Transcript Chapter 18

Real Estate Finance
Presentation 9
(Chapter 18)
Escrow Procedures
Escrow Procedures
 The last step in the loan process is CLOSING, when the loan
proceeds are distributed and a deed to the property is transferred
and recorded. TQ
 These steps are usually carried out by an escrow agent. It is the
common procedure here in southern California. Northern California
uses a title company/escrow…some states use attorney's. TQ
 The escrow agent makes sure that all necessary documents are
prepared and properly signed, calculates any necessary prorations,
makes sure that all necessary funds have been deposited, and
provides a settlement statement.
 Once everything is in order, the loan funds are disbursed, the deed
and other documents are recorded, and the transaction is
completed. TQ
An ESCROW
 is where a neutral third party holds the items deposited
by the parties to a transaction and disburses them
after the conditions of the transaction have been met.
 Attorneys, title companies, and independent escrow
companies all perform this function. !!!
 Many lending institutions have their own escrow
departments for the transactions that they finance.
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Some real estate brokers have the same set up.
In either case only transactions their company is part of
can be in their escrows! TQ
 Think of the guy who holds the money in an old
western movie when they race horses down the
main street! That’s the escrow company.(kind of)!
TWO TYPES OF ESCROW California
 Department of Corporations controls rules and
regulations and can investigate. TQ
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These are known as “independent” escrows.TQ
 Department of Insurance controls rules and
regulations and can investigate.TQ
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These are escrow departments of Title
(Insurance) Companies.TQ
These are the most common now, but not
always best, nor worst. Each individual
organization should be judged separately.
All real estate escrows
involve the following essential steps:
1. Gathering information necessary to prepare escrow
instructions.
2. Obtaining a preliminary title report from the title company.
3. Satisfying existing loans secured by the property.
4. Preparing documents such as escrow instructions, loan
documents, deeds, etc.
5. Depositing funds from a buyer or a seller.
6. Prorating expenses and allocating closing costs.
7. Preparing a Uniform Settlement Statement.
8. Issuing policies of title insurance for the buyer and the
lender.
9. Disbursing funds and delivering documents.
I. Opening Escrow
Opening Escrow
 It is a good idea for agents and loan brokers to use an escrow
progress chart.
 By utilizing such a chart, the progress of the escrow can be
monitored and the parties can be reminded of items that still
need to be completed to close the transaction.
 The first step in the process is to open the escrow.
 This is done by providing the escrow agent with the preliminary
escrow instructions. Notice that current CAR/NAR contracts say
“and Escrow Instructions” on them.
Once the instructions are prepared
 The escrow agent will order a preliminary title report.
 This preliminary report will then be forwarded to the
buyer/borrower’s lender/seller along with the escrow instructions.
TQ
 Note that the escrow instructions must correspond to the lender’s
terms.
 Early in the process, the escrow agent will send a “demand for
payoff” to the previous lender, if necessary.
 A structural pest inspection will also be immediately ordered so as
to complete any needed repairs and not unduly delay the close of
escrow.
 A VERY COMMON MISTAKE IS THE BUYER AND SELLER NOT
COMPLETING THE “STATEMENT OF INFORMATION”. This
information is used to clear liens, know what lender to pay off for
the seller, to make sure all preliminary title report items are correct,
etc. TQ whole bullet point.
II. Settlement Statement
and Closing Costs
Settlement Statement and
Closing Costs
 A SETTLEMENT STATEMENT is a listing of all the amounts involved in a
transaction. OFFICIALLY, the HUD-1 is the closing statement. TQ
 In sales of residential property financed by institutional investors, the
Uniform Settlement Statement is used. (HUD-1)
 Items on the statement are listed as either debits or credits.
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DEBIT
CREDIT
 When the transaction closes, the balances for both the buyer and the seller
should equal zero. TQ
 Loan officers and agents are often asked to calculate an estimate of the
buyer’s cash requirements for closing and the seller’s net proceeds. I say
call escrow and ask them to do it!!
Figure 18-3.
A. BUYER’S COSTS
 The main cost to the buyer is the purchase price.
 There is generally a loan origination fee to cover the lender’s
administrative costs. The lender may also charge points to make
the loan.
