Interested in Closing Escrow in as Soon as a Week? Consider an All Cash Escrow.

In Today’s tight-lending market, individuals looking to invest have the opportunity to capitalize on some great deals and benefits when making an “all cash offer” on a property. An “all cash offer” is an offer that does not require a third party lender. Cash offers also make for one of the smoothest escrow processes possible.

So how does a cash offer affect escrow?

As mentioned in a previous blog posting (Life of an Escrow – Buyer’s Perspective) there are three stages of the escrow process: the opening, the processing, and the closing. The opening and processing stages of an “all cash” escrow are no different than those of a normal escrow; however, the closing process differs slightly since there is no lender involved. During the closing process, once the escrow officer has received the buyer’s and seller’s signed initial paperwork and has received all demands, bills and/or reports required under the contract, the escrow officer will prepare the closing amendments and any additional documents necessary for signatures. In addition, the estimated closing statements are prepared for signatures and the buyer is made aware of the funds needed to close the transaction. Depending on how quickly the signatures and appropriate paperwork can be collected, the escrow could potentially close in as quickly as a week!

If a buyer is considering investing in a property, they should speak with their agent to learn how paying cash can be beneficial to both parties. These benefits might include:

  • A seller possibly accepting the “all cash offer” rather quickly, even if it’s not the highest offer, or one of many
  • A seller finding an “all cash offer” more attractive because a buyer who is purchasing “all cash” is generally highly motivated to close escrow quickly
  • No appraisal inspection/appraisal review issues or delays
  • No loan or underwriting issues or delays
  • Parties having the option to waive certain reports or inspections that they are not interested in paying for, that a lender may require as part of the loan process
  • The buyer paying less money in closing costs

Upon the escrow officer’s receipt of all conditions of the purchase contract being met, the buyer’s final wired closing funds, and the final signed paperwork from the buyer and seller, the escrow is ready to close. Escrow then coordinates the recording with the Title Company. (Though all counties have different guidelines for recording times; most recordings take place the following business day.) The real estate transaction is considered closed when the Grant Deed is stamped and recorded in the County Recorder’s Office. Because there is no lender involved in an “all cash escrow”, the escrow tends to close faster and is considered a much smoother process.

If you have any further questions about all cash escrows, feel free to contact us.

Life of an Escrow

For some, the escrow process can be perceived as confusing, perhaps even overwhelming at times. Buyers and sellers are dealing with deadlines, mounds of paperwork, and signatures galore. It is not uncommon to feel anxious and have questions during the process. As the neutral third party at the center of the transaction, escrow’s goal is to facilitate the transfer of property from the seller to the buyer. To help give buyers and sellers a better understanding of the entire process, we put together a Life of an Escrow overview flowchart.

Life of an Escrow

As the chart illustrates, the escrow company is the neutral third party that facilitates the closing process when real estate is purchased or sold. Escrow is involved in many of the details regarding the purchase or sale transaction. It is common for there to be myriad of details, and escrow works with many different parties, such as a title company, mortgage banker, seller’s agent, etc., during the escrow process. It is important to also understand that escrow holds the money associated with the transaction until the requirements of the contract are accurately completed. Once escrow has facilitated the completion of the legal and contractual items, the transaction is recorded at the county and the buyer becomes the new legal owner of the property.

There are many details buyers and sellers should become aware of to facilitate a smooth escrow process. Many of these details are items we discuss on our blog in an effort to help demystify this complicated process. The chart above serves as the foundation for most transactions and can be used as a basis for further discussion or questions you may have with your escrow officer.

An Explanation of the Truth in Lending Disclosure Statement in Escrow

One of the many important documents received by Escrow from a lender is the Truth in Lending Disclosure Statement (TIL). The TIL disclosure statement is one of the most misunderstood documents required for closing, and Escrow Officers are often faced with many questions from the borrower regarding this document. This post is designed to educate the borrower (purchase or refinance) as to how to best understand the Truth in Lending Disclosure Statement.

