Real Estate Finance Presentation 9(Chapter 18)

Escrow ProceduresEscrow Procedures

Escrow Procedures

The last step in the loan process is CLOSING, when the loan proceeds are distributed and a deed to the property is transferred and recorded. TQ

These steps are usually carried out by an escrow agent. It is the common procedure here in southern California. Northern California uses a title company/escrow…some states use attorney's. TQ

The escrow agent makes sure that all necessary documents are prepared and properly signed, calculates any necessary prorations, makes sure that all necessary funds have been deposited, and provides a settlement statement.

Once everything is in order, the loan funds are disbursed, the deed and other documents are recorded, and the transaction is completed. TQ

An ESCROW

is where a neutral third party holds the items deposited by the parties to a transaction and disburses them after the conditions of the transaction have been met.

Attorneys, title companies, and independent escrow Attorneys, title companies, and independent escrow companies all perform this function. !!!companies all perform this function. !!!

Many lending institutions have their own escrow departments for the transactions that they finance. Some real estate brokers have the same set up. In either case only transactions their company is part of

can be in their escrows! TQ Think of the guy who holds the money in an old

western movie when they race horses down the main street! That’s the escrow company.(kind of)!

TWO TYPES OF ESCROW - California Department of Corporations controls rules and

regulations and can investigate. TQ These are known as “independent” escrows.TQ

Department of Insurance controls rules and regulations and can investigate.TQ These are escrow departments of Title

(Insurance) Companies.TQ These are the most common now, but not

always best, nor worst. Each individual organization should be judged separately.

All real estate escrows

involve the following essential steps:

1. Gathering information necessary to prepare escrow instructions.

2. Obtaining a preliminary title report from the title company.

3. Satisfying existing loans secured by the property. 4. Preparing documents such as escrow instructions,

loan documents, deeds, etc. 5. Depositing funds from a buyer or a seller. 6. Prorating expenses and allocating closing costs. 7. Preparing a Uniform Settlement Statement. 8. Issuing policies of title insurance for the buyer and the

lender. 9. Disbursing funds and delivering documents.

I. Opening Escrow

Opening Escrow

It is a good idea for agents and loan brokers to use an escrow progress chart.

By utilizing such a chart, the progress of the escrow can be monitored and the parties can be reminded of items that still need to be completed to close the transaction.

The first step in the process is to open the escrow.

This is done by providing the escrow agent with the preliminary escrow instructions. Notice that current CAR/NAR contracts say “and Escrow Instructions” on them.

Once the instructions are prepared

The escrow agent will order a preliminary title report.

This preliminary report will then be forwarded to the buyer/borrower’s lender/seller along with the escrow instructions. TQ

Note that the escrow instructions must correspond to the lender’s terms.

Early in the process, the escrow agent will send a “demand for payoff” to the previous lender, if necessary.

A structural pest inspection will also be immediately ordered so as to complete any needed repairs and not unduly delay the close of escrow.

A VERY COMMON MISTAKE IS THE BUYER AND SELLER NOT COMPLETING THE “STATEMENT OF INFORMATION”. This information is used to clear liens, know what lender to pay off for the seller, to make sure all preliminary title report items are correct, etc. TQ whole bullet point.

II. Settlement Statement and Closing Costs

Settlement Statement and Closing Costs

A SETTLEMENT STATEMENT is a listing of all the amounts involved in a transaction. OFFICIALLY, the HUD-1 is the closing statement. TQ

In sales of residential property financed by institutional investors, the Uniform Settlement Statement is used. (HUD-1)

Items on the statement are listed as either debits or credits. Items on the statement are listed as either debits or credits. DEBITDEBIT CREDITCREDIT

When the transaction closes, the balances for both the buyer and the seller should equal zero. TQ

Loan officers and agents are often asked to calculate an estimate of Loan officers and agents are often asked to calculate an estimate of the buyer’s cash requirements for closing and the seller’s net the buyer’s cash requirements for closing and the seller’s net proceeds. I say call escrow and ask them to do it!!proceeds. I say call escrow and ask them to do it!!

Figure 18-3.

A. BUYER’S COSTS

The main cost to the buyer is the purchase price.

There is generally a loan origination fee to cover the lender’s administrative costs. The lender may also charge points to make the loan.

There is an appraisal fee, a credit report fee, attorney fees, notary fees, a fee for the lenders title insurance policy, and possibly impound fees for taxes and insurance.

