Title companies act as a neutral third party to the transaction, to search for and remove clouds or flaws on title, and to provide title insurance.
Title insurance is required by most lenders to ensure that the property, when transferred to the buyer will be free of encumbrances or liens. It also guarantees the right of the current seller to transfer ownership or title to the new buyer. if an undisclosed lien comes up after the property has been transferred to the buyer, title insurance ensures the buyer and lender are not liable. Title insurance is paid once-at the time of purchase or refinance. It perpetuates as long as the buyer owns the property. With a purchase, the buyer usually incurs this cost.
There are different types of title insurance. Currently, CAR purchase agreement forms state that the highest coverage insurance (CLTA/ALTA) will be issued, if available. CLTA/ALTA covers the purchaser against known and unknown defects on title, such as mechanics liens. The CLTA or ALTA-R insurance only cover known defects.
The escrow officer needs the following information when escrow is opened:
1. The buyer and seller’s contact info
2. The lender’s contact info
3. Copy of the fully executed contract and any attachments
4. HOA contact info (if any)
5. Payoff information for the seller’s current loan (if any)
Once escrow if opened, the escrow officer will order the title search at the “plant”. If this is a mobile home transaction, the escrow will not be opened until a contract is ratified, and the title search will not begin until the buyer’s deposit is received by title.
The plant is made up of a group of title research personnel whose job is to search old records on microfiche and county records that disclose liens, encroachments, bonds, and assessments.
The title company performs thus research for three reasons:
1. To ensure the lender they are loaning money against a property that is free and clear of liens.
2. For the title company when they issue title insurance.
3. To ensure that the buyer is purchasing the property free and clear.
Any lien must be researched by the escrow company to verify what the outstanding debt amount is and/or if it has been paid off. Multiple liens, or liens that have been transferred to a new lien holder, may require extended periods of time to research. Always notify the escrow officer of any liens you not on the Preliminary Title report to confirm they are following through with research.
Research on a property’s title typically takes five to ten working days to complete, and a preliminary title report is forwarded to all team members. The title company usually submits 3 copies to each agent to distribute to their client, broker, and file.
Most title companies have an “at a glance” checklist for the buyer and seller to review when they receive the title report. It is imparitive that your client reads this carefully and contacts the officer if any issues need addressing. This form is an early opportunity to identify problems that could make it challenging or impossible to close.
Because items can be overlooked, all team members should read the title report and look for the following:
1. Tax Liens
2. Mortgage Liens
3. Child Support or Mechanics Liens
5. Assessments & Bonds
6. Road Maintenance or Landscape Agreements
8. Correct Property Address
9. Correct Spelling of the Buyer’s Name
10. Any Names on Title You Do Not Recognize
Out of State Sellers
If a seller has lived outside of the state for more than 2 years, they may be subject to an out-of-state tax. Occasionally, a seller is exempt from this rule. If you know your seller falls under this 2 year rule, have the escrow officer send the seller a exemption form to complete for the IRS.
Power of Attorney
Occasionally, a buyer or seller will be out of the country, and use a Power of Attorney to sign closing papers. This give another individual the authority to sign on another individual’s behalf. This is most easily accomplished by having the title company where the escrow is opened, draft a POA. They are more apt to accept it when it’s their own form!
When a person signs on behalf of a trust, he or she must also sign listing papers and contract docs in the same manner. A POA begins whenever the POA designating document is signed. Therefore, it is not necessary that all contracts be signed in the same manner prior to execution. A POA can be implemented during an escrow for a spouse who is out of the country, disabled owner, etc.
1031 Tax Deffered Exchange
“Buyer to cooperate with seller’s 1031 Exchange at no cost or liability to buyer” or “Seller to cooperate with buyer’s 1031 Exchange at no cost or liability to seller“, are typical clauses within contract that clue you to an additional party involvement. The party is called a “facilitator” who manages the required paperwork and signs the closing papers.
You will see this disclosed by the buyer or seller on a purchase agreement. 1031 Exchanges are used for clients to exchange their income property for “like or similar” property within the limited time allotment. This “roll over” defers taxation to the replacement property.
The person who requests an exchange will need to locate an exchange company. The exchange company holds the sales proceeds to ensure it is exchanged and not pocketed by the client. The purchase agreement plus escrow info will need to be sent to the facilitator. The escrow officer will prepare closing docs for both the facilitator and the client to sign. All team members must be informed of this exchange. Ensure that a timely delivery of closing papers to the facilitator is being managed by the title officer.
Terms are instructions given to the escrow officer on who pays for what. Each agent prepares their terms and submits these to title. Terms can be found in the purchase agreement. Terms include: sales price, closing date, credits, and charges to the buyer and seller. Typically purchases from the seller to the buyer such as washer, dryer, refrigerator, and other personal items are not included in the terms of escrow.