A lender is required to give the borrower a Truth in Lending “statement” containing information on the loan’s annual percentage rate (APR), the finance charge, the amount financed, schedule of payments, and the total payments required. The statement may also contain information on security interest, late charges, prepayment provisions, and whether the mortgage is assumable. The lender will require that the TIL disclosure statement is signed by the borrower along with many other loan documents, all of which must be received back into Escrow.

What is a TIL?

It is important to understand that the TIL statement is not an agreement between the borrower and the lender. It is a federal-required disclosure document (Regulation Z) under The Truth-in-Lending Act (TILA), which is an important part of the federal Consumer Credit Protection Act. The TIL disclosure statement requires complete disclosure of all credit terms, conditions and consumer costs of obtaining credit. Unlike the “Good Faith Estimate” document which discloses an entire sale transaction’s cost, Truth-in-Lending deals only with the cost of the loan.

Understanding the APR Calculation in the TIL Statement

One of the most common questions Escrow receives regarding the TIL statement often has to do with the annual percentage rate. This piece of information in the TIL statement often confuses borrowers, as the APR calculation is prominently displayed on the document. It is not uncommon for a borrow to panic when they are presented with the statement during Escrow and loan document signing, as the APR is usually higher than the agreed contract interest rate of the loan.

To many borrowers APR, or “annual percentage rate”, sounds a lot like “interest rate.” The APR is not an interest rate. It is a measure of the total cost of credit, expressed as a percentage rate. The contract interest rate is defined in the promissory note. The purpose of the APR is to provide the borrower with a uniform measure of the total cost of a loan. The APR calculation includes the contract interest rate in addition to the other costs of the loan, including any prepaid costs (points and fees) that are part of the cost of borrowing. The contract interest rate in the note is only one part of the finance charges. The APR is a representation of the total finance charges.

Though it is important to understand how the APR is calculated, it is equally important to thoroughly understand the other elements of the TIL statement, as the lender requires the statement is signed by the borrower and given to Escrow. For more specific questions related to a borrower’s loan, Escrow will assist the borrower in contacting the lender representative.

Loan Documents are in Escrow. We’re Ready to Close Then, Right? Not Necessarily…

As the close of escrow date draws near, the buyer and seller are usually eager to close. And, loan documents arriving in escrow represent a big step towards the completion of the escrow and the transition of the property to the new owner. However, it is often mis-understood that the close will occur immediately after loan documents are received at escrow and signed. That is not always the case. There are many details (such as lender conditions) that escrow must still verify, and depending on the lender, the funding process may take several days after the signing. This post is designed to educate the buyer as to the steps that escrow goes through in dealing with loan documents that are received in escrow. As you will see, there are several items that have to happen once loan documents are received at escrow before a transaction can close. Understanding this process can help to set the proper expectations about the closing process and help buyers be better prepared to work with both their lender and escrow to facilitate a smoother escrow process.

1. Once your loan has been approved and all prior to loan document conditions have been received and approved by the Lender, the Lender will prepare loan document and send them to escrow for signing.

2. Escrow reviews the loan documents to comply with the Lender’s requirements and reviews the escrow file for any outstanding conditions.

3. Escrow will prepare the buyer’s estimated HUD1/closing statement and put together any required paperwork needing the buyer’s signature. Escrow will make arrangements for signatures on these papers.

4. Escrow will prepare the seller’s estimated HUD1/closing statement and put together any required paperwork needing seller signature. Escrow will make arrangements for signatures on these papers.

5. In some instances the Lender may have documents that may also need signatures from the listing agent, selling agent or loan agent, so escrow will also make arrangements for these items to be signed.

6. If still needed, escrow will order insurance, closing protection letter, etc as required by the lender.

7. Once the buyer’s loan documents have been signed and/or received back into escrow, escrow will package the documents to be returned to the funding Lender. This package of documents is referred to as the loan package. Ideally, by this time, all paperwork that has been sent for signature to the seller, listing agent, selling agent and loan agent have been signed and returned to escrow to include in this package. Lender’s work differently, and some will be prepared to fund the loan when they receive the loan package, others will require 24-72 hours after the loan package is received by the lender to review the package prior to advising if there are any additional requirements/conditions to fund the loan (this is the most common scenario we run across on the West coast). Buyers are advised to understand the timeframe associated with funding the loan from the lender that they are working with. This timeframe is outside the control of escrow.

