All About Escrow

Table of Contents: All About Escrow

 


Questions every home seller asks

What exactly is an escrow?

An escrow is an independent "stakeholder" account and is the vehicle by which the interests of all parties to the transaction are protected.

The escrow is created shortly after you execute the contract for the sale of your home and becomes the depository for all monies, instructions and documents pertaining to the sale. Some aspects of the sale are not part of the escrow. For example, the buyer and the seller must decide which fixtures or personal property items are included in the sales agreement. Similarly, loan negotiations occur between the buyer and the lender. Your real estate agent can guide you in these non-escrow matters. Escrow services in Northern California are generally provided by title companies.

What does an escrow holder do?

The escrow holder is a neutral third party, taking instructions based on the terms of the purchase agreement and the lender's requirements. He or she is responsible for maintaining the escrow account and managing the escrow process to ensure that the conditions of the sale are properly met.

Duties of the escrow holder include...

  • Receiving and holding all monies, instructions and documents pertaining to the purchase.
  • Serving as the communication link and Raison between all parties.
  • Requesting a preliminary title search and report to determine the status of title to the property
  • Requesting a beneficiary statement or payoff demand from existing lenders.
  • Holding inspection reports, deeds, insurance documents.
  • Complying with the lender's requirements in its instructions to escrow.
  • Preparing or obtaining the grant deed.
  • Prorating taxes, interest, insurance, rents and other costs related to the property.
  • Recording the deed and other documents. Requesting the title insurance policy.
  • Closing the escrow according to the instructions of the buyer, seller, and lender.
  • Disbursing funds as authorized by the instructions, including charges for real estate commissions, loan payoffs, title insurance, taxes, recording fees and other costs.
  • Preparing final statements of disposition of all funds.

 

Opening Escrow

How does the escrow process work?

The escrow retains the buyer's funds for the down payment, the new lender's funds, documents for the new loan, the loan payoff or assumption requirements from the existing lender, and the Grant Deed. The escrow officer takes instructions from you and the buyer, the real estate agent and the lender, based on the terms of your Sales Agreement and the lender's requirements. He or she can hold inspection reports and bills for work performed as required by your Sales Agreement. Other elements of the escrow include obtaining the buyer's hazard insurance, issuance of title insurance and preparation of the Grant Deed from you to your buyer. Escrow cannot be completed until the instructions (requirements) have been satisfied and all parties have signed escrow documents.

How is the escrow opened?

Either your real estate agent or the buyer's agent may open the escrow. As soon as you execute the Sales Agreement, the buyer's agent will place the initial deposit into an escrow account at the title company or into the estate broker’s trust account.

How will I know where the buyer's money has gone?

Written evidence of the deposit is generally included in your copy of the sales contract. The funds will then be deposited in a separate escrow or trust account,

What information will I have to provide?

You may be asked to complete a Statement of Identity as part of the necessary paperwork. Because many people have the same name, the Statement of Identity is used to identify the specific person in the transaction through such information as date of birth, social security number, etc. This information is considered confidential. Depending on the method by which you currently hold title to the property, you may also be asked to provide copies of Trust Agreements, Partnership Agreements or corporate documents.

How long does it take to complete the escrow?

The amount of time necessary to complete the escrow is determined by the terms of the purchase agreement. It is normally 45 to 60 days but can range from a few days to several months.

What happens next?

Unless he/she is paying cash, the next step will be that the buyer will apply for a mortgage loan. Your real estate agent will be able to keep you informed about the progress of the loan application. During the escrow process, you are still required to make your payments on existing loans so that you do not incur any late fees or damage to your credit rating.

Paying Off Your Existing Loans

Unless the buyer takes over your existing loan(s) on the property, the loan(s) will be paid off during the escrow process. You will need to furnish complete information to your escrow officer and real estate agent on each loan against your property. Please be prepared to provide the name of the lender, the loan number, address and phone number of the lender. Your escrow officer will need this information to order the loan payoff demands so the loan(s) may be paid off correctly during the escrow. Homeowners' Association information may also be required if you are selling a condominium,townhome or property located in a planned unit development (P.U.D.). All of this information will help to ensure the timely closing of the escrow.

Disclosures and Contingencies

During the process of selling your property, you will be asked to fill out a property disclosure form (known as a Transfer Disclosure Statement), which is now required by law. In this document, you will inform the buyer of any significant facts you have about the condition of the property. If you are moving out of California, other disclosures may be necessary. Your real estate agent or escrow officer will assist you with these.

There will, no doubt, be various contingency dates in your real estate sales contract. You should be very aware of these and be sure that the actions required are performed in a timely manner. Such contingencies include the buyer's loan approval, approval of the Preliminary Title Report, approval of structural pest control and other inspections. Stay closely in touch with your real estate agent regarding these important dates.

