California Real Estate Principles, 9th Edition

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©2011 Cengage Learning
California Real Estate
Principles
Chapter 10
The Role of Escrow and Title
Insurance Companies
©2011 Cengage Learning
Chapter 10
1.
2.
3.
4.
Define escrow and list the legal requirements
for a valid escrow.
Describe the basic services provided by title
insurance companies.
Explain the differences between a CLTA
standard and an ALTA extended coverage title
insurance policy.
Explain various closing costs and indicate who
normally pays for each closing cost.
©2011 Cengage Learning
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
©2011 Cengage Learning
Escrow Disagreements

Escrow agent cannot give
legal advice.

Halt until mutual agreement.

Interpleader: Legal court
action to resolve dispute
between the parties.
©2011 Cengage Learning
Who May Act
Escrow Laws
Corporation
Independent*
Corporation
Commissioner
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.
©2011 Cengage Learning
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.
©2011 Cengage Learning
TYPES OF ESCROWS
 Residential Sales
 Liquor License
 Bulk Sale
 Re-Finance
 Income Property
 Business Opportunity
 Exchange
 Probate
 Commercial
 Industrial Land Sales
©2011 Cengage Learning
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
©2011 Cengage Learning
LIFE OF AN ESCROW
Prepare Escrow Instructions
and Pertinent Documents
Obtain Signatures
Order Title
Search
Receive and Review
Preliminary Report
Request Demands (if any)
Request Clarification of
Other Liens (if any) and
Review Taxes on Report
Receive Demands and
Enter into File
©2011 Cengage Learning
Process
Financing
Continued . . .
LIFE OF AN ESCROW
continuation
Process Financing
Request
Beneficiary
Statement
Request/or Prepare
New Loan Application
Receive Beneficiary Statement
and Enter into File, Review
Terms of Transfer and Current
Payment Status
Obtain Loan Approval
and Determine that
Terms are Correct
Request Loan Documents
©2011 Cengage Learning
LIFE OF AN ESCROW (cont)
Financing
Title
Review File To Determine that All Conditions Have Been Met
and that All Documents are Correct and Available for Signature
Termite inspection, contingencies released, fire insurance ordered
additional documents (2nd T.D. bill of sale etc.) have bee ordered
Compute Prorations
(Costs and Charges)
and Request Signatures on all
Remaining Documents
Forward Documents
To Title Company
©2011 Cengage Learning
Obtain Funds
From Buyer
Return Loan
Documents
LIFE OF AN ESCROW (cont)
Request Loan Funds
Receive Loan Funds
Order Recording of Deed
and Other Documents
Close File
Prepare Statements
and Disburse Funds
©2011 Cengage Learning
Complete Closing
Forward Final Documents
to All Interested Parties
(Buyer Seller Lender)
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
©2011 Cengage Learning
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
©2011 Cengage Learning
TERMINATION OF ESCROW
 Full Performance of the sale, exchange or
refinance
 Mutually agreed - Cancellation
 Revocation or Refusal by one party; Legal
problems
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Non-Recurring CLOSING COSTS
Non-Recurring = One Time Costs
Loan Fees
Appraisal Report
Credit Report
Pest Control
Escrow Fee
Tax Service Fee
Drawing, Notary, Recording Fees
Title Insurance Policy Fee
Broker Commission
Transfer Tax
Note: ALL costs are negotiable between the parties unless
restricted by the loan.
©2011 Cengage Learning
Recurring CLOSING COSTS
Recurring = Continue repeated costs
Insurance : Hazard,
Flood, Mortgage
(MIP, PMI)
Property Taxes
Interest on Loans
Impound Deposits
Note: ALL costs are negotiable between the parties unless
restricted by the loan.
©2011 Cengage Learning
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.
©2011 Cengage Learning
TYPICAL CLOSING STATEMENT
Buyer
Seller
Debit Credit Debit Credit
Prepaid rents
Documentary transfer tax
Prepayment penalties
Termite inspection/correction
Seller’s CLTA title ins policy
Brokerage commission
Recording Fees
xxxx
Payoff of Existing Loan
Discount points
xxxx
Any “seller pays” fees
Seller’s Net Proceeds
©2011 Cengage Learning
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
xxxx
TYPICAL CLOSING STATEMENT
Buyer
Seller
Debit Credit Debit Credit
Sales Price
xxxx
xxxx
Buyer’s initial deposit
xxxx
Buyer’s new loan
xxxx
Balance of Buyer’s Deposit
xxxx
Appraisal
xxxx
Loan origination fee
xxxx
New fire Ins. Policy
xxxx
Credit report
xxxx
Drawing Fee/Notary
xxxx
Lender’s ALTA Title
xxxx
Any “buyer pays” fees
xxxx
Tax service & impounds
xxxx
©2011 Cengage Learning
TITLE INSURANCE PROCESS
Search
Examine
Chain of Title
Preliminary Title Report
Escrow
Title Policy
©2011 Cengage Learning
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
©2011 Cengage Learning
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
©2011 Cengage Learning
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
©2011 Cengage Learning
Review Quiz Chapter 10
1.
Which of the following is not exempt from the escrow
licensing law?
(a) trust companies
(b) escrow companies
(c) title insurance companies
(d) real estate brokers when acting as an agent in the
transaction
©2011 Cengage Learning
Review Quiz Chapter 10
2. A history of title transfers for a particular parcel of
land is a/an:
(a) preliminary report
(b) title insurance policy
(c) abstracter index
(d) chain of title
3. Which insurance policy requires the title company to
make a physical inspection of the property?
(a) CLTA
(b) standard
(c) RESPA
(d) ALTA
©2011 Cengage Learning
Review Quiz Chapter 10
4. There are certain requirements that must be met before
a transaction can be placed in escrow. They are:
(a) a binding contract between buyer and seller
(b) a neutral third party is employed
(c) conditional delivery of all documents related to sale
(d) all of the above
5. Which of the following is normally paid by the seller?
(a) prepayment penalty
(b) credit report fee
(c) recording fee for the trust deed
(d) loan origination fee
©2011 Cengage Learning
Review Quiz Chapter 10
6. When an escrow officer receives conflicting instruction
that cannot be resolved by the parties, the escrow officer
can file a legal action in court called:
(a) arbitration
(b) hold harmless
(c) interpleader
(d) settlement suit
©2011 Cengage Learning
Review Quiz Chapter 10
7. Which law prohibits a real estate agent from receiving
a referral fee from an escrow or title company?
(a) Truth in Lending
(b) Regulation Z
(c) RESPA
(d) all of the above
8. Title insurance does not cover publicly disclosed:
(a) easements
(b) zoning ordinances
(c) deeds of trust
(d) corporation commission
©2011 Cengage Learning
Review Quiz Chapter 10
9. Title insurance rates are set by:
(a) title companies
(b) insurance commissioner
(c) real estate commissioner
(d) corporation commissioner
10. On behalf of the buyer and seller, the escrow officer
acts as:
(a) an employee
(b) an independent contractor
(c) an agent
(d) a licensee
©2011 Cengage Learning
Review Quiz – Chapter 10 Answers
1. B
6. C
2. D
7. C
3. D
8. B
4. D
9. A
5. A
10. C
©2011 Cengage Learning
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