8. Escrow will request funds from the lender. It is important to note, that although the loan package has been completed and received by the lender, there may be other issues/conditions related to the transaction (for example, outstanding termite repairs) that will hold up the request of loan funding from escrow. In other words, escrow has to be in a position to close escrow, meaning all conditions of the escrow have been met and all the Buyer’s closing funds have been received.

As you can see there is more to getting the Escrow closed once loan documents are in escrow than just signing, so coordinating and getting conditions cleared with your loan officer in an efficient manner is very important for a timely closing. It is important to reiterate that all loan documents are time sensitive and each Lender works differently.

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Reappraisal Exclusion Program–Tax Savings For Sellers 55 And Over

Senior couple outside house

To help homeowners over the age of 55 be able to afford to move to a different home in California or purchase a “move down” home and not suffer an increase in property taxes, Propositions 60 and 90 were passed. The Propositions, also known as the Reappraisal Exclusion Program, provide a one-time property tax relief by preventing a property valuation increase when someone over the age of 55 sells their home and purchases another home of equal or lesser value, effectively saving the seller thousands of dollars each year.

Both Sellers and REALTORS need to understand that there are specific timelines to apply for the exclusion, they need to know which counties in California allow the transfer, and what are the qualifications for the exclusion. Let’s start by defining Proposition 60, 90 and 110.

What are Propositions 60 and 90?

Propositions 60 and 90 are constitutional amendments passed by California voters that provides property tax relief for persons aged 55 and over. it allows these persons, under certain conditions, to transfer a property’s factored base year value from an existing residence to a replacement residence. Typically the property tax of a newly purchased or constructed residence is based on its current market value upon change of ownership. However, the provisions of Propositions 60 and 90 may result in substantial tax savings since it allows the property tax of the original (sold) property to be transferred to the newly purchased or constructed home if eligibility requirements are met.

Proposition 110 allows the transfer of a base year value for severely and permanently disabled persons. Except for the disability factor, the qualifications for Propositions 60/90 are same as Proposition 110.
What is the difference between Proposition 60 and Proposition 90?

Proposition 60 allows transfers of base year values within the same county (intracounty). Proposition 90 allows transfers from one county to another county in California (intercounty) and it is the discretion of each county to authorize such transfers. As of January 2007, only seven counties have passed an ordinance authorizing intercounty transfers; however, it is recommended that you call your assessor for verification as it could change at any time.

Here are the counties currently allowing the Exclusion Program:

Alameda, Orange, San Mateo, Los Angeles, San Diego, Santa Clara and Ventura.

Here is a list of counties that have rejected Prop 90:

Butte, Calaveras, El Dorado, Fresno, Lake Madera, Mendocino, Merced, Mono, Monterey, Napa, Nevada, Placer, Sacramento, San Benito, San Bernardino, San Luis Obispo, Santa Barbara, Santa Cruz, Shasta, Siskiyou, Solano, Sonoma, Stanislaus, Tulare, Trinity and Yolo.

What does “equal or lesser value” mean?

Sellers are able to take advantage of the Reappraisal Exclusion Program when they sell a home and purchase another home of equal or lesser value. What does that entail?

Equal or lesser value means that the fair market value of the replacement property does not exceed one of the following:

100% of the market value of the original property as of the date of the sale if the replacement property is purchased before an original property is sold.

105% of the market value of the original property as of its date of sale if the replacement property is purchased within 1 year after the sale of the original property.

110% of the market value of the original property as of its date of sale, if the replacement property is purchased within the 2nd year after the sale of the original property.

If you purchase a property of greater value than the original sale property, there will be no exclusion.

Timeline:

You must buy the replacement property within two years of selling the original property in order to qualify. You have three years following the purchase date or new construction completion date of the replacement property to file an application for the exclusion. As of the date the original property sold, the seller or the spouse of the seller must be 55 years or older or be permanently disabled.

Proposition 110 creates an exception to the one-time-only limitation for anyone who becomes permanently disabled after having received a reappraisal exclusion as a claimant over the age of 55 years. If a person over the age of 55 years transferred the base year value from an original property to a replacement property and subsequently becomes disabled, then that person may now transfer his or her base value a second time.