After the buyer's loan is approved, what's next?

When the loan is approved and the loan documents are sent to the escrow officer or the escrow assistant handling your transaction, "escrow instructions" and the Grant Deed will be prepared.

 

Escrow Instructions

What are escrow instructions?

Escrow instructions define all the conditions that must occur before the transaction can be finalized. The escrow instructions represent your written statement to the escrow holder (the title company) protecting your interests and specify, in a debit and credit format, the disposition of the sales proceeds and the conditions under which the Grant Deed may be recorded in favor of the new buyer.

What is a Grant Deed?

A Grant Deed is the document which legally transfers your title to the property to the new owner. You will sign the Grant Deed as part of the escrow instructions and the deed will be notarized by your escrow officer or another qualified notary public. Proper identification is needed for this procedure (see heading "Identification"). The Grant Deed is recorded at the time escrow closes.

When do I sign escrow instructions and where do I do this?

Your escrow officer or real estate agent will contact you for an appointment to sign your escrow instructions and Grant Deed. At this time, the escrow officer will inform you of the amount of proceeds you will receive from the sale of your home. If you are also purchasing another home, arrangements can be made to transfer funds to your purchase escrow.

Usually you will sip your escrow instructions at an escrow office. However, you may go to your real estate agent’s office or some other location agreed upon by all parties.

 

Your Appointment

What do I need to do before my appointment to sign the escrow papers?

Ö Appointment. An appointment is required for the sign-off. Please call your escrow officer to arrange a convenient time and expect the process to take approximately one hour.

Ö Identification. There are several acceptable forms of identification which may be used during the escrow process. These include a current driver's license, passport, or State of California Department of Motor Vehicles Identification Card. One of these forms of identification must be presented at the signing of escrow in order for the signature to be notarized. If you do not have one of these forms of identification, call your escrow officer ahead of time to discuss a solution.

Ö Cashier's Check. On rare occasions, funds are insufficient to close escrow and you, as the seller, must deposit money into the escrow. Should this situation occur, you will need to obtain a cashier's check or certified check issued by a California financial institution made payable to escrow in the amount indicated to you by your escrow officer or escrow assistant. A personal check may delay the closing since escrow is required by law to have "good funds" (check clearance) before disbursing funds from escrow. Similarly, an out of-state check could cause a delay in closing, due to delays in clearing the check.

 

After the Sign-off

What's the next step after I've completed my sign-off?

After you and the buyer have signed allthe necessary instructions and documents, the escrow officer will return them to the new lender for a final review. Following the review, which usually occurs within a few days, the lender is ready to fund the buyer's loan and advises the escrow officer, so that the necessary work can be completed to record the documents and "close" the escrow.

What is an "escrow closing"?

It signifies legal transfer of title to the property from the seller to the buyer and is the culmination of the transaction. Usually the Grant Deed and Deed of Trustare recorded within one working day of the escrow's receipt of loan funds. This completes the transaction and signifies the "close of escrow." Once all the conditions of the escrow have been satisfied, the escrow officer advises you of the date the escrow will close and takes care of the technical and financial details, including paying off your loan.

When will I receive the proceeds from the sale?

A final settlement statement and a check for the proceeds will be available to you the day the sale is completed, documents are recorded and the escrow is closed.

 

After the Close

What happens after the escrow closes?

After the loan has been finalized, the documents signed and recorded, and the financial settlement completed, there arestill several steps which must be accomplished to complete the transaction.

Your existing loan is being paid in full from the escrow. Your lender is required by law to issue a full reconveyance (release) of their loan. As soon as the deed of reconveyance removing the previous Deed of Trust is received, it should be recorded and the original returned to you. This may take several weeks. However, you need not be concerned by this delay since it is normal.

What happens to funds held in escrow?

In some cases the escrow holder will be instructed to hold funds in escrow to pay off obligations which may not be completed until after escrow closes. An example might be a set-aside of funds to correct a structural problem, remodeling or termite repair work. Upon completion of the project and receipt of the proper documentation and releases, the escrow officer will disburse the reserved funds.

 

Helpful Reminders

  • If you wish to transfer funds to another escrow or wire transfer funds, arrangements must be made in advance with the escrow officer.
  • In the event that you wish to use a Power of Attorney, arrangements must be made one to two weeks in advance with the escrow officer, and the Power of Attorney must be approved by the buyer's lender and escrow. These arrangements should be made as early as possible in the transaction.
  • Please bring appropriate identification (for example, a valid driver's license or passport) with you to the title company, so that your identity can be verified by the notary public.
  • Should the funds deposited in escrow be insufficient for closing, you will need to bring a cashier's check or certified check to the title company for the remainder of the purchase price. Either type of check should be from a California bank or savings and loan and should be issued in the exact amount of the balance due. The amount of the balance may be obtained by phoning the escrow officer prior to signing the papers. The check should be made payable to your title company.

