Principles of California Real EstateLesson 12: Closing Real Estate Transactions
ClosingClosing: Final stage in real estate transaction. Also called settlement.Buyer pays seller purchase price.Seller transfers title to buyer.
Escrow In California, closing process is usually handled through escrow.Escrow: Arrangement in which neutral third party holds money and documents for buyer and seller until transaction closes.
EscrowEscrow agentEscrow agent: Neutral third party selected to handle closing; also called closing agent.Chosen by agreement between buyer and seller.Often appointed in purchase agreement.Acts as dual agent, representing buyer and seller, until transaction is over.
EscrowEscrow instructionsThe parties usually give escrow agent written instructions for closing which:direct escrow agent to take necessary steps to close transactionspecify conditions that must be met before escrow agent releases funds or documents reflect contingencies and other requirements in purchase agreement
EscrowEscrow instructionsIf there is any conflict between escrow instructions and purchase agreement, later contract (the escrow instructions) prevails.
EscrowEscrow servicesEscrow agent may provide many services, such as:ordering title report and inspectionspreparing documentspaying off sellers loan and other liensprorating and allocating expensesdepositing and disbursing fundspreparing Uniform Settlement Statementsdelivering and recording documents
EscrowPurpose and benefitsEscrows main purpose is to ensure that:seller receives purchase pricebuyer receives clear titlelenders security interest is perfectedEscrows main benefits are:convenience: neither party is required to attend closing in personprotection: each party is protected from change of heart by other party
EscrowPurpose and benefitsDeposit into escrow is essentially irrevocable; once party has placed sum of money or document into escrow, she cant get it back except: according to conditions set forth in escrow instructions, orwith other partys consent.
EscrowRole of brokerReal estate broker isnt principal in escrow transaction and cant direct escrow agent during closing process.
EscrowAgents scope of dutiesEscrow agent can call for funding of buyers loan but does not have authority to discuss inspection results or order repairs.
Termination of EscrowEscrow will terminate when:transaction closesescrow instructions arent fulfilled by closing date (or within reasonable time, if no closing date specified), orbuyer and seller mutually agree to termination
Termination of EscrowEscrow does not terminate:unilaterally (action by only one party)by death or incapacity of either party
Termination of EscrowInterpleaderSometimes when transaction fails to close, disputes will arise between parties over funds or other items placed in escrow.If dispute arises, escrow agent should file interpleader action and let court decide who gets funds.Escrow agent should not try to decide dispute. (Not an arbitrator.)
Escrow LicensingIndependent escrow companies must be licensed by California Department of Corporations.Only corporation may be licensed:not partnership not individual
Escrow LicensingExemptionsThe following entities may provide escrow services without escrow license:bank or savings and loaninsurance companytitle companyattorney at lawreal estate broker handling escrow for clients transaction
Licensing ExemptionsReal estate brokersBroker may provide escrow services, and charge fees for those services, only in transactions in which they are also providing real estate services.
SummaryEscrowClosingEscrowEscrow instructionsInterpleaderIndependent escrow companyLicensing requirementsExemptions
Closing Costs/Settlement StatementsClosing costs: Fees and other charges related to real estate transaction that are typically paid at closing.Particular cost may be paid by buyer or by seller, or shared by both parties.Amounts may be paid to:other party, orthird party.
Settlement Statements Settlement statement: Document that sets forth financial details of transaction. Also called a closing statement.Shows how much cash:buyer needs for closingseller will receive at closing
Settlement StatementsDebits and creditsDebit: An amount to be paid by a party.
Credit: An amount to be paid to a party.
Settlement StatementsDebits and creditsClosing costs paid by one party to the other are a debit for one and a credit for the other.Debits and credits one party pays to or receives from a third party are a credit or debit to that party only.
Settlement StatementsDebits and creditsPurchase price: Buyers debit and sellers credit.Assumed loan: Buyers assumption of sellers loan is credit to buyer, and loan balance is a debit to the seller.
