Understanding the Sacramento real estate escrow process

What is escrow in a real estate deal?

The definition of a real estate escrow is a process where a neutral third party acts as the closing agent for the buyer and the seller.  The escrow officer undertakes the responsibility of handling all the paperwork and disbursement of funds to close out a real estate transaction. 

Which escrow are we talking about?

English uses the same word to mean different things. There are types of escrows in real estate. There are two popular real estate escrow meanings in California. The first is an escrow to transfer property conducted with a purchase contract.

The second escrow meaning refers to the mortgage lender requiring the borrower to pay each month 1/12th of the annual estimated property taxes and hazard insurance into an account maintained by the lender. Then when the property tax and insurance bills for the property are due, the lender pays them from the escrow account funds. This would be the mortgage escrow account.

This account can also be called the impound account. It is my practice during a real estate transaction when I represent the buyers to call the real estate transaction escrow and the loan funds the impound account. I think this helps the home buyers have a way to keep the 2 escrows clear in their mind.

What is the meaning of escrow in real estate?

Escrow is a contractual arrangement between two parties that allows third parties to hold onto cash or property as long as a condition exists. In other words the deposit of instruments and/or funds with instructions with a third neutral party to carry out the provisions of an agreement or contract. These can be the purchase contract to buy a home. It can also be the loan agreement between the borrower and lender.

What is an escrow on a mortgage?

A mortgage escrow accounts are also called the mortgage impound account. Your mortgage escrow is paid with your monthly mortgage payment to cover property tax and insurance payments with the goal they are paid on time. The mortgage escrow collects the property taxes, other mandatory fees, mortgage insurance, and home insurance premiums on a monthly basis. The monthly mortgage payments also include a portion of your loan principle and the interest. The yearly escrow review property taxes and insurance premiums change over time. Typically lenders require when buying a home to set up a mortgage escrow.

What makes a valid real estate escrow?

The primary escrow issues covered here is the home buying transaction escrow. The legal requirements for a valid escrow have two essential requirements for a lawful real estate escrow. First, there must be a binding contract between the seller, also called grantor and the buyer, also called grantee. Second, there must be the conditional delivery of transfer instruments and monies to a neutral third party. This is the home buying process.

The binding contract can be in any legal form, such as a deposit receipt, an agreement of sale in California called residential purchase agreement, an exchange agreement, or mutual instructions from the buyer and the seller. The escrow instructions signed by the buyer and seller supplement the terms of the original purchase agreement and the two contracts are interpreted together. In California the CAR form is called California residential purchase agreement and joint escrow instructions. This form is used as a joint form for the agreement of sale and escrow instructions.

Who chooses which escrow company to use?

The selection of an escrow company is negotiated between the buyer and seller. The real estate agent cannot demand which escrow company to use. Sacramento and Placer County has excellent escrow companies to work with. One of the benefits of the Sacramento real estate market is the professionalism of the escrow system. Escrow agents are very knowledgeable and easy to work with.

Who pays for escrow?

The payment of the escrow fee is an item that is negotiable between buyer and seller. They can split the fees or the buyer can pay for all the fees or the seller can pay for all the fees. This is one of the areas working with a real estate professional pays off. Some fees are only $99 other fees are a few thousand dollars. I have saved my client thousands of dollars just by knowing which escrow fees to spit 50/50 and which ones to let the other side pay for.

What are the escrow company’s duties?

The escrow company carefully collects, prepares, and safeguards the instructions, documents, and monies required to close the transaction. Upon receipt of written instructions from all parties, the escrow instructions are compared to determine whether the parties are in mutual agreement. The buyer, seller, lender, and real estate agent are all parties to the in escrow Sacramento CA.

Here is a partial list of some of the escrow services performed by an escrow company.

• They prepare buyer’s and seller’s escrow instructions
• Collect earnest money that a purchase contract states
• Prepare deed and other needed documents
• Promissory notes and deeds of trust as instructed from all parties
• They can request the demand for payoff for the seller’s loan from the lending institution
• In the case of an assumption, request a beneficiary statement from the lending institution.
• Escrow companies can collect the structural pest control report
• Notices of work completed
• They balance the accounting details
• Adjustments and prorate of taxes
• Adjustments and prorate of mortgage interest
• Adjustments and prorate of homeowners insurance
• Adjustments and prorate of assessments (if any)
• Adjustments and prorate of rents (if any)
• They collect the balance of monies required to close the transaction
• Pays real estate commissions when the property closes and records
• Escrow companies also verify that the appropriate documents are recorded after transfer has occurred.
• The escrow company audits the file
• The final stage is the escrow officer then disburses the funds
• Issues itemized closing statements to all parties
• Establishes the title insurance policy

One important issue to understand is that escrow can only do what they are instructed.

