Got Escrow Questions? 
Ask Cynthia!

Cynthia Moller, Manager and Escrow Officer
661-250-8616

Welcome to ASK CYNTHIA, an informative question and answer Blog about real estate and escrow related topics of interest to Realtors.

Cynthia Moller, an escrow officer with over 23 years of experience, will answer your real estate questions.  Cynthia Moller has the unique experience of specializing in varied transactions including residential sales, short sales, REO’s, mobile homes, bulk sales and business opportunities including liquor licenses, multi-family, commercial and land transactions. 
 

Please feel free to browse recent topics below, and submit your questions to cynthiam@valleywideescrow.com .

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Got Escrow Questions? ASK CYNTHIA! Negotiating Between the First and Second on a Short Pay.

Short pays are challenging enough, but when you have to negotiate with first and second loans with different lenders, it is tougher still. 

I am beginning to see a pattern emerging, however, that might be helpful, so I thought I would share a recent scenario with you.  The pattern seems to be that although the “investors” seem to have very specific limitations as to what they will and won’t pay for certain closing costs, like the payoff on a second, HOA dues, closing costs, commission, etc.., the “investors” seem pretty comfortable with credits to buyer for closing costs.

In a recent escrow, the first and second would not agree.  The first only wanted to pay the second $3,000.00.  The second was insisting on no less than $4,450.00 (actually it could be a lot worse, as I am sure you all know…).

The purchase agreement called for the seller to credit the buyer 3% of the purchase price in closing costs, which neither the first or second had a problem with. 

After much back and forth, the first suggested that although their investor would not approve a dime over $3,000.00 be paid to the second, the investor would not have a problem increasing the closing cost credit to the buyer by $1,450.00.

Not being a bank myself, or, sadly, any kind of “investor”, I wonder what difference it makes what the money goes to, since it ultimately means the first nets $1,450.00 less either way, but that’s beyond me…

In order to make sure this worked for EVERYONE in the transaction, I had to talk to the buyer’s new lender, to make sure a closing cost credit in excess of 3% was okay.  Since this particular buyer is FHA, the new lender was able to give his blessing, and we were able to work this out.

Here’s an addendum to the purchase agreement that I suggested:

Buyer and Seller acknowledge that the ABC BANK, who holds the first trust deed loan of record, has given approval for a short pay, subject to certain terms, including the limitation that the second trust deed holder, XYZ BANK, is paid not more than $3,000.00 from seller’s proceeds.

XYZ BANK who holds the second trust deed loan of record, has given approval for a short pay, subject to certain terms, including the requirement that XYZ BANK is paid not less than $4,450.00 at close of escrow.

At close of escrow, Seller is to credit buyer through escrow the sum of $1,450.00, in addition to the 3% of the purchase price referred to in 25E of the purchase agreement dated January 8, 2009, to be applied toward buyer’s recurring and non-recurring closing costs, for a total credit to buyer of $9,429.00.

At close of escrow, Buyer shall pay the sum of $1,450.00 through escrow to XYZ Bank, to be applied to the negotiated payoff for seller’s second trust deed loan of record.

I believe this language works, because it is very clear what is happening, and it contains full disclosure to all parties.  The first is happy, because the HUD will show the seller paying only $3,000.00 to the second.  The second is happy, because they will receive $4,450.00 as they required, partially from the seller, and partially from the buyer.  The Buyer is happy, because he got a great deal on his dream home, and the Seller is happy, because he is able to avoid a foreclosure.

I look forward to working with you soon!

GOT ESCROW QUESTIONS? ASK CYNTHIA! HOA Dues on Short Sales

One of the big challenges I have been encountering lately on short sales is what to do about unpaid HOA dues and HOA liens.

California is not a “Super Lien State”, meaning our laws don’t give the HOA priority over home loans. Many short sale lenders are refusing to pay back HOA dues.  This of course does not make the HOA dues go away, and in many cases the HOA will have recorded a lien, which has to be paid in order to close escrow.

The remedies are:

1)       Try to renegotiate with the short sale lender to pay the back dues, try to make them understand that the lien must be satisfied for the transaction to close

2)       Try to negotiate with the HOA to take less than is actually due.  If the short sale does not ultimately close, and the house goes to foreclosure, the HOA gets nothing because their lien will be wiped out by the foreclosure.

3)       Negotiate with the parties to the transaction (buyer, seller and SADLY agents) to get the back dues paid.