In addition, the borrower/buyer is responsible for any special costs that he or she incurs. Home inspection, inspections negotiated in contract.

B. SELLER FEES The seller will have to pay off any existing loans,

including any pre-payment penalties, at the close of escrow.

The seller (usually the seller) will also pay the sales commission and his or her portion of the attorney fees, escrow fees, notary fees, and recording fees.

Depending on local custom, always as per the contract, the seller may also pay none, all, or a portion of the title insurance premium, the structural pest control inspection/repairs, the buyer/borrower’s loan discount, and a home warranty contract.

C. BUYER CREDITS

The buyer will normally be credited with The buyer will normally be credited with any payments initially made out of any payments initially made out of pocket for an earnest money deposit, pocket for an earnest money deposit, appraisal fee, credit report, and appraisal fee, credit report, and prorated taxes or rents due. prorated taxes or rents due.

D. SELLER CREDITS

In addition to receiving funds from the purchase price, the seller may be due credits for items such as prorated taxes, insurance premiums, and the balance in any existing impound account that was required for the seller’s prior loan.

If the property is income property, there might be a credit for prorated rents.

III. Real Estate Settlement Procedures

Act (RESPA)

Real Estate Settlement Procedures Act (RESPA)

The REAL ESTATE SETTLEMENT PROCEDURES ACT (RESPA) applies to the sale of one-to-four unit properties that involve financing from institutional lenders where the purchase loan is secured by a first trust mortgage.

In transactions subject to RESPA, the lender must give the borrower a good faith estimate of the closing costs at the time of the loan application.

The lender is also required to give the borrower a The lender is also required to give the borrower a booklet published by HUD which describes closing costs, booklet published by HUD which describes closing costs, settlement procedures, and the borrower’s rights. settlement procedures, and the borrower’s rights.

IV. Additional Disclosures

IV. Additional Disclosures

Many states require additional Many states require additional documentation to transfer property or documentation to transfer property or to obtain a loan. to obtain a loan.

In many cases, this consists of disclosures to the prospective borrower or purchaser.

The following are a list of the disclosures required by the state of California.

1. Real Estate Transfer Disclosure. 1. Real Estate Transfer Disclosure.

2. Pest Control Inspection Report..2. Pest Control Inspection Report..

3. Disclosure of Geologic Hazards. 3. Disclosure of Geologic Hazards.

4. Disclosure of Hazardous Waste Deposits. 4. Disclosure of Hazardous Waste Deposits.

5. Thermal Insulation Disclosure. 5. Thermal Insulation Disclosure.

6. Special Flood Area Disclosure. 6. Special Flood Area Disclosure.

7. City and County Ordinances. 7. City and County Ordinances.

8. Condominium Documents Disclosure. 8. Condominium Documents Disclosure.

9. Disclosure for Real Property Loans. 9. Disclosure for Real Property Loans.

NEXT TWO WEEKS – FINAL EXAM

I will email the final exam out to all the email addresses I have currently, on Sunday December 5th. At or before 7:00 PM. If your email address isn’t correct please make it so on sheet passed around in class. I won’t post the test online at all.

I will be here at 6:00 on December 6th, I will stay until 7:30 or until all students who show up, have in their exams. If you must do so, you can email me an answer sheet by midnight per email stamp. No finals will be accepted after that.

NEXT TWO WEEKS – FINAL EXAM

I would prefer Scantron sheets, and the test taken in person in the classroom. This could help your grade.

If you must send in via email use the sheet attached to the test or scan in a scantron sheet if you can (still preferred).

On December 13, CLASS WILL MEET AT PASCO’S PIZZA, FOR FREE PIZZA FOR MY STUDENT’S (spouses are o.k. too) ONLY. WE WILL MEET AT 6:30 PM. PASCO’S IS ON THE WEST SIDE OF THE NW CORNER OF “I” AVE AND MAIN ST., HESPERIA.

This is when you will know your grades! You do not have to attend or eat pizza! Grades will be posted at WebAdvisor per VVC guidelines if you cannot or don’t want to come. No dings for not showing up to this event!!!!

I will attach this information again to the test pages next week.

PLEASE SHOW UP FOR CLASS TOMORROW NIGHT IF AT ALL POSSIBLE.

LAST CHANCE TO ASK QUESTIONS AND LEARN THIS SEMESTERS INFORMATION ON REAL ESTATE FINANCE!

Happy Holidays, all of them! I’m just too lazy to list them all….see you soon. Dana Gordon, Adjunct Instructor