A seller may apply for this exclusion in the county of the replacement property by completing and submitting the necessary application form. Contact the County Assessor or download the application directly from the County Assessor’s website.

For more information about the Propositions, frequently asked questions and more, go here.

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The Short Sell Process: Escrow Explains What You Need to Know

In a prior post we explain the terminology associated with Short Sales. In order to further clarify the short sale process, this post explains the process a seller must go through if they find themselves facing a short sale.

A Short Sale comes in to play when a seller must sell their home and the value of the property is just not sufficient to cover the balance owed to the existing lender. In order to accomplish this the seller must work with their existing lender(s), and any other existing lien holders, to request approval of the sales price, the sale terms, and payoff of their loan to be at a reduced amount.

The Short Sale process is as follows:

  • The owner or their agent/negotiator must contact the existing lender.
  • The lender will direct them to their website, or will advise how, to obtain specific forms, instructions and lender requirements.
  • This group of documents, along with the lender’s financial forms (Short Sale Package*) is then sent to the lender as per the lender’s instructions.
  • After the lender receives the package it is then assigned to a contact person in the lender’s Loss Mitigation Department. This process can take anywhere from two weeks to two months and sometimes even longer.
  • At this point the Loss Mitigation Dept then reviews the package and will contact the homeowner to request any additional items that may be required by the lender. This request is usually made verbally to the homeowner or negotiator but can sometimes be found via the lender’s website.
  • The lender will then request a Broker’s Price Opinion (BPO) from an agent chosen by the lender.
  • Once the lender has received the BPO as well as the Short Sale Package they submit it for final review. Once the lender has completed their final review they may give approval as is or their approval may be subject to changes such as sales price changes. Or the lender, at this time may decide that the seller did not have ample reason for the short sale and therefore deny the request for the short sale.

*Short Sale Package can consist of 100 to 200 pages including, but not limited to, the following items:

1. Listing Agreement

2. Short Sale Addendum

3. Offer to Purchase

4. Proof of Buyer’s funds

5. Owner’s Tax returns

6. Paystubs

7. Owner’s Bank Statements

8. Hardship letter from owner (explaining why the short sale is needed)

Remember that every lender and every situation is a different story so it will help to keep a handle on each request by staying in touch with the lender constantly through the process.

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An Explanation of Property Tax Prorations in Escrow

dollardistribution_cropped

One of an escrow officer’s simpler jobs is calculating the amount of property tax that is payable by the buyer and the seller on any given real estate transaction. One of the agent’s tougher jobs can be explaining to the buyer why they may get an official property tax adjustment bill months after the sale is done. Let’s wade into the arithmetic and explain the situation.

Property Tax Defined

Every property gets assessed by the county assessment office every year, establishing the amount of tax due on that property. At the time of a sale, it’s a simple matter for the escrow agent to find out the property’s tax for the full year, and apportion the correct amount to the seller for the year to that date, and the right amount to the buyer for the remainder of the year.

Say, for example, the property tax of the year is $1200, and the transaction closes on May 1. The seller pays $400 for the first 4 months, and the buyer pays $800 for the last 8 months. These numbers show up on the closing statements.

Sale Triggers Assessment

The complication arises because a property sale triggers a new assessment. This assessment happens according to the schedule and timetable of the county assessment office; this means it could happen months after the transaction has closed, when the buyer has long since thought the sale over and done with.

When it eventually occurs, the property has a new assessed value – and a new tax burden – retroactive to the date of the sale. It might be more or less than what the buyer paid on the closing statement, but chances are good that it will be different. Therefore, the assessment office will issue an adjustment notice. If it’s a tax increase, the buyer needs to pay more. If it’s a decrease, each county handles the situation differently. Check with the links below for your own area’s procedures.

Escrow Works With The Numbers

The escrow officer’s job with prorating property tax is just to work with the existing numbers. They use the property tax amount provided to them by title at the time of the escrow (the current property tax amount). They take this current tax information and allocate the charges to the parties accordingly.