It is very important during the short sale approval process to have your seller keep you up to date on the amounts due the HOA.  It is sometimes difficult for escrow to obtain the amounts due from the HOA Management Companies (who often want up front fees to issue statements), but your seller should be getting frequent statements in the mail.  If your seller keeps you up to date, we can have accurate figures for the HUD statements we are providing the short sale lenders.

Just a thought:  Sometimes as a listing agent you have the opportunity to work with a seller in the early stages of a short pay transaction.  By early stages, I mean when the seller is making the decision to stop making payments on their house or condo, and has decided that they are going to pursue a short sale, or possibly let the house go to foreclosure.  Your seller may be unable to pay the high monthly house payment (which of course can be thousands of dollars).  In these early stages, they may be willing to continue to make the HOA payments each month, which by contrast is a very small monthly expense.  If you can convince your seller early in the process to keep their HOA dues current, it will save a lot of headaches when your short sale is ready to close.  As I mentioned…it’s just a thought…

Please call me to help you on your next escrow!

Got Escrow Questions? ASK CYNTHIA: Home Warranty on Short pays

I recently had a short pay escrow, and the buyer’s inspection revealed that the air conditioning was not working.  It made me wonder why the property wasn’t covered by a Home Warranty with Seller’s coverage, since the seller definitely did not want to pay for the repair.

This “Ask Cynthia” is a little different, because what I have done is interview Dawn Zirbel of First American Home Warranty, to ask her to explain how Seller’s coverage works on a short pay listing.

My questions are in black, and Dawn’s answers are in red:

1)      Do you think listing agents should order seller coverage on their short pay listings? Not always. .Each home is different. If an Agent wants seller's coverage it must ALWAYS be ordered before the home inspection. You can and should always call Dawn and discuss it prior to making a decision.

2)      How much does the seller’s coverage cost? It can range from 74 cents to $1.09/day, depending on the coverage ordered.

3)      Is seller’s coverage any different than buyer’s coverage? Seller’s coverage is limited in the slab leak limits and a/c limits and to six months coverage (you may elect to cover just the basic home warranty items OR cover the air conditioning and First Class Upgrade items..........)

4)      When does the seller’s coverage have to be paid? At the close of escrow. If there is no close, no monies are due.

5)      What if the short sale bank does not approve the payment of Home warranty? The buyer or agents may select and pay for seller's coverage.

6)      What happens if something covered by home warranty needs repairs during the listing period? The parties call for service. The service fee of $55 is ALWAYS due. Normal conditions and exclusions apply.

7)      What happens if First American makes repairs during a listing, but the short sale never gets approved or never closes (and property gets foreclosed)? First American does not and can not collect payment if there is no close of escrow (which is why Dawn does not waive service fees during seller's coverage.).

Thank you Dawn for taking the time to answer my questions.  Agents, be sure and contact Dawn to discuss seller’s home warranty coverage on your short pay listings. 

I look forward to working with you on your NEXT DEAL!

Got Escrow Questions? ASK CYNTHIA! Power of Attorney Forms

I have had a couple of transactions recently where someone had to sign with a Power of Attorney, and it brought up a few questions, so I thought I would pass the information along.

The most important things to know about a Power of Attorney (POA) form are the following:

(1)     Not all POA forms will work for a Real Estate transaction.

(2)     The POA form will need to be approved by the title company to make sure they meet their requirements if the Power of Attorney is to be used for a document to be recorded at close of escrow (like a Grant Deed, a Quit Claim Deed or a Deed of Trust).

(3)     The POA form will need to be approved by the Lender if they are going to be used to sign loan documents.

(4)     The POA form will need to be notarized, and the original will generally need to be submitted into escrow for recording at close of escrow, if the Power of Attorney is to be used for a document to be recorded at close of escrow (like a Grant Deed, a Quit Claim Deed or a Deed of Trust).

(5)     A title company generally does not like to see a POA form that is more than a couple of years old, although this will vary from company to company.

(6)     If the buyer and/or seller is in a family trust, it gets a little more complicated, and the title company may have to review the trust agreement to see if a POA is allowed by the trust.

When signing with a Power of Attorney, a special signature is always required.  

If Bob Jones gives his wife Sara Jones a Power of Attorney form, Sara will have to sign the following everywhere Bob would normally sign:

Bob Jones, By Sara Jones, His Attorney In Fact.