An escrow agent can do no more or no less than the instructions dictate. This is a key aspect of escrow. The escrow officer can take no action other then what the escrow instructions dictate. If other actions are needed, new additional escrow instructions must be agreed by the parties before the escrow holder can act.

What if the escrow officer receives conflicting instructions from the principals? The escrow officer simply refuses to proceed until the parties settle their differences. An escrow officer cannot give legal advice and may bring an action in court forcing the principals in the escrow to litigate their differences. This legal action is called an interpleader action.

When is escrow closed?

When the parties are in agreement and all instruments and monies have been deposited, the escrow officer sees that title is transferred. In California, when the deed is recorded is the point when ownership of the property is done. For most real estate agents and home buyers and sellers, this is the point we call escrow closed. But the escrow company still has activities to do after that point.

Escrow is confidential

Escrow instructions are confidential. The principals and their agents in the transaction are entitled to see the escrow instructions. But only to the extent that as the instructions pertain to mutual items in the transaction. How much the seller is profiting from the sale is no business of the buyer. Equally, the buyer’s financing arrangement with an institutional lender is no business of the seller.

 Setting the time of escrow is a legal aspect of escrow

All the conditions required by escrow instructions must be performed within the time limit set forth in the escrow agreement. The escrow officer has no authority to enforce or accept the performance after the time limit provided in the instructions. When the time limit provided in the escrow has expired and neither party to the escrow has performed in accordance with the terms, upon receiving mutual written releases, the parties are entitled to the return of their respective papers, documents, and money from the escrow officer.

Escrow settlement statement

A settlement statement is a document summarizing all costs owed by or credits due to the homebuyer and seller. The document also includes the purchase price of the property, loan amount and other details. One important issue is that the buyer’s settlement statement is different than the seller’s settlement statement. These are the funds held in escrow.

Closing Costs for California Real Estate in Escrow

Remember rule one in real estate:

Everything is Negotiable

Closing costs refer to the expenses paid by the buyer and the seller as negotiated at the close of the sale of property.  The payment of the closing costs is a negotiable subject between the buyer and seller. No law requires that certain closing costs are the responsibility of the buyer or the seller. (The only exception can happen with some government backed loans where regulations prohibit the buyer from paying certain closing costs.)

Local customs can create the standard that certain closing costs are typically paid by the buyer, and other costs are usually paid by the seller.

The home buyer’s and possibly a mortgage borrower’s closing costs can be divided into two categories. First, the nonrecurring closing costs and second, the recurring closing costs are a way to classify payments. The nonrecurring closing costs are one-time charges paid upon the close of escrow. The recurring closing costs are prepaid items that the buyer pays in advance that will continue as long as the buyer owns the property.

Examples of nonrecurring closing costs for the buyer are Loan origination fees. A fee charged by a lender to cover the expenses of processing a loan. Another one is an appraisal fee. An appraiser charges to give an estimate of property value which can be charged to the buyer. Note that some appraisal costs are paid by the buyer even if the transaction does not make it to closing. Understand if this is the case when you are buying a home. The escrow agency in Sacramento CA shows the escrow fees definition in the net sheet. There are more nonrecurring closing fees and costs.

Examples of recurring closing costs for the buyer are hazard or fire insurance. A one-year premium for insurance against fire, storm, and other risks is charged at close of escrow but every year the new home owner will continue to pay for this type of insurance. Another ongoing expense is property tax proration. In California, the property tax year runs from July 1 through June 30 of the following year. If the seller has prepaid the taxes, the buyer reimburses the seller for the prepaid portion. Interest due before the first loan payment is another cost. Interest on real estate loans is typically paid in arrears.

The closing costs paid by a seller are nonrecurring expenses. After the close of escrow, the seller is divested of ownership and has no recurring expenses. Examples of closing costs typically paid by the seller are the transfer tax. The transfer tax is charged when title is transferred. The county has a documentary transfer tax that is computed at $1.10 per $1,000 of the sales price. The pest report and possibly the corrective work are customarily paid by the seller. These can change based in some areas convention.

