As an escrow officer,

Sep 22, 2021 | students

Question

As an escrow officer, what area have to grow in to do the job successfully? Use the information from Chapter 10 to understand some of the skills/actions required for a successful escrow process.

ESCROW PROCEDURES

After an offer to purchase has been accepted by a seller of real estate, buyer, seller, and broker(s) must ensure that all necessary details have been covered. If there are no vague or ambiguous provisions between the parties, the escrow process will be that much smoother. A real estate agent is considered involved in a transaction, and thus the escrow, even if the agent will not receive a commission or fee.

TRANSACTION CHECKLIST

Buyer and seller will be concerned, and all points will help discuss in the negotiations and the final contract terms. The real estate agent also must make sure that certain information is known to the parties. Has the broker made the appropriate inspection of the property? Is the buyer fully informed of all material facts concerning the property? Have the relevant disclosures been made regarding the broker’s agency relationship to seller and buyer? Have seller and buyer confirmed their understanding of the broker’s role in the transaction? Have all other necessary disclosures been made? Using a checklist, such as the one in Figure 10.1, will help ensure a successful sale closing. Once the transaction requirement is established, the escrow holder knows what to expect from buyer and seller.

A checklist is a necessity to make sure all details (especially disclosures) have been covered.

Some of the essential elements of a successful transaction are included in the items listed in Figure 10.1, such as a property appraisal acceptable to the lender. If the lender isn’t satisfied that the property is sufficient collateral for the loan, the loan will not be granted, and the borrower will use the loan contingency clause.

FIGURE 10.1:

Transaction Checklist

TRANSACTION CHECKLIST

  • Date and place of signing of the contract by buyer(s).
  • Full name, address, and marital status of each buyer. The type of business (corporation, general partnership, etc.) should be specified if a company.
  • The purchase price, deposit amount, and how the deposit will be made (such as by personal check or cashier’s check). The person who will hold the deposit prior to closing (the escrow holder, for instance) also should be named.
  • Financing terms. The buyer may be required to obtain a loan commitment by a certain date. The buyer should always have the protection of a loan contingency clause in the purchase contract, such as “This offer is subject to and conditioned upon the buyer and property qualifying for and the buyer obtaining said loan within X days of the opening of escrow.” Without such protection, the buyer could risk forfeiting the deposit if the sale were frustrated by the buyer’s or property’s failure to qualify for the loan. If the buyer will assume an existing loan, some provision should be made for the buyer’s approval of the existing loan’s terms.
  • Encumbrances that affect titles, such as restrictions and easements. These should be clarified as acceptable to the buyer, or a time period should be given in which a preliminary title report is to be received and accepted by the buyer. If the seller will retain any interest in the property, such as an easement, that interest should be specified, as should rights of any person (such as tenants) currently in possession.
  • Required property inspections and who will pay for them. The person who will pay for necessary repairs also should be named. The buyer usually will want a final “walk-through” of the property just before closing to ensure it has been properly maintained and repaired (if necessary).
  • Names of escrow holder and title company, as well as who is to pay the escrow fee, title insurance premium, and applicable county and city documentary transfer taxes and other fees.
  • Description of any other documents required from either party.
  • Names of all real estate brokers and salespeople involved, as well as the agency role of each in the transaction, the negotiated sales commission, and who will pay the commission.
  • Contract termination date, how long the buyer’s offer is open, and when the buyer will take possession.
  • Signatures of all parties, including broker(s). If a salesperson signs on behalf of a broker, the broker must review the contract within five days, initialing and dating it. The Real Estate Law provides for delegation of the broker’s responsibility in certain instances.

RESPONSIBILITIES OF THE BUYER

The buyer will

  • sign escrow instructions;
  • provide a copy of any contract of the buyer that will affect the escrow, such as a buyer broker agreement;
  • review the preliminary report and any encumbrances of record;
  • review all loan documents, including new loans, loans to be assumed, loans buyer is taking title “subject to,” and disclosure information if the seller is taking back a purchase-money mortgage;
  • obtain hazard insurance coverage;
  • review and approve all property inspection reports and arrange for a final property inspection before closing;
  • examine the bill of sale covering any items of personal property to be conveyed separately at closing; and
  • deposit the cash needed to cover down payment, closing costs, and other expenses, such as revolving debt and collection accounts, if any, to be paid off at closing.

Usually, expenses may be negotiated between buyer and seller. (An exception may be a government-backed loan.) The buyer typically pays for

  • buyer’s share of escrow fees,
  • loan fees,
  • appraisal fee,
  • credit report,
  • lender’s title insurance,
  • recording fees for documents prepared on the buyer’s behalf,
  • notary fees for documents prepared on the buyer’s behalf,
  • prepayment of loan interest,
  • assumption fee (if applicable),
  • new fire or other hazard insurance premiums,
  • FHA mortgage insurance, and
  • any prorated expenses the seller already has paid.