If Sara Jones gives her husband Bob Jones a Power of Attorney form, Bob will have to sign the following everywhere Sara would normally sign:

Sara Jones, By Bob Jones, Her Attorney In Fact

NOTE:  If your client tells you they already have a POA form, please get it to escrow EARLY in the process, so we can get it approved.

If you know that your buyer and/or seller will be out of town or otherwise unavailable for the escrow closing, ask your escrow officer to prepare a power of attorney during the listing period or early in the escrow, so that there is plenty of time to get it signed and notarized.  We have special forms which meet the lender and title company requirements.

Thank you, and I look forward to working on your NEXT DEAL!

Got Escrow Questions? ASK CYNTHIA! Short Pay "Offer Fatigue"

I just wanted to give you a little reminder about multiple offers on those pesky short pay listings.

I can see where over the several months that you may be babysitting a short pay listing, with various buyers dropping in and out, an agent could definitely suffer from “Offer Fatigue”, (just made that up, good huh?) and get a little sloppy with the counter offers.

I was recently working on a short pay where the SELLER got cold feet at the last minute (stay tuned, we are still trying to save it). 

The listing agent pulled out the file copies to look for the counter-offer and short pay addendum, to defend the seller and show the buyer’s agent that the short pay (not yet approved) was a contingency of the deal. 

This was the 5^th or 6^th offer during the short pay process, and the listing agent, suffering from “Offer Fatigue”, hadn’t bothered to counter this particular offer, and make the short pay approval a contingency.  NOT GOOD.

I just want to remind you to treat all your short pay offers as REAL, and counter them, make sure buyer is aware that certain “seller” costs may not end up being paid, establish the short pay contingency if the offer doesn’t state it, and set the time tables to start from short pay approval, if that is what you want. 

I have sample counter-offer language in previous “Ask Cynthia” columns, if you need them, send me an email.

With any luck, and a lot of determination, one of those offers will be the one we close!!!!!!

Got Escrow Questions? ASK CYNTHIA! Transfer Tax on REO Transactions

QUESTION:  My buyer is purchasing an REO. In contract it states:

TRANSFER TAXES/TAX STAMPS: Seller is exempt from payment of state taxes and tax stamps on deeds, mortgages and notes. (12 U.S.C. 1452 (e) and if payment of such state taxes or stamps is necessary to record the deed or mortgage, the tax will be paid by Purchaser and will not be considered part of closing costs.

The purchase price is $315,900.  How much will the buyer pay or how do I calculate?

ANSWER:  While the bank may consider itself “exempt” from paying transfer tax, the Los Angeles County Recorder, the agency that collects the tax at closing, will not agree.  Because of the language in the REO Contract, your buyer will have to pay the transfer tax at closing.

Transfer tax must be paid on deeds recorded in connection with a sale transaction.  Transfer Tax isn’t required for non-monetary transfers, such as a Quit Claim deed between spouses, a Deed given as a gift, a Deed recorded to change a name or correct spelling, or a Deed to put a property in a family trust, to name a few.  When the Deed is exempt from transfer tax, there is special language that we type on the deed to explain to the Recorder’s Office why transfer tax should not be paid.

To calculate a transfer tax, the County charges $1.10 per $1,000.00 of consideration, rounded up to the nearest $500.00.  So, for your sales price of $315,900.00, I would first round up to $316,000.00, and then multiply 316.00 X 1.10, which equals $347.60.

It gets much more expensive if the property is within the City of Los Angeles.  This is because in addition to the $1.10 per thousand charged by the County of Los Angeles, the City of Los Angeles charges $4.50 per thousand for a total of $5.60 per thousand.  This changes the amount of transfer tax from $347.60 for a property outside of the Los Angeles City limits, to $1,769.60 for property within the City of Los Angeles.

CONTINUATION:  Good Morning Agents!  I had two people ask me the same follow up question regarding the buyer paying transfer tax on an REO transaction, so I thought I would share it with everyone, in case I confused anyone yesterday.

QUESTION: Sorry, if what I hear you saying is, the bank is responsible, but because of the wording in that particular contract the buyer was responsible, correct?

ANSWER:  Yes, let me clarify.  A seller generally, customarily pays transfer tax here in Southern California.  It is ALWAYS negotiable as to who pays it, but it is the CUSTOM that the seller pays it.  There is nothing special about an REO transaction that makes the buyer pay the transfer tax, it was just this particular contract, prepared by the REO Bank, which required the buyer to pay the transfer tax.  Thank you for the question.