After receiving the terms from both parties of the transaction, the escrow officer will prepare the closing papers for the buyer and seller to sign. The closing papers include escrow instructions and reports received by the escrow officer.
Always submit terms in writing. Make sure to allow sufficient time to double check your terms and give time to the escrow officer to prepare the docs before signing.
(click here for Closing Costs by County Chart)
Title offices are required by the government to provide an estimate settlement statement when the buyer and seller sign closing papers and a final settlement statement once recording has taken place. These are known as HUD1 statements. The HUD1 will break down all credits and debits for the seller and buyer. These are the terms you, the other agent, and the lender have submitted to the escrow officer as stipulated in the purchase agreement.
Have your client review the estimate settlement statement before signing the closing papers. Remind your client that the estimated statement is only an estimate. Final figures cannot be established until the escrow actually closes. However, they are usually within a couple hundred dollars of the final HUD1. Most escrow officers will “pad” the escrow-that is debit the buyer and seller an extra few hundred dollars for unanticipated charges. This prevents the buyer and seller from having to bring in additional money or sign documents at the last minute to close. Any overage amount will be refunded back to the appropriate parties after close of escrow. Remember a credit gives an amount to someone; a debit takes away. The key items you want to look at on the estimate are as follows:
1. COE Date
2. Sales Price
3. Prepament penalty on loans
4. Unpaid taxes
5. Commissions paid to agents
6. Inspections and repairs
7. Credits to buyer
9. HOA dues, transfer, and doc fees
10. Geological report
11. City and/or county transfer fees
12. Escrow & title fees
13. Net proceeds to seller
1. COE Date
2. Sales Price
5. Loan fees
6. Inspections paid by buyer
7. Credits from seller
8. Seller’s rentback
9. HOA dues, transfer and doc fees
10. Escrow & title fees
11. Net amount buyer must bring into escrow to close
Sign offs describe the act of the buyer and/or seller meeting with the escrow officer to sign closing papers. The buyer and seller usually sign separately.
The seller can sign closing docs before the loan docs are delivered to title IF the loan is not an FHA or VA loan. The buyer cannot sign closing docs until the loan docs are received by title from the lender.
The buyer usually needs to bring in the balance of the purchase money prior to the lender funding the loan. This money cannot be cash or personal check. The lender will not allow cash that is untraceable. A personal check requires too much time to clear the bank. The buyer has two choices. He or she can bring in a cashiers check OR can wire the funds from an account into the escrow account. The funds can come from a personal bank or savings account or from the proceeds of the sale of the buyer’s property, if applicable, which is being held n a second escrow account.
The seller must decide how to be paid from the proceeds of the sale. There are several choices. He or she can pick up the check from title on the day escrow closes, have the check delivered or mailed, or have the money wired into an account of their choice. For wire transfers, the seller needs to bring in a deposit slip from the account or escrow information when they sign closing papers and provide instructions to the escrow officer. Remember to remind individuals signing at title that they are required to have a valid photo id on hand to facilitate notarization.
Prorations help to calculate charges on a day-by-day basis. Escrow officers use proration for calculating payment of property tax, HOA dues, plus mortgage payments. Always calculate using a thirty-day calendar.
Holdbacks are funds withheld from the seller’s proceeds until something occurs. Typically the money is released at a later date, per mutual instructions by both agents.
Funding occurs when the bank wires the loan amount into the escrow account. The day before funding occurs, the escrow officer sends a request to the bank for funding figures. The officer receives a confirmation from the bank the next day indicating its intention to fund. Then, the wire transfer occurs.
Funding usually occurs the day before close. Banks do not want money held in an escrow account for more than a day without collecting interest. Funding usually occurs between 8am ad 4 pm. Occasionally the funding deadline is missed for a variety of reasons, so an attempt is made by the escrow officer and bank to fund the next business day. When this occurs, closing escrow is delayed. It’s a good idea to call the escrow officer to verify funding has taken place the afternoon prior to close.
Leins of against the property are paid when the property records. This is accomplished by using the buyers purchase money to pay off the means and the seller. If the transaction is in all cash offer, no funding takes place. The buyers simply brings in the funds prior to close. The buyers should bring in a cashier’s check, or make arrangements for a wire transfer. They should not bring in cash or a personal check that would cause an avoidable delays. The buyers funds must be in the escrow account prior to recording.
