What is Escrow & What Does Escrow Do?
In this Episode of the Southern California Real Estate Answer Man, I speak with Keith Parnel of All Valley Escrow. Below you will find a full explanation of the Escrow Process.
Buying or selling a home (or other piece of real property) usually involves the transfer of large sums of money. It is imperative that the transfer of these funds and related documents from one party to another be handled in a neutral, secure and knowledgeable manner. For the protection of buyer, seller and lender, the escrow process was developed.
As a buyer or seller, you want to be certain all conditions of sale have been met before property and money change hands. The technical definition of an escrow is a transaction where one party engaged in the sale, transfer or lease of real or personal property with another person delivers a written instrument, money or other items of value to a neutral third person, called an escrow agent or escrow holder. This third person holds the money or items for disbursement upon the happening of a specified event or the performance of a specified condition.
The escrow holder impartially carries out the written instructions given by the principals. This includes receiving funds and documents necessary to comply with those instructions, completing or obtaining required forms and handling final delivery of all items to the proper parties upon the successful completion of the escrow.
The escrow must be provided with the necessary information to close the transaction. This may include loan documents, tax statements, fire and other insurance policies, title insurance policies, terms of sale and any seller-assisted financing, and requests for payment for various services to be paid out of escrow funds.
If the transaction is dependent on arranging new financing, it is the buyer’s or the buyer’s agent’s responsibility to make the necessary arrangements. Documentation of the new loan agreement must be in the hands of the escrow holder before the transfer of property can take place. A real estate agent can help identify appropriate lending institutions.
When all the instructions in the escrow have been carried out, the closing can take place. At this time, all outstanding funds are collected and fees–such as title insurance premiums, real estate commissions, termite inspection charges–are paid. Title to the property is then transferred under the terms of the escrow instructions and appropriate title insurance is issued.
Payment of funds at the close of escrow should be in the form acceptable to the escrow, since out-of-town and personal checks can cause days of delay in processing the transaction.
The following items represent a typical list of what an escrow holder does and does not do:
- serves as the neutral “stakeholder” and the communications link to all parties in the transaction
- prepares escrow instructions
- requests a preliminary title search to determine the present condition of title to the property
- requests a beneficiary’s statement if debt or obligation is to be taken over by the buyer (Seller’s loan must be an assumable loan)
- complies with lender’s requirements, specified in the escrow agreement
- receives purchase funds from the buyer
- prepares or secures the deed or other documents related to escrow
- prorates taxes, interest, insurance (if applicable) and rents (if applicable) according to instructions
- secures payoff statements from the lender that holds the Seller’s existing mortgage loan and secures releases of all contingencies or other conditions as imposed on any particular escrow
- records the grant deed(s) and Deed of Trust (Buyer’s new loan) and any other documents as instructed
- requests issuance of the title insurance policy
- closes escrow when all the instructions of buyer and seller have been carried out
- disburses funds as authorized by instructions, including charges for title insurance, recording fees, real estate commissions and loan payoffs
- prepares final statements for the parties accounting for the disposition of all funds deposited in escrow. (These are useful in the preparation of tax returns.)
The Escrow Holder Does Not:
- offer legal advice
- negotiate the transaction
- offer investment advice
How Should I take ownership of the property I am buying?
This important question is one California real property purchasers ask their real estate, escrow and title professionals every day. Unfortunately, though these professionals may identify the many methods of owning property, they may not recommend a specific form of ownership, as doing so would constitute practicing law.
Because real property is among the most valuable of assets, the question of how parties take ownership of their property is of great importance. The form of ownership taken—the vesting of title—will determine who may sign various documents involving the property and future rights of the parties to the transaction. These rights involve such matters as: real property taxes, income taxes, inheritance and gift taxes, transferability of title and exposure to creditor’s claims. Also, how title is vested can have significant probate implications in the event of death.
Buyers should carefully consider the manner in which title will be held. Buyers may wish to consult legal counsel to determine the most advantageous form of ownership for their particular situation, especially in cases of multiple owners of a single property.
What are the Common Methods of Holding Title?
