deposit of the balance of your down payment, and the wire transfer from the lender with the funds for the new loan.
Understanding Prorations
One of the most important jobs of the escrow officer, and one of the most confusing to buyers and sellers, is balancing the money according to the day of closing. In California, for instance, if a seller has not paid the first installment of their property taxes (which become delinquent on December 10th), and the property is scheduled to close on December 8th, a buyer might worry about getting stuck with paying that whole first installment tax payment. That is not the case. The escrow officer is responsible for prorating taxes, and if applicable, HOA fees to the day of closing. Thus, in the above example, the seller would be responsible for the property taxes from July 1-December 8, and the buyer would be responsible for December 9–10 as well as the second installment, which is due February 1st and delinquent April 10th.
Mortgage interest is also prorated, which again can be confusing. Unlike rent that is paid in advance of each month, mortgage interest is paid in arrears. Thus, when you pay your mortgage on the first of the month, you are actually paying for the use of that money (the interest) during the previous month. At closing, you will pre-pay interest from the date of closing to the first of the next month. So, if you close escrow on December 8th, you will pre-pay interest from the 8th until December 31st, but you won’t have a mortgage payment due until February 1st, at which time you’ll be paying interest for January. You will receive an estimated settlement statement during the escrow process, including the Closing Disclosure (CD), at least three days before closing. This 3-day window gives you time to compare your original estimated settlement statement provided by your lender and the final terms.
Escrow or Impound Account
There is another use for the term “escrow” that often confuses first-time buyers. When financing a home purchase, or when refinancing, a lender will sometimes set up an “escrow” or “impound” account for the borrower. Every month when the borrower pays their mortgage, the lender is also collecting a percentage of the annual hazard insurance premium and property taxes. These funds are deposited into the borrower’s escrow or impound account held by the lender. When property taxes and the insurance premium are due, those bills are paid by the lender directly, not the borrower. The advantage to this is that you don’t need to worry about saving money for those bills. But, on the flip side, you are not able to put that money to work in any way while it is sitting in the lender’s account. With that said, an escrow or impound account is recommended for first-time buyers.
Close of Escrow
So, when does escrow close? Real estate closings in California rarely involve everyone sitting at a table and signing papers, then handing over keys. Typically, once the lender has funded the loan—or all buyer funds are deposited in an all-cash transaction—the title company will record the deed at the County Recorder’s Office and provide confirmation of recording to the escrow officer, who will then notify both the buyer and seller. Recording confirms that title to the property has successfully passed to the buyer and arrangements are made to deliver the keys. This signals escrow has officially closed. The final job of the escrow officer at this point is to perform a closing audit on the escrow account and disburse the proceeds to the seller; pay any demands or invoices, such as termite work or warranties; pay commissions to brokers; and mail a check to the buyer if there was an overage in the estimated amount of their costs. The escrow officer then issues a certified closing statement (or HUD1, as the form is called), showing the final accounting of all funds.
If all of this still sounds a bit overwhelming, rest assured you can (and should) ask questions about any aspect of the escrow process that seems confusing. Escrow is the most important part of the sales process, and your agent and escrow officer are there to make sure you are comfortable every step of the way.
Savvy Shopper Tips: If your real estate agent has a favorite escrow officer, it is likely because they provide great service. Trust your real estate agent’s recommendation. If some of the fees appear high, ask for a reduction or at least an explanation. If this is your first purchase, talk to a lawyer about how to take title. If you are financing your purchase, close later in the month to reduce the amount of pre-paid interest you’ll pay. Carefully review the estimated settlement statement and Closing Disclosure, and ask questions about any line items you don’t understand.
Chapter 13
The Truth about Title Insurance
A title officer recently shared a story with me about a couple who were getting ready to close escrow on their dream home in one of San Diego’s nicest communities. They were especially excited about the lavish outdoor entertainment area that included a pool, spa, kitchen, and bar. The current owners had just finished the project a couple of days before they learned the husband was being transferred out of state. The couple purchasing the property were paying cash, so they weren’t required to purchase title insurance for a lender, and they didn’t really see the need for the added expense. They closed escrow and happily moved into their new home.
They soon learned that the previous owners had not finished paying the contractor for the entertainment area and pool, and the contractor had filed a mechanics lien against the property. As title had transferred without the lien being paid, the new owners were now responsible for paying the $40,000 balance! This would have been discovered in a title search had the buyers purchased title insurance. Tough way to learn a lesson!
According to Fidelity National Title Company, “title problems are discovered in more than one-third of residential real estate transactions.”1 Some common title problems, or “defects” as they are known, range from existing liens, judgments, and unpaid mortgages to errors in recorded names, addresses, and legal descriptions.2 A title defect left unresolved can lead to legal battles down the road and even loss of property.
What It Is
Title insurance, unlike all other types of insurance, insures against what has happened prior to the policy being issued, as opposed to after issuance. This means the owner and lender are insured that the title to the property is free of defects, and they are protected against future claims. There are two
separate policies issued: one for the new owner, and if there is a new loan, one for the lender protecting the lender’s interest in the property. Title insurance is a one-time purchase paid through escrow that remains in effect so long as you own the home, and in the case of the lender, so long as they hold a mortgage on the property. The price of title insurance is based on the sales price of the property and any upgrades added to the policy.
Over the course of time, there may be many entities that have some sort of rights in any given property; owners, heirs, and even government agencies or utility companies. In recent times in the US, changes to title have typically been recorded, which helps maintain the “chain of title” and makes clear the rights of all parties as they pertain to a particular property. However, even when recorded, there can be hidden risks, such as forgery, incapacity of signers, impersonation, and unknown errors. Title insurance helps protect you against these unknown and often hidden issues.
How It Works
When the listing agent opens escrow, the escrow officer will open a title order with the selected title insurance company. Generally, the title company is selected by the seller, often based on the recommendation of the listing agent. The title order is then passed to a department within the title company that is responsible for research. This is a complicated process, as many records are not digitized and often require manual investigation. In the course of the research, the chain of title will be examined, looking to make sure each time title has passed from one person to another there are no gaps, errors, or any questionable succession. All deeds and records are collected, including a plat map showing the property in relationship to surrounding parcels. A search is also done by a local tax service to verify the status of current property taxes and any liens that may have been filed against the property.