That’s why, in an appreciating market, a buyer can get an additional tax bill, months after the sale, when they thought it had already been covered. And that is why, in a depreciating market, the potentially reduced taxes on the home cannot be determined and applied at escrow. For specific tax questions related to a particular parcel, further information can be gained by contacting your county’s tax recorders office:

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Patience Is Key for a Successful REO Escrow


In a previous post, the nuts-and-bolts differences between REO (Real Estate Owned) escrows and standard escrows were discussed. This post is designed to highlight a significant psychological difference that can help you and your clients successfully navigate the REO terrain: patience.

For a number of reasons, the process for an REO escrow can take longer than a standard escrow:

  • The Seller of an REO is a Bank or Lending Institution who may have many properties in escrow at once. This means that what may seem like a simple response to a question can take days to be considered, much less answered.
  • An accepted offer or contract may take several days to be uploaded onto the Seller’s online system where it will only then be listed as a “task” to open escrow.
  • Banks must follow specific, strict procedures that can take longer than a standard escrow.
  • Finally, the HUD process takes approximately five days after the Buyer has signed the loan.

Realtors: Realizing these differences and delays can help you keep your Buyer calm and confident while working through an REO escrow.

Buyers: Knowing it can take longer to work through an REO escrow can help make the process much less stressful.

When all parties understand how these differences add time to the process, they can sit tight and allow the escrow officers to focus their time on processing the transaction. Ultimately, your patience can lead to a successful (and less stressful) transaction for everyone.

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What Buyers Need to Be Aware of After Close Of Escrow – Part 1: Taxes

As Escrow Holders we often get inquiries from Buyers and Sellers well after the close of an escrow. It is a common belief that our responsibility as Escrow Holder continues after the close of escrow, when, in fact, escrow no longer has any connection with the transaction once it is officially closed. As a neutral third party in the transaction, escrow may not always have all the answers but your escrow officer can guide you to a source that can help you.

In this series of posts, I will address some of the most common questions asked by new home owners after the close of escrow. This first post addresses the issue of taxes.

TAXES

Almost always, we get calls from Buyers after the close of escrow, asking about property taxes. As a new home owner it is important to remember the following dates:

  • The fiscal year begins July 1 and ends June 30 of the following year.
  • The first installment of taxes is due November 1 and is delinquent December 10.
  • The second installment is due February 1 and is delinquent April 10.

It is the Homeowner’s responsibility to make tax payments on time. Keep in mind the County Tax Collector will not waive tax penalties, regardless of the reason. To avoid paying any penalties, make sure to pay the bill on time. If you have not received a bill as the due date approaches, contact your County Tax Collector and request for a duplicate bill.

Keep an eye out for my next post where I will explain what a home buyer needs to know about the Residential Property Report.

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Per Diem: Two Little Words that Can Impact a Buyer in an REO Sale

Buyer’s of a “bank owned” property, or REO sale as they are often referred to, may come across some verbiage in the Banks Addendum to the Real Estate Purchase Contract that catches their eye: Per Diem Penalty. Escrow Officers are often asked, what does this mean?

Latin for “per day”, per diem has many uses. What per diem is referring to in this instance is in the event escrow does not close by the date set forth in the contract, the Seller can impose a daily penalty to the Buyer for each day beyond the initial agreed upon closing date until the day the escrow officially closes.

The amount of this penalty differs depending on terms of the contract. It can be a percentage of the purchase price or a set daily amount (ie $100 per day). It is important to note, agreements can be made between the Buyer and Seller to waive the penalty when applicable.

One way a Buyer can strive to close escrow on time and avoid penalties is to complete escrow and mortgage paperwork and provide requested documents in a timely manner. However, circumstances may still arise that are beyond the Buyer’s control. In this event, a Buyer should ask their agent to renegotiate the terms of the contract to extend the closing date or to waive the penalty with the Seller and Seller’s agent.

In REO transactions, as with any real estate transaction, it is very important to be sensitive to all time frames in order to alleviate unnecessary charges.

If you have further questions about the Per Diem Penalty, do not hesitate to contact your escrow officer for further clarification or leave us a note in the comments.

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