Got Escrow Questions? ASK CYNTHIA! Short Pay Counter Offer Language.

The existing lender’s on short pay transactions are not parties to the escrow, however, they will arbitrarily “disallow” certain costs, which the seller may normally pay in a transaction.  The fact that the short pay lender won’t authorize the payment from the seller’s account does not, however, make these closing costs go away.

As a suggestion to Listing Agents on short pay transactions, is that you may want to include language in your counter offers, to introduce the possibility of having the BUYER pay closing costs disallowed by the short pay lender.   Something like this might work:

Buyer acknowledges that costs identified to be paid by seller in the Purchase Agreement are subject to approval by the seller's existing lender as a part of the short pay approval process.  Buyer acknowledges that seller will not deposit funds at close of escrow to pay costs disallowed by the seller's existing lender.  Buyer acknowledges that in order to close escrow, buyer may be required to pay some or all of the seller's expenses including Home Warranty, Homeowner's Association Transfer fees, Document Fees, delinquent HOA dues and Zone Disclosure Report fees, and certain Title fees normally paid by seller including sub-escrow fees, wire fees and messenger fees.

Of course, if you represent a buyer, you may not want to have your buyer agree to a counter like this, or you may want to cap the potential contribution of the buyer to a certain dollar amount.

GOT ESCROW QUESTIONS?  ASK CYNTHIA!  Notes on Short Pay Escrows

Hello Agents!  I don’t have a question and answer format for “Ask Cynthia” today, but I thought I would pass on to you some notes and Short Pay Escrows.  The question was asked “what can we all do to improve the process while waiting for bank approval?”   These are my thoughts:

For my part, communication between the listing agent and escrow during the short pay negotiation period is KEY.

Help us help you:

(1)  We need to order a Preliminary Title Report during the listing period.  Once it comes in, I'll review it, and I'll send you a copy to review.  Together we can work to avoid surprises.

(2)  We need the seller's Statement of Information (available online under “forms” at valleywideescrow.com), to have title run the seller's name for liens. Again, surprises are no fun the night before recording!

(3)  We need HOA statements (HOA won't talk to escrow without upfront money, but your seller should be getting some kind of bills from HOA) and we need them on an ongoing basis because penalties and legal fees can escalate as time goes on.

(4)  When you request a HUD, give us a copy of the offer, so we can help you make sure we don't miss "little" things, like closing cost credits or City of Los Angeles Transfer Tax, to name a few.

(5)  Have that termite inspection, lets see what's out there early in the process!

(6)  If you have a conversation with a negotiator, and they verbally tell you what they will and won't pay, please take notes for your escrow officer!

THE MOST IMPORTANT POINT TO HELP A SHORT PAY CLOSING GO SMOOTHLY IS:

(7)  We need the opportunity to update your HUD's.  If you get approval based on a two month old HUD statement, the numbers aren't going to work. When you are getting close to approval, ASK FOR AN UPDATED HUD!!!!!

Got Escrow Questions? ASK CYNTHIA! Non-Borrowing Spouses

Question:  Cynthia, my buyers are a married couple.  It seems that the Hubby has less than stellar credit, but he is uncomfortable signing a quit claim deed.  What can we do?

Answer:  The first thing to do is to ask the lender.  Many lenders will allow both spouses to be on title, with only the well-qualified spouse on the loan.  This referred to as a "non-borrowing spouse".  The non-borrowing spouse will be on the grant deed, and will have to sign a portion of the loan documents, including the Deed of Trust.  This is becoming more and more common, but it will not work in all cases with all lenders, so ask early.

Let me give you a little more info about quitclaim deeds.  Sometimes in escrow, one or the other spouse can get "offended" by the idea of having to sign a quitclaim deed.  If a married woman/man wants to buy something by herself/himself, why does she/he need her/his spouse to sign off anyway?

Quitclaim deeds are required by the title company, and sometimes even the lender to confirm "sole and separate property" of a spouse.  Since we live in a community property state, there can be an assumption of community property interest, and the quitclaim just confirms that the spouse is waiving any potential interest.

Sometimes a seller who has owned a property by themselves for a long time (maybe they bought it before they got married) will have to get a quitclaim from their spouse when they sell, because the title company wants to make sure that the spouse acknowledges that any potential community property interest they have is waived.

The toughest part is when a couple is divorcing.  Until that divorce is final, chances are any husband or wife buying by themselves is going to have to have their soon-to-be-ex spouse sign a quitclaim.  Let your escrow officer know early in the process so we can get documents prepared, and can deal with getting signatures in plenty of time before closing.