Sole ownership may be described as ownership by an individual or other entity capable of acquiring title. Examples of common vesting cases of sole ownership are:
1. A Single Man or Woman, an Unmarried Man or Woman or a Widow or Widower:
A man or woman who is not legally married or in a domestic partnership. For example: Bruce Buyer, a single man.
2. A Married Man or Woman as His or Her Sole and Separate Property:
A married man or woman who wishes to acquire title in his or her name alone.
The title company insuring title will require the spouse of the married man or woman acquiring title to specifically disclaim or relinquish his or her right, title and interest to the property. This establishes that both spouses want title to the property to be granted to one spouse as that spouse’s sole and separate property. The same rules will apply for same sex married couples. For example: Bruce Buyer, a married man, as his sole and separate property.
3. A Domestic Partner as His or Her Sole and Separate Property:
A domestic partner who wishes to acquire title in his or her name alone.
The title company insuring title will require the domestic partner of the person acquiring title to specifically disclaim or relinquish his or her right, title and interest to the property. This establishes that both domestic partners want title to the property to be granted to one partner as that person’s sole and separate property. For example: Bruce Buyer, a registered domestic partner, as his sole and separate property.
Title to property owned by two or more persons may be vested in the following forms:
1. Community Property:
A form of vesting title to property owned together by married persons or by domestic partners. Community property is distinguished from separate property, which is property acquired before marriage or before a domestic partnership by separate gift or bequest, after legal separation, or which is agreed in writing to be owned by one spouse or domestic partner.
In California, real property conveyed to a married person, or to a domestic partner is presumed to be community property, unless otherwise stated (i.e. property acquired as separate property by gift, bequest or agreement). Since all such property is owned equally, both parties must sign all agreements and documents transferring the property or using it as security for a loan. Each owner has the right to dispose of his/her one half of the community property by will. For example: Bruce Buyer and Barbara Buyer, husband and wife, as community property, or Sally Smith and Jane Smith, registered domestic partners as community property. Another example for same sex couples: Sally Smith and Jane Smith, who are married to each other, as community property.
2. Community Property with Right of Survivorship:
A form of vesting title to property owned together by spouses or by domestic partners. This form of holding title shares many of the characteristics of community property but adds the benefit of the right of survivorship similar to title held in joint tenancy. There may be tax benefits for holding title in this manner. On the death of an owner, the decedent’s interest ends and the survivor owns all interests in the property. For example: Bruce Buyer and Barbara Buyer, husband and wife, as community property with right of survivorship, or John Buyer and Bill Buyer, husband and husband, as community property with right of survivorship. Another example for same sex couples: Sally Smith and Jane Smith, registered domestic partners, as community property with right of survivorship.
3. Joint Tenancy:
A form of vesting title to property owned by two or more persons, who may or may not be married or domestic partners, in equal interests, subject to the right of survivorship in the surviving joint tenant(s). Title must have been acquired at the same time, by the same conveyance, and the document must expressly declare the intention to create a joint tenancy estate. When a joint tenant dies, title to the property is automatically conveyed by operation of law to the surviving joint tenant(s). Therefore, joint tenancy property is not subject to disposition by will. For example: Bruce Buyer, a married man and George Buyer, a single man, as joint tenants.
Note: If a married person enters into a joint tenancy that does not include their spouse, the title company insuring title may require the spouse of the married man or woman acquiring title to specifically consent to the joint tenancy. The same rules will apply for same sex married couples and domestic partners.
4. Tenancy in Common:
A form of vesting title to property owned by any two or more individuals in undivided fractional interests. These fractional interests may be unequal in quantity or duration and may arise at different times. Each tenant in common owns a share of the property, is entitled to a comparable portion of the income from the property and must bear an equivalent share of expenses. Each co-tenant may sell, lease or will to his/her heir that share of the property belonging to him/her. For example: Bruce Buyer, a single man, as to an undivided 3/4 interest and Penny Purchaser, a single woman, as to an undivided 1/4 interest.