RESPONSIBILITIES OF THE SELLER

The seller will

  • sign escrow instructions;
  • provide a copy of any contract of the seller that will affect the escrow, such as the listing agreement, and any required disclosure statement(s);
  • include the seller’s deed and title insurance policy and any unrecorded instruments affecting title;
  • provide information on the present status of existing loans, including consent to the submission of a beneficiary statement or demand for payoff, as required, and financing disclosure information if the seller is taking back a purchase-money mortgage;
  • provide certificates or releases on any mortgage, judgment, mechanic’s lien, or other encumbrance to be paid off through escrow;
  • provide any existing hazard insurance policies to be assigned to the buyer;
  • provide any subordination agreement required by the contract;
  • provide tenant information, including their names, rent and deposit information, assignment of all leases to buyer, and the fact that tenants have been notified of the change of ownership;
  • provide executed deed on real property to the buyer;
  • provide an executed bill of sale on any items of personal property or security agreement if the purchase is by installments; and
  • make available any other documents or approvals needed to close the sale.

Again, most sale expenses are open to negotiation. The seller typically pays for

  • seller’s share of escrow fees,
  • title insurance,
  • home warranty plan (if any),
  • structural pest control report and clearance (if needed),
  • the beneficiary statement,
  • existing loan payoff and prepayment fee (if any),
  • mortgage discount points and nonallowable fees on behalf of the buyer in FHA transactions,
  • all fees in VA transactions,
  • notary fees on documents prepared primarily on the seller’s behalf,
  • various transfer fees,
  • cost of required disclosure reports, and
  • any arrearages for taxes or other prorated items.

RESPONSIBILITIES OF THE REAL ESTATE AGENT

When a real estate agent represents a party in a transaction, there are steps the agent can take to ensure that the transaction is successfully completed. In general, a real estate agent’s responsibilities are to keep informed of the progress of the escrow and assist the escrow officer when necessary. The agent usually will

  • deliver copies of the executed (signed) purchase contract to the parties;
  • deliver and explain the escrow instructions to the parties in the transaction, and ensure that the parties have signed and returned the instructions (it may be best to have the parties go to the escrow office for signatures);
  • provide all necessary property and transfer disclosure reports;
  • provide the escrow officer with copies of the seller’s payment coupons on any loans, a property profile or copy of the grant deed indicating the present owner(s), tax information, and any other items that will assist the escrow officer;
  • advise the buyer(s) (particularly a married couple) to obtain legal advice on how to take title (agents and escrow officers, unless licensed to practice law, may not give this advice);
  • remind the seller to continue to make all payments on loans during escrow and maintain the property as required by the purchase agreement;
  • advise the parties (buyer and seller) to notify the escrow officer if they have plans to be traveling during the escrow period, especially if they plan to be out of the country (If so, an arrangement, such as a power of attorney, must be made to ensure that the transaction is not delayed);
  • review the preliminary report as soon as it is available and explain its contents to the buyer;
  • assist the buyer in obtaining any necessary loans and place the lender in contact with the escrow officer;
  • assist the buyer in obtaining an inspection of the property and review the inspection with the buyer afterward;
  • assist the seller in ordering a timely pest control report and review the required corrective work;
  • make sure that the parties deliver the required documents and funds to escrow; and
  • provide any assistance the parties request or require that is within the agent’s abilities to ensure that the parties fulfill their obligations and are fully informed of the progress of the transaction.

The real estate broker for the seller may share the sales commission with a cooperating broker who brings the buyer to the transaction. An agreement between the two brokers will ensure that both understand the compensation that will be paid at the closing of the transaction.

RESPONSIBILITIES OF THE ESCROW HOLDER

Although local practices may vary somewhat, the duties of the escrow holder generally include those listed below and in the flowchart shown in Figure 10.2. Throughout this section, we refer to the escrow officer, someone employed by an escrow company or escrow holder to handle escrow transactions. The escrow officer follows the specific procedures required by the escrow company or escrow holder, which vary from company to company and may be quite detailed.

ESCROW INSTRUCTIONS

The escrow holder in a residential property sale typically uses a printed form of escrow instructions listing what buyer and seller must do. Both buyer and seller must sign the instructions. The instructions will include such items as the

  • purchase price,
  • terms,
  • financing provisions,
  • how buyer’s title is to vest,
  • encumbrances that will affect the buyer’s title,
  • conditions affecting the transaction,
  • date of closing,
  • required inspections and other reports,
  • expenses to be prorated,
  • date on which buyer will take possession of the property,
  • documents involved, and
  • disbursements to be made and who will pay for them.

Since 1999, the CAR Residential Purchase Agreement (Form RPA-CA) has included joint basic escrow instructions. Most escrow companies now send out instructions that serve as a supplement/addendum to the contract, stipulating their additional general provisions of escrow practice and providing disclosures required by federal and state laws applicable to escrow agents.

