California Real Estate Principles 10 1 Edition Chapter

California Real Estate Principles, 10. 1 Edition Chapter 11 The Role of Escrow and Title Insurance Companies © 2016 On. Course Learning

Chapter 11 1. Define escrow and list the legal requirements for a valid escrow. 2. Describe the basic services provided by title insurance companies. 3. Explain the differences between a CLTA standard an ALTA extended coverage title insurance policy. 4. Explain various closing costs and indicate who normally pays for each closing cost.

LEGAL REQUIREMENTS FOR VALID SALE ESCROW 1. Binding contract between Buyer and Seller 2. Conditional Delivery of 1. Money: Deposit funds and monies 2. 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

Escrow Disagreements • Escrow agent cannot give legal advice. • Halt until mutual agreement. • Interpleader: Legal court action to resolve dispute between the parties.

Who May Act Escrow Laws Corporation Independent* Corporation Commissioner (Office of Business Oversight) Bank Saving ** &** Loan Title** Real** Attorney Insurance Estate ** Company Broker FSLIC Commissioner Bank Commissioner Insurance Commissioner Bar Association Real Estate Commissioner *License by Corp. Commissioner **Exempt from escrow licensing law. Only if Broker is involved in the Transaction

Different Practices • Northern California Escrow handled by Title insurance Co • Southern California Escrow handled by Independent escrow co. or Title co. or Broker-owned escrow co.

TYPES OF ESCROWS • • • Residential Sales Liquor License Bulk Sale Re-Finance Income Property Business Opportunity Exchange Probate Commercial Industrial Land Sales

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

LIFE OF AN ESCROW Continued. . .

LIFE OF AN ESCROW continuation

LIFE OF AN ESCROW (cont) Title Financing

LIFE OF AN ESCROW (cont)

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

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

TERMINATION OF ESCROW • Full Performance of the sale, exchange or refinance • Mutually agreed - Cancellation • Revocation or Refusal by one party; Legal problems

Non-Recurring CLOSING COSTS Non-Recurring = One Time Costs üLoan Fees üAppraisal Report üCredit Report üPest Control üEscrow Fee üTax Service Fee üDrawing, Notary, Recording Fees üTitle Insurance Policy Fee üBroker Commission üTransfer Tax Note: ALL costs are negotiable between the parties unless restricted by the loan.

Recurring CLOSING COSTS Recurring = Continue repeated costs üInsurance : Hazard, Flood, Mortgage (MIP, PMI) üProperty Taxes üInterest on Loans üImpound Deposits Note: ALL costs are negotiable between the parties unless restricted by the loan.

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.

TYPICAL CLOSING STATEMENT Prepaid Rents 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 BUYER Debit BUYER Credit X SELLER Debit X X SELLER Credit X X X X X X

TYPICAL CLOSING STATEMENT BUYER Debit X BUYER Credit X SELLER Debit SELLER Credit X X X Loan Origination Fee X X New Fire Insurance Policy X Credit Report X X Lender’s ALTA Title X Any “Buyer Pays” Fees X Tax Service and Impounds X Sales Price Buyer’s Initial Deposit Buyer’s New Loan Balance of Buyer’s Deposit Appraisal Drawing Fee/Notary

TITLE INSURANCE PROCESS Search Examine Chain of Title Preliminary Title Report Escrow Title Policy

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

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

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