Other ways of vesting title include as:
1. A Corporation*:
A corporation is a legal entity, created under state law, consisting of one or more shareholders but regarded under law as having an existence and personality separate from such shareholders.
2. A Partnership*:
A partnership is an association of two or more persons who can carry on business for profit as co-owners, as governed by the Uniform Partnership Act. A partnership may hold title to real property in the name of the partnership.
3. Trustees of a Trust*:
A Trust is an arrangement whereby legal title to property is transferred by a grantor to a person called a trustee, to be held and managed by that person for the benefit of the people specified in the trust agreement, called the beneficiaries. A trust is generally not an entity that can hold title in its own name. Instead title is often vested in the trustee of the trust. For example: Bruce Buyer trustee of the Buyer Family Trust.
4. Limited Liability Companies (LLC)*:
This form of ownership is a legal entity and is similar to both the corporation and the partnership. The operating agreement will determine how the LLC functions and is taxed. Like the corporation its existence is separate from its owners.
*In cases of corporate, partnership, LLC or trust ownership – required documents may include corporate articles and bylaws, partnership agreements, LLC operating agreements and trust agreements and/or certificates.
How title is vested has important legal consequences and tax consequences. The tax consequences may be different for same sex legally related couples. You may wish to consult an attorney or tax advisor to determine the most advantageous form of ownership for your particular situation.
FOOTNOTE (1): Note: Registered domestic partnership status is not limited to same sex couples.
Note: Under current law, California recognizes same sex relationships that are legally performed or entered into in California and in other states and other countries. This recognition includes same sex marriages and other types of legal unions that are similar to registered domestic partnership status.
For our purposes in the discussion we will use the title “registered domestic partner” in examples, the term “domestic partnership” will be used to include both California registered domestic partnerships and all non-marital legal unions that are recognized in California (i.e. Civil Unions, etc.). 1
What services will I be paying for when I pay closing costs?
You will usually be paying for such things as real estate commissions, appraisal fees, loan fees, escrow charges, property taxes (depending on the time of year you are closing escrow), homeowner’s insurance premium for 1 year, title insurance premiums (Owners & Lenders), pest inspections, natural hazard report, homeowner’s association transfer fees, document fees & dues (if applicable), and any other City/County or State mandated inspections/reports that may be part of your real estate contract. These fees are requested approximately 48-72 hours prior to your close of escrow date.
How much should I expect to pay in closing costs?
The amount you pay for closing costs will vary; however, when buying your home and obtaining a new loan, an estimate of your closing costs will be provided to you pursuant to the Real Estate Settlement Procedures Act after you submit your loan application. This disclosure provides you with a good faith estimate of what your closing costs will be in the real estate process. An itemized list of charges will be prepared upon escrow holder’s receipt of the buyer’s loan documents (for both the buyer & the seller) which is typically 1 week prior to the close of escrow and a final statement is issued to all parties when you close your transaction (records) and the buyer takes title to your new property.
Will I be allowed to write a personal check to cover my closing costs?
Your closing funds should be in the form of a wire transfer, to the escrow company or the title company as directed by your escrow officer in the amount requested by your escrow officer. A cashier’s check may be accepted but this should be verified with your escrow officer prior to obtaining the cashier’s check as this may delay the closing or may be unacceptable to the escrow or title company because of CA state requirements.
All of this information was prepared and made available to me by Keith Parnel and All Valley Escrow. Thank you for all of the hard work.
You can contact All Valley Escrow at www.allvalleyescrow.com with offices near you.
3202 E Los Angeles Ave Suite 30, Simi Valley Ca. 93065
Phone: (805) 584-9596
Fax: (805) 581-1854
2301 Daily Drive Suite 301, Camarillo, Ca. 93010
Phone: (805) 388-1901
Fax: (805) 388-1968
Westlake Village Office
4165 E. Thousand Oaks Blvd. Suite 160, Westlake Village, Ca. 91362
Phone: (805) 494-1027
Fax: (805) 494-4768
Santa Clarita Valley Office
23822 Valencia Blvd Suite 211, Valencia, Ca. 91355
Phone: (661) 705-1045
Fax: (661) 705-1049