Real estate brokerage commission is almost always paid by the seller. The commission is normally quoted as a percentage of the sales price. Dan Parisi makes sure both the buyers and sellers knows about the agents commission. The natural hazard disclosure fee is also generally paid by the seller. The natural hazard disclosure provides seller required disclosures for earthquake, flood, fire, and other hazards.

Some closing costs are split between buyer and seller. The one cost which is generally a 50/50 split is the escrow fees. Knowing that the closing costs are negotiated, the escrow fees are a good way to show good will or demonstrate who is in the power position. Title insurance is another area of negotiations that helps with buyer funds needed at closing.

Some closing costs are prorated between the buyer and seller. Examples of this type of cost are property taxes, interest if loan is assumed by buyer and rents if the property is a tenant-occupied income property.

One of the key values of closing costs is to know the real numbers of your particular escrowed transaction. Ask for a net sheet or closing cost document sometimes called a HUD-1 Settlement Statement. A net sheet is a simple tool that shows the costs required to sell the property and shows approximately what the amount of the proceeds will be after all costs have been considered. The HUD-1 Settlement Statement is a standard form used to itemize services and fees charged to the borrower or buyer by the lender. If there is no loan, then ask for a net sheet for the buyer side of the transaction.

Here is a quick Summary of Closing Costs

Buyer Usually Pays

1. Loan origination fee

2. Appraisal fee

3. Credit report

4. Property inspection fee

5. Tax service fee

6. Recording fees

7. Notary fees

8. Assumption fee, if any

9. Title and escrow fees in buyer-pays areas

10. Title insurance

11. Hazard insurance

12. Interest on loan before first payment

Seller Usually Pays

1. Transfer tax

2. Structural pest control work and report fee

3. Real estate brokerage commission

4. Discount points on government-backed loans

5. Recording and notary fees

6. Title and escrow fees in seller-pays areas

7. Natural hazard disclosure fees

Understanding closing costs can help with the real estate transaction negotiation. Knowing what fees are significant amounts and which is minor amounts can help set the tone of the transaction. Knowing what closing cost will add more money the buyer will have to add to closing can help in finalizing the sale price.

If the local real estate market is in a seller’s market or buyer’s market will help in the negotiations of the closing cost. Whether you believe in a win-win deal or win-lose deal the appearance of fairness will help the transaction to close. Using closing costs to create the atmosphere of a fair deal is generally a good practice.

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Escrow warning

Don’t create a problem at the end of the real estate transaction. This is a warning to the real estate agents to check and double check when you receive the estimated settlement statement and the final settlement statement that the buyer’s only goes to the buyer and/or the seller’s goes to the seller.

Also check if escrow sent you the master that shows both sides. If escrow did send the master ask them to make a single side settlement statement for the party you represent.  The escrow officer jobs include transfer ownership, making sure the funds go to the correct parties and look out for all parties interest.

Giving the buyer or the seller the other side transaction information can create real life problems and could kill the deal. The escrow information is for the part of the transaction they are part of. The buyer gets only the buyer info and the seller gets only the seller info.

An estimated settlement statement itemizing these costs will be provided for the buyer and seller to review.  Signing the estimated settlement statement will authorize the Escrow Holder to pay and prorate those items listed on the estimated settlement statement. 

A closing settlement statement is an accounting or itemized list of all of the charges and credits in connection with your escrow account which is prepared by the escrow officer. In addition to closing costs, the closing statement will reflect the purchase price and financial terms, funds deposited, debits or credits, payments to third parties, and payoffs of existing loans and/or liens. The closing statement will indicate how much money you may need to bring into the escrow or how much money you are to receive at the close of escrow.

How do escrows end?

Escrows are usually terminated by completion of the sale or in the case of a refinance upon completion of the loan process. A completed escrow transfers title to the new owners and the monies to the parties entitled by the escrow instructions. At this point the seller will be given the funds after all liabilities have been satisfied.

How You Hold Title in California -Advantages and Limitations

Title to real property in California may be held by individuals, either in Sole Ownership or in Co-Ownership. Co-Ownership of real property occurs when the title is held by two or more persons. There are several variations as to how title may be held in each type of ownership. The following brief summaries reference eight of the more common examples of Sole Ownership and Co-Ownership. Married in California covers man and woman; man and man; woman and woman and other types of relationships. It is important to get professional legal advice from an attorney to understand the full implications of your situation.

