California Real Estate
Principles, 10.1 Edition
Chapter 11
The Role of Escrow and Title Insurance Companies
© 2016 OnCourse Learning
Chapter 11
1. Define escrow and list the legal
requirements for a valid escrow.
2. Describe the basic services provided by
title insurance companies.
3. Explain the differences between a CLTA
standard and an ALTA extended
coverage title insurance policy.
4. Explain various closing costs and
indicate who normally pays for each
closing cost.
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
Escrow Disagreements
•
Escrow agent cannot give
legal advice.
•
Halt until mutual
agreement.
•
Interpleader: Legal court
action to resolve dispute
between the parties.
Who May Act
Escrow Laws
Corporation
Independent*
Corporation
Commissioner
(Office of Business
Oversight)
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.
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.
TYPES OF ESCROWS
•
•
•
•
•
•
•
•
•
•
Residential Sales
Liquor License
Bulk Sale
Re-Finance
Income Property
Business Opportunity
Exchange
Probate
Commercial
Industrial Land Sales
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
LIFE OF AN ESCROW
Prepare Escrow Instructions
and Pertinent Documents
Obtain Signatures
Order Title
Search
Process
Financing
Receive and Review
Preliminary Report
Continued . . .
Request Demands (if any)
Request Clarification of
Other Liens (if any) and
Review Taxes on Report
Receive Demands and
Enter into File
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
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
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
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
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
TERMINATION OF ESCROW
• Full Performance of the sale, exchange or
refinance
• Mutually agreed - Cancellation
• Revocation or Refusal by one party; Legal
problems
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.
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.
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.
TYPICAL CLOSING STATEMENT
BUYER
Debit
Prepaid Rents
Documentary
Transfer Tax
Prepayment
Penalties
Termite
Inspection
Seller’s CLTA
Title Insurance
Policy
Brokerage
Commission
Recording
Fees
Payoff of
Existing Loan
Discount
Points
Any “Seller
Pays” fees
Seller’s Net
Proceeds
BUYER
Credit
X
SELLER
Debit
X
X
SELLER
Credit
X
X
X
X
X
X
X
X
X
X
TYPICAL CLOSING STATEMENT
Sales Price
BUYER
Debit
X
BUYER
Credit
Buyer’s Initial
Deposit
X
Buyer’s New Loan
X
X
Balance of Buyer’s
Deposit
Appraisal
Loan Origination
Fee
X
X
New Fire Insurance
Policy
X
Credit Report
X
X
Drawing
Fee/Notary
Lender’s ALTA Title
X
Any “Buyer Pays”
Fees
X
Tax Service and
Impounds
X
SELLER
Debit
SELLER
Credit
X
TITLE INSURANCE PROCESS
Search
Examine
Chain of Title
Preliminary Title Report
Escrow
Title Policy
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
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
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