Settlement StatementsDebits and creditsPayoff of sellers loan: Debit to seller.No entry made on buyers side of settlement statement.Escrow agent requests beneficiarys statement from sellers lender, which states loans remaining principal balance.
Settlement StatementsDebits and creditsSellers reserve account: Funds the sellers lender required to be deposited to cover recurring costs. Also called impound or escrow accounts.Includes property taxes, insurance, assessments, and homeowners association fees.At closing unused balance is refunded, as credit to seller.
SummarySettlement StatementsSettlement statementCreditDebitPurchase priceAssumed loanPayoff of sellers loanSellers reserve account
Prorations Prorate: To prorate an expense is to divide and allocate it proportionally between parties, according to time, interest, and benefit.
Expenses commonly prorated include: property taxesmortgage interest paymentshazard insurance premiums
ProrationsGenerally, seller is responsible for these expenses during period of ownership but not beyond; buyer becomes responsible for these expenses after taking title.
Allocation of responsibility for these expenses must be detailed in settlement statement.
Settlement StatementsProrationsTo prorate an expense:calculate daily rate of expense (per diem rate)determine number of days party is responsible for expensemultiply number of days by per diem rate to determine that partys share of expense
ProrationsStep 1: Per diem rate To find per diem rate:annual expense: divide by 365 days (366 days in a leap year)monthly expense: divide by number of days in month when closing occurs (28, 29, 30, or 31)
ProrationsFormulasAlthough most closing agents use exact number of calendar days, state license exam may have questions that use simplified bankers year of 360 days (30 days each month).To be completely accurate, per diem rates should be carried to at least 4 decimal points.
ProrationsStep 2: Number of days Count number of days between closing date and beginning or end of month in which closing will occur (depending on whether expense is buyers or sellers responsibility).
ProrationsStep 3: Rate Days Final step is to multiply per diem rate by number of days, to get that partys prorated share.
Prorations Property taxes Property taxes are:sellers responsibility up to closing datebuyers responsibility from closing date and beyond
Prorations Property taxesIf taxes have been paid in advance:buyer debited for closing date and days following that which are covered by advance paymentseller credited for same amount
Prorations Property taxesIf taxes are paid in arrears (not yet paid):seller debited for days before closing date that the (buyers) tax payment will coverbuyer credited for same amount
Prorations Property taxesProperty taxes are levied once a year.In California, property tax year runs from July 1 to June 30.
Taxes are paid in two installments:first installment due November 1 (covers July through December)second installment due February 1 (covers January through June)
Prorating Property TaxesExampleA transaction is closing January 20. The years property tax bill was $1,752 and the seller paid the entire amount on October 30. How much does the buyer owe? (Use a 360-day year.)$1,752 360 = $4.87Count days: 11 (Jan.) + 150 (Feb.June, 30 5) = 161$4.87 161 days = $784.07
ProrationsInterest paymentsMortgage interest is paid in arrears.Example: Payment made on April 1 includes interest that accrued in March.So sellers last mortgage payment did not include interest for month in which closing will take place.Seller must pay this interest at closing.
ProrationsRental incomeIn addition to prorating expenses, some transactions also require proration of income (in sale of rental property).Rent is usually paid in advance, so seller must give buyer prorated share of any advance rent (for time past closing). Security deposits are not prorated. (Seller must transfer entire security deposit to buyer at closing, as lease continues.)
Settlement StatementsCash at closingTo determine balance due to seller (amount seller will take away from closing):add up all of sellers creditsadd up all of sellers debitssubtract sellers debits from sellers credits
Settlement Statements Cash at closingTo calculate balance due from buyer (cash needed for closing):add up all of buyers creditsadd up all of buyers debitssubtract buyers credits from buyers debitsBalance due from buyer is entered in buyers credit column.
Settlement StatementsFinal balancesBuyers column totals dont have to match sellers column totals; in fact, they vir