 Sole Ownership or as one person ways to hold titlein California

1. A Single Man/Woman: A man or woman who is not legally married. Example: John Doe, a single man.
2. An Unmarried Man/Woman: A man or woman, who having been married is legally divorced or, a man or woman, having been in a registered domestic partnership that has been legally dissolved. Example: John Doe, an unmarried man.
3. A Married Man, Woman, or Registered Domestic Partner: As His/Her Sole and Separate Property. When a married man, woman or a registered domestic partner wishes to acquire title in his or her name alone, the spouse/partner must consent, by quitclaim deed or otherwise, to transfer thereby relinquishing all right, title and interest in the property. Example: John Doe, a domestic partner, as his sole and separate property.

Four Ways to Holding Title in California Real Estate
When More Than One Person Holds Title

Holding title in California real estate is one of the more important parts of the escrow process. When there is more than one person has four main options: Joint Tenancy, Tenancy in Common, Community Property, and Community Property with Right of Survivorship. All have important issues that can make them just right for the situation or just wrong.

Joint Tenancy

Joint tenancy exists when two or more persons are joint and equal owners of the same undivided interest in real property. Joint tenancy requires four things:  1) The owners must acquire their interests at the same time, 2) The owners must all be included on the same deed, 3) The owners are presumed to own the property in equal shares, and 4) Each owner is presumed to have an equal right to use the property.  If any one of these things is missing, the joint tenancy could be invalidated if challenged.

Tenancy in Common

Tenancy in common is when two or more persons are owners of an undivided interest in property.  Each owner may hold an unequal interest; that is, ownership can be divided 64/40 or any way the owners choose.  Even so, each one has an equal right to use the property and is legally obligated to pay his or her share of the expenses, such as property taxes.  Each owner may sell, convey, or encumber his or her interest without the consent of the co-owners.

Community Property

Community property ownership is another form of ownership held by more than one person. But, in this case, the property can be held only by a husband and wife or by registered domestic partners. Community property is generally defined as all property acquired during a valid marriage or registered domestic partnership. California is a community property state.  Therefore, all California property acquired by a husband and wife or by registered domestic partners during marriage is presumed to be community property.

Community Property with Right of Survivorship

Community property with right of survivorship means upon the death of one spouse or partner, the surviving spouse or partner receives title to the entire property without the need for a court order.

Ownership can be Titled in a Trust

Title to real property in California may be held in a title holding trust, The trust holds legal and equitable title to the real estate. The trustee holds title for the trustor/beneficiary who retains all of the management rights and responsibilities. Read more about the types of trust at Wills, Trust and Probate transferring real property upon death the basics.

How to cancel escrow

But if the transaction is not completed, the escrow may be canceled by mutual agreement of all parties. The parties will execute a cancellation of contract.  The escrow company is entitled to receive partial payment of escrow fees for services rendered to date.

Real estate escrow when a property is in probate

Escrow must work with the probate courts both to open escrow correctly and close the sale of real property that is in escrow. Once approved by the probate judge, the probate judge will sign the

Order (Form DE-226). You will in turn give the certified order to escrow to close your escrow transaction.

When a house in probate is sold, the real estate professionals get paid at the close of escrow and real estate creditor’s get paid prior to the final petition stage. Everyone else (attorney, personal representative and heirs), is paid at the close of probate.

Living trust and escrow

The Successor Trustee of the trust is in charge and can accept an offer and sign the documents necessary to close escrow

The real estate escrow is done by a neutral third party

The key parts of real estate escrow are done by a neutral third party.  They are agents for the buyer and the seller.  The escrow officer assumes the responsibility of handling all the paperwork and disbursement of funds to close out a real estate transaction.

To state this in a more formal way, the California Department of Real Estate: “At its essence, escrow is the process whereby parties to the transfer or financing of real estate deposit documents, funds, or other things of value with a neutral and disinterested third party (the escrow agent), which are held in trust until a specific event or condition takes place according to specific, mutual written instructions from the parties. Escrow is essentially a clearinghouse for the receipt, exchange, and distribution of the items needed to transfer or finance real estate. When the event occurs or the condition is satisfied, a distribution or transfer takes place. When all of the elements necessary to consummate the real estate transaction have occurred, the escrow is “closed”.”