 

The following is a brief list of the best sources for assistance for certain common questions:

Details of your Sales Agreement X Real Estate Agent
Possession and key to home X Real Estate Agent
Loan requirements and financial matters X Lender or Mortgage Company or Real Estate Agent Escrow Instructions (review at title company on sign-off day) X Title Company, Escrow Officer, Escrow Assistant or Real Estate Agent.

 


CHECKLIST TO PREPARE FOR
TERMITE AND HOME
INSPECTION

An home inspector will be at your home to perform a visual inspection of the physical structure of the home (i.e. roof, exterior, foundation) as well as the mechanical components (i.e. heating /air conditioning, appliances, plumbing). They wish to provide as thorough an inspection as possible. With your assistance, they can provide all interested parties with a comprehensive report the first time out, thus saving time and expense. This will eliminate unnecessary reinspection to resolve unanswered questions and also further inspections of inaccessible areas. Be aware that further inspections of inaccessible areas are chargeable.

The following checklist is provided to assist you in preparing for your home inspections:

  • Clear obstructions that would prevent or restrict inspection of the furnace, water heater, electrical panels and sub-panels. Make sure areas are unlocked.
     
  • Locate and make accessible entry hatches to the attic and subarea spaces.
     
  • Notify me if the subarea soil is wet or flooded, as this will seriously hamper inspection in this area.
     
  • Unlock all exterior gates and interior doors to an rooms/structures that are to be inspected.
     
  • Notify me if the electricity, gas or water is off. All utilities need to be on for complete inspection of electrical components, heating systems, etc.
     
  • Have all pilot lights for furnaces, water heaters, etc. lit prior to inspection.
     
  • Advise inspector of any known problems (i.e. dishwasher leakage, oven does not heat, etc.)
     
  • Inspection of the garage, basement, attic and crawlspace will be limited if access to these areas is restricted due to stored articles. Please attempt to have all areas as accessible and uncluttered as possible during inspection (this pertains to the areas under sinks and in utility closets as well.) Make sure areas are unlocked.
     
  • Make provisions for your pet during the hours of inspection. This is for the safety and security of both inspector and pet.

 

Please feel free to ask the inspectors questions at the end of his reviews or can their office and/or your realtor after you have received a copy of the written report.


 

Who Pays What . . .In Santa Clara County?


The SELLER can generally be expected to pay:

  • Real estate commission
  • Escrow fee
  • Buyer's title insurance premium (CLTA)
  • 50% of any city transfer/conveyance tax according to contract
  • Document transfer tax ($1.10 per $1,000 of sales price)
  • Document preparation fee
  • Notary fees
  • Recording charges to clear all documents of record against seller
  • Property tax proration (to date of acquisition)
  • Termite inspection according to contract
  • Work/repairs required according to contract
  • Homeowners' association statement fee and prorations of dues (to date of acquisition)
  • Home warranty according to contract
  • Special delivery/courier fees, if required
  • Bonds or assessments according to contract
  • Any buyer's new loan charges specified by lender for seller to pay (e.g. FHA/VA costs)
  • Matters of record against the property or seller (loans, tax liens, judgments, etc.) and fees required to clear them (statement fees, reconveyance/trustee fees and prepayment penalties)

 

The BUYER can generally be expected to pay:

  • Lender's new loan charges (except for those required by lender for seller to pay, e.g. FHA/VA)
  • Interest on new loan from date of funding to 30 days prior to first-payment
  • Lender's title insurance premium (AILTA)
  • 50% of any city transfer/conveyance tax according to contract (except VA)
  • County preliminary change of ownership fee (P.C.O.R.)
  • Documentary preparation fee
  • Notary fees
  • Recording charges for all documents in buyer's name
  • Property tax proration (from date of acquisition)
  • Inspection fees according to contract (termite, roof, property, geological, etc.)
  • Fire insurance premium for first year
  • Homeowners' association transfer fee and proration of dues (from date of acquisition)
  • Home Warranty according to contract
  • Special delivery/courier fees, if required
  • Assumption/change of records fee, if taking over existing loan
  • Other prorations (rents, insurance, etc.)
  • Matters of record against the buyer (tax liens judgments, etc.) and fees required to clear them.

 

Check with your escrow officer or your realtor for additional costs which may be unique to your city. In Santa Clara County, some of the fees listed above are customarily paid by the buyer or seller. All fees charged are governed by the terms of the sales contract and other written escrow instructions from buyer and seller.