FIGURE 10.2:

The Escrow Process

  • ESCROW HOLDER
  • Accepts purchase contract that includes joint escrow instructions
  • Prepares escrow holder’s general instructions and any specific instructions
  • Orders title search
  • Receives and reviews preliminary report
  • Requests and receives statements from present lenders
  • Receives termite and other inspection reports
  • Receives new loan package
  • Receives fire and other insurance policies
  • Receives other required information and statements
  • Makes instructed prorations and adjustments
  • Requests and receives necessary funds
  • Audits file to verify sale ready to close
  • Orders final check of title and recording of documents
  • Closes the sale by preparing and delivering settlement statements and transferring funds and documents of title

  TITLE SEARCH

Following a request by the escrow officer, the title company named by the parties searches the title records and provides a preliminary report. The preliminary report should identify the property and current owner of record, as well as any recorded liens or other encumbrances. The escrow holder reads the report to verify the legal description and to determine if there are any child support liens, taxes, or judgments for which a release will be required before the close of escrow. The buyer and the buyer’s agent should review the preliminary report.

LENDERS’ STATEMENTS

If the property is encumbered by any loans, the escrow officer contacts all lenders. Each is asked to provide either a demand for payoff (if the loan is to be paid in full through escrow) or a beneficiary statement (if the buyer will take title subject to loans of record)

TERMITE AND OTHER REPORTS

The escrow officer receives all reports authorized by the escrow instructions and obtains the necessary approvals of those reports by the parties. Such reports might include a structural pest control report or a roof, an electrical, a foundation, or a soil report. If the seller has agreed to pay for indicated repairs through escrow, provision for that payment at closing must be made.

NEW LOAN PACKAGE

Most often, the buyer obtains new financing. In that case, the escrow officer receives the appropriate loan documents and instructions, obtains the buyer’s signature of approval, and makes sure all conditions are met before funds are disbursed at closing.

HAZARD INSURANCE POLICIES

Prudent buyers arrange to insure property they purchase, effective as soon as they take title. Lenders will insist on a policy that adequately covers the cost to repair or replace the improvements. The escrow officer must obtain a copy of the policy commitment.

 OTHER INFORMATION AND STATEMENTS

The closing may require information on property taxes, assessments for improvements such as sewers, utility payments, and other property expenses that will require an accounting at the time of closing. If the property is rented, rent payments and security deposits also may be part of the computations. Other statements, such as the FHA appraisal value required in an FHA-insured sale, are required.

 PRORATIONS AND ADJUSTMENTS

The escrow holder, who has received all of the required information, then computes the necessary prorations of items charged to buyer and seller. These may include insurance, taxes, assessments, utilities, and security deposits and rents.

 Tax prorations will depend on whether the tax has been paid. Prepaid taxes from the day of closing will be a credit to the seller and debit to the buyer. If the current tax due has not been paid, the seller will be debited and the buyer credited the amount of tax owed up to the day of closing.

Taxes are prorated as of July 1, the first day of the tax year, or January 1, the beginning of the second half of the tax year. The escrow holder also prorates the buyer’s mortgage interest as of the date funds are disbursed. Because interest payments always are made in arrears (that is, for the month just past), interest for the number of days from closing to the start of the first full month must be computed.

 In most prorations, a 30-day month is used. (In interest prorations, the lender sometimes insists on the actual number of days in the month—31 days, for instance.) Prorations typically assume that the buyer’s rights and obligations begin on the day of closing. The buyer is responsible for any payments to be made for that day, such as property taxes and homeowners association dues. The buyer will receive credit for any proceeds, such as rent income, that have been received for that day.

MATH CONCEPTS

FOR EXAMPLE

FOR EXAMPLE

FUNDING

The escrow officer requests the appropriate party to deposit the required funds in the escrow account. The lender provides the committed percentage of the purchase price. The buyer (borrower) will provide whatever amount is necessary to cover the remainder of the purchase price, taking into account any deposits already made as well as costs of closing, such as fees and prorations.

 AUDIT OF THE FILE

The escrow officer double-checks that all conditions before closing have been met, including all necessary funding.

 FINAL TITLE REVIEW

The escrow officer orders the title company to make a final check of the seller’s title as of the close of business of the escrow completion date. This is done to verify that the title has not changed or been encumbered since the time of the preliminary report. If no change has occurred, the title company records all transaction documents.

 CLOSING OF THE SALE

After the escrow officer has confirmed the recording of the transaction documents, the escrow is considered closed. The escrow holder will send settlements to buyer and seller, disburse funds, and deliver documents as soon as possible. Note: California law permits the lender to charge interest for no more than one day before the date that the loan proceeds are disbursed out of escrow or disbursed to the borrower or another party on behalf of the borrower. The law applies to notes secured by a mortgage or deed of trust on property of one to four residential units.

 Settlement statements detailing transaction costs to buyers and sellers of dwellings of one to four units are required by the Real Estate Settlement Procedures Act (RESPA). A Closing Disclosure form appears in Figure 10.3.

Closing Disclosure

 CANCELLATION OF THE ESCROW

Not every transaction reaches a successful closing. The escrow can be canceled and the deposit returned to the buyer, only if both parties provide written instructions to the escrow holder. The agent(s) should check with the escrow officer for cancellation fees before having buyer and seller sign the cancellation instructions to ensure that all costs are accounted for.