 There is an appraisal fee, a credit report fee, attorney fees,
notary fees, a fee for the lenders title insurance policy, and
possibly impound fees for taxes and insurance.
 In addition, the borrower/buyer is responsible for any special
costs that he or she incurs. Home inspection, inspections
negotiated in contract.
B. SELLER FEES
 The seller will have to pay off any existing loans,
including any pre-payment penalties, at the close of
escrow.
 The seller (usually the seller) will also pay the sales
commission and his or her portion of the attorney
fees, escrow fees, notary fees, and recording fees.
 Depending on local custom, always as per the
contract, the seller may also pay none, all, or a
portion of the title insurance premium, the structural
pest control inspection/repairs, the buyer/borrower’s
loan discount, and a home warranty contract.
C. BUYER CREDITS
 The buyer will normally be credited with any
payments initially made out of pocket for an
earnest money deposit, appraisal fee, credit
report, and prorated taxes or rents due.
D. SELLER CREDITS
 In addition to receiving funds from the
purchase price, the seller may be due credits
for items such as prorated taxes, insurance
premiums, and the balance in any existing
impound account that was required for the
seller’s prior loan.
 If the property is income property, there
might be a credit for prorated rents.
III. Real Estate
Settlement Procedures
Act (RESPA)
Real Estate Settlement
Procedures Act (RESPA)
 The REAL ESTATE SETTLEMENT PROCEDURES ACT
(RESPA) applies to the sale of one-to-four unit properties that
involve financing from institutional lenders where the purchase
loan is secured by a first trust mortgage.
 In transactions subject to RESPA, the lender must give the
borrower a good faith estimate of the closing costs at the time
of the loan application.
 The lender is also required to give the borrower a booklet
published by HUD which describes closing costs, settlement
procedures, and the borrower’s rights.
IV. Additional
Disclosures
IV. Additional Disclosures
 Many states require additional documentation
to transfer property or to obtain a loan.
 In many cases, this consists of disclosures to
the prospective borrower or purchaser.
The following are a list of the disclosures
required by the state of California.
1. Real Estate Transfer Disclosure.
2. Pest Control Inspection Report..
3. Disclosure of Geologic Hazards.
4. Disclosure of Hazardous Waste Deposits.
5. Thermal Insulation Disclosure.
6. Special Flood Area Disclosure.
7. City and County Ordinances.
8. Condominium Documents Disclosure.
9. Disclosure for Real Property Loans.
NEXT TWO WEEKS – FINAL EXAM
 I will email the final exam out to all the email
addresses I have currently, on Sunday December
5th. At or before 7:00 PM. If your email address isn’t
correct please make it so on sheet passed around in
class. I won’t post the test online at all.
 I will be here at 6:00 on December 6th, I will stay until
7:30 or until all students who show up, have in their
exams. If you must do so, you can email me an
answer sheet by midnight per email stamp. No finals
will be accepted after that.
NEXT TWO WEEKS – FINAL EXAM
 I would prefer Scantron sheets, and the test taken in person in
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the classroom. This could help your grade.
If you must send in via email use the sheet attached to the test
or scan in a scantron sheet if you can (still preferred).
On December 13, CLASS WILL MEET AT PASCO’S PIZZA,
FOR FREE PIZZA FOR MY STUDENT’S (spouses are o.k. too)
ONLY. WE WILL MEET AT 6:30 PM. PASCO’S IS ON THE
WEST SIDE OF THE NW CORNER OF “I” AVE AND MAIN ST.,
HESPERIA.
This is when you will know your grades! You do not have to
attend or eat pizza! Grades will be posted at WebAdvisor per
VVC guidelines if you cannot or don’t want to come. No dings
for not showing up to this event!!!!
I will attach this information again to the test pages next week.
 PLEASE SHOW UP FOR CLASS
TOMORROW NIGHT IF AT ALL POSSIBLE.
 LAST CHANCE TO ASK QUESTIONS AND
LEARN THIS SEMESTERS INFORMATION
ON REAL ESTATE FINANCE!
 Happy Holidays, all of them! I’m just too lazy
to list them all….see you soon.
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Dana Gordon, Adjunct Instructor