 


How Improvements Add Value to Your Home

What follows are "best estimates "for the most typically consistent remodeling projects. Unless otherwise noted, the maximum time between remodeling and re-sale must be five years; otherwise the "value added" figures are void.

Kitchen Remodel

Cost from $15,000 to $35,000 + you recover 80 to 110%. Cost includes new cabinets and countertops, appliances, flooring, and re-wiring. Structural changes, relocated plumbing, custom cabinetry, and top-of-the-line appliances raise the cost.

Bathroom Remodel

Cost from $ 6,000 to $15,000 + you recover 80 to 115%. Cost includes new fixtures and fittings, tile floors and walls. Structural changes, relocated plumbing, and high-end materials and fixtures raise the cost.

Bathroom Add on

Cost from $13,000 to $25,000 + you recover 100 to 180%. Cost includes new fixtures and fittings, tile floors and walls. Structural changes, relocated plumbing, and high-end materials and fixtures raise the cost. Note: adding a second bath should yield a resale value of more than 100% of the cost.

Room Addition

Cost from $35,000 to $50,000 + you recover 50 to I 00%. Depends on type of room. A family room or new master suite may add more value to a home than a private office or fourth bedroom.

Converting an attic, basement or garage to living space

Cost from $12,000 to $20,000 + you recover 25 to 40%. Cost assumes no structural changes and no new plumbing. Value added depends on size of house (smaller house, more value) and type of space created (family room or bedroom, more value than a game room or exercise area).

Adding a deck

Cost from $5,000 to 15,000 + you recover 50 to 90%. The size of deck, the complexity of design, and the added amenities (spa, trelliswork) will influence the cost and value added.

Re-painted exterior

Costs from $2,000 to $5,000 + you recover 100 - 200%. Assumes old exterior was worn and re-painting was done immediately prior to putting house on market. A new coat of paint probably adds the "best profit" to selling an older home.

In-ground swimming

Cost from $25,000 to $40,000 + you recover 0 to 30%. Cost assumes an average-size pool (16'x32') with a rectangular shape; value added depends on desirability to future owner.

 



JOINT TENANTS vs. COMMUNITY PROPERTY


Holding title as joint tenants or as community property involves a multitude of issues to be dealt with. Given that, let me narrow the issues to those two distinguishing features between taking title as joint tenants or community property (i.e., death and tax benefits) that most people are concerned with.

When title is taken as joint tenants and one spouse dies, the surviving spouse automatically receives the property. This is called a right of survivorship. (Although the property does not go through any probate proceeding, the surviving spouse must still file an affidavit of death of joint tenant to remove the deceased's name from the deed).

When title is taken as community property, however, and one spouse dies, there is no right of survivorship and the surviving spouse does not automatically receive title to the property. If the deceased spouse died without a will, the deceased spouse's interest in the community property would go to the surviving spouse. If there was a will, the deceased spouse's interest would be handled as outlined in the will. In other words, each spouse has ownership of their half of the community property and can leave it by will to their surviving spouse or any other third party.

One way of looking at the death scenario is that joint tenancy has more certainty and community property has more flexibility. The tax consequences have been a little more blurred as of late but basically the issue is as follows:

If property is held as joint tenants, the tax basis of the deceased spouse's 1/2 interest would be "stepped-up" to the fair market value at the date of his/her death. The tax basis of the surviving spouse's 1/2 interest would remain at its original basis.

For example: Husband and Wife purchased their house for $100, 000 with each spouse's tax basis at $50,000. At the date of the Husband's death the property's fair market value was $200,000. Since they held the property in joint tenancy, the Wife automatically received the Husband's 1/2 interest upon his death.

The husband's 1/2 interest tax basis (originally $50,000) is "stepped-up " to the fair market value at his death (i.e., $100,000). The Wife then has property worth $200,000 with a tax basis of $150,000 (her original $50,000 basis plus her deceased husband's stepped-up basis of $100,000). If the property were sold for $200, 000 there would be $50, 000 of taxable gain.

If title is taken as community property, however, the entire property receives a "stepped-up" basis to the fair market value at the time of one spouse's death.

For example: Assume the same $100,000 purchase and $200,000 value at date of death and further assume the Husband willed his interest to the Wife. Wife's original $50,000 basis gets stepped-up along with the Husband's original $50,000 basis to the current $200,000 fair market value. The Wife has property worth $200,000 with a basis of $200,000. If the property were sold for $200,000, there would be no taxable gain.

Keep in mind that there are other issues to be concerned with
so a visit to your lawyer or tax accountant is in order.

 
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