Recording takes place or occurs when a representative of the title of this goes to the county recorder’s office and deliver as the paperwork for the transaction to be recorded. Most recording offices have specific times during the day they are open to receive paperwork and perform recordings. Recording cannot take place unless the loan has funded and the buyers balance of payments have to be received. funding typically takes place one day prior to recording. specially recordings, where you fund and the record the same day are only allowed on the last day of the month. Most buyers do not want to find on Friday and record on Monday because they will pay interest on the loan over the weekend. Since they do not own the home until it records, buyers prefer closing any other weekday than Monday.
Occasionally, a recording is kicked back or declined by the recorder’s office for different reasons. The escrow officer will have to correct the problem, and then Resubmit it to the recording office, hopefully by the next day. Lenders do not like their money sitting in escrow for an extended period of time waiting to record. This is why funding usually takes place no more than one day before closing. If the recording is delayed, the bank may get frustrated and take the money back.
When recording has finally come, this is communicated to the escrow officer. He or she then contacts you and to inform you that escrow is closed. A package containing two copies of all signed escrow instructions and commission check we’ll be delivered or mailed to your office. The money is usually available within several hours of closing. Occasionally, the seller wishes to have their proceeds wired or directly deposited into his or her account. The seller simply leaves a copy of a checking deposit slip with the escrow officer when signing closing papers. Always check your closing papers for any checks, paperwork for letters intended for one of the other team members.
Coordinating Concurrent Closes
And concurrent close occurs when a buyer of a property close of escrow on a property owned and on a new property he or she is purchasing at the same time. Sometimes, concurrent closes can go back several transactions.
The chances of multiple properties closing on the same day are not great. Funding can be a problem if it needs to occur the day before close and a condition of funding is recording the buyers home. When presenting offers on a property, agents initially may not be privy to specifics on multiple concurrent closes. If your client is at the tail end of this type of multiple transactions, a delay could be eminent due to the domino effect. Additionally, when you have numerous escrows closing concurrently, the chances are significant something will cause a delay in one or more of the closings. Two decrease pressure on but team, agents should prepare their client four contention all delays and request a seller rent back after close during negotiations, or avoid concurrent closes. Try to close escrow during the middle of the week, not Friday. If a problem arises with recording, hopefully it can be solved by the next working day. Title offices, banks and county recorder’s are not open on weekends and holidays.
Tips on when to inform your escrow officer of a potential problem:
If the property is currently held in trust, partnership or corporation or if the property will be transferred to a new trust, partnership or corporation.
If the sellers and/or buyers are using a power of attorney
If any of the sellers on title is incapacitated or deceased
If one of the sellers and/or buyers has a change in marital status since signing the purchase agreement
If the seller resides out of state
If the seller and/or Buyer is participating in a 1031 exchange
If the sellers and/or Buyer have been involved in bankruptcy within the last seven years
If the seller has any Federal, state or county tax liens against them personally or against the property.
Common Ways of Holding Title
(click here to view Common Ways to Hold Title Chart)
Title to real property may be held by a single individual or entity, known as Sole Ownership, or by two or more individuals and/or entities known as co-ownership. Examples are:
Where one individual or entity is the sole owner of the realty.
1. A single individual who has not been legally married or registered as a Domestic Partner.
2. An unmarried man/woman is one who has previously been married and is now legally divorced.
3. Sole and separate refers to a married man/woman who is either married or a registered domestic partner who will hold title without a spouse or registered domestic partner.
Where two or more individuals or entities are the owners or the realty.
4. Community property is a form of co-ownership by a legally married husband and wife.
5. Community property with rights of survivorship is a form of co-ownership by a legally married husband and wife which includes the benefits of community property and that of joint tenancy.
6. Joint tenancy is a form of co-ownership by two or more individuals (none of which can be a partnership, limited liability company, or trustees of a trust) in equal shares, by a title created by a single transfer, when expressly declared in the transfer to be a joint tenancy. The joint tenants must derive their title at the same time from a single transfer, share identical interests and have equal rights of possession. On the death of one co-tenant, the survivor takes no new title but hold the entire estate under the original transfer.
7. Tenancy in common is a form of co-ownership with two or more individuals or entities. The interest of each individual or entity may or may not be state and may not be equal. a tenant in common has the right to deal with its interest as it sees fit-sell, hypothecate, lease, gift, etc.
Other Forms of Ownership:
8. Corporation-an artificial entity created under the authority of the laws of a state usually regarded separate from its shareholders.
9. Partnership-an artificial entity created under the authority of the laws of a state as an association of two or more individuals or entities to carry on, as co-owners, a business for profit.
10. Limited Liability Companies (LLC)-an artifial entity created under the authority of the laws of a state and can be considered a hybrid of a corporation and partnership.
11. Trust-a confidence in one person to hold and administer for the benefit of another. The legal title to realty is held by the trustee who may be an individual, and entity or both who manages the realty for the benefit of others called the beneficiaries.