Thanks for the opportunity to give you a little information.  I look forward to working with you and taking great care of your escrows!

GOT ESCROW QUESTIONS? ASK CYNTHIA! Property Tax Assessments

Question:  Cynthia, my buyer is in escrow for an “REO” property which was foreclosed by a bank.  My buyer wants to know if the Los Angeles County Tax Assessor will automatically reduce the property taxes to my buyer’s purchase price after the close of escrow, or does my buyer have to file some type of request to have the taxes reduced?

Answer:  An excellent and timely question!  For years buyer’s worried about Supplemental Tax Bills, which were generated by the County after escrow closed, because property values were always going up, up, up!  Now we find ourselves in rather “different” market conditions. 

If you’ve been in California as long as I have (which is all my life), you remember hearing about “Prop 13”.  This law limited the County Tax Assessors ability to re-asses a property’s value only in the event of a sale or permits pulled for improvements on a property.  Lucky for buyers in this market, this is a two way street.

At close of escrow, the Preliminary Change of Ownership Report (also known as a “PCOR”) is filed with the Grant Deed.  This informs the Tax Assessor of the new buyer’s name, mailing address, and the sales price of the property.  The assessor’s office then adjusts the property taxes, AS OF THE DATE OF ESCROW CLOSING, to the new sales price.

Here’s the kicker:  According to the LA County Assessor’s Office Official Calendar, January 1 of any given year is the exact day that the Assessor looks at any given property to determine value for the bill that will be issued THE FOLLOWING FALL.  This means that buyer’s who have closed escrow AFTER JANUARY 1, 2008, stand the chance of receiving a tax bill in the Fall, based on the previous owner’s value. 

The earlier in the year your buyer closes, the more likely that they will receive a re-assessed tax bill in the Fall.  The later in the year that an escrow closes, the more likely that your buyer will receive a tax bill that doesn’t reflect the new assessed value. 

The Los Angeles County Tax Collector will always take the position that a buyer has to pay what is billed, when it is due, to avoid paying a penalty.  This means some buyers will have to over-pay their property taxes initially, and then wait for a refund, in order to avoid paying a late penalty to the Tax Collector.

HERE’S A LITTLE UPDATE BASED ON A “TIP” I RECEIVED FROM AN AGENT THIS MORNING:

After receiving a “tip” this morning, I called and spoke to an appraiser in the LA County Assessor’s Office.  He confirmed to me that the Assessor has the right to assess a property at a value higher than the reported sales price if, based on the Assessor’s view of other comparables, they feel the Bank/Seller “dumped” the property at a below market value.  When I asked the gentleman at the Assessor’s Office for some written information regarding how this works, he told me to go on the California State Board of Equalization website, and if I read all the information on Proposition 13, I would find it “somewhere” in there.

Got Escrow Questions?  ASK CYNTHIA!  Title Insurance

Question:  Cynthia, my Buyer asked me why there is a title insurance charge on their closing statement, when on the purchase agreement we indicated that the seller was to pay title insurance.  Also, what is the difference between an ALTA policy of title insurance and a CLTA policy of title insurance?

Answer:  In the typical escrow, where the buyer gets a new loan, there are two policies of title insurance. 

A CLTA (California Land Title Association) policy (also known as an Owner's Policy) is for the benefit of the BUYER, and in Southern California, it is typically paid for by the SELLER, based on how the purchase agreement is filled out.  (In escrows from about San Luis Obispo to the rest of Northern California, it is typical for the BUYER to pay for the owner's policy of title insurance.) 

An ALTA (American Land Title Association) policy (also known as a Lender's Policy) is for the benefit of the buyer's Lender, and is paid for by the BUYER.

The Owner's (CLTA) policy of title insurance is generally quite a bit more expensive than the Lender’s (ALTA) policy, because it covers the buyer for the full purchase price, and the ALTA policy is only for the loan amount.  Title companies give a discount on the ALTA policy when it is purchased with the CLTA policy, so at close of escrow, the buyer typically pays about 1/3rd of what the seller pays for title insurance.  The seller can get a discount (known as a short term rate), if the property has had title insurance within the previous 5 years from most title companies.

Other title charges paid by the BUYER include Endorsements (kind of like "optional" coverage to add to a basic ALTA policy, but required by the buyer's lender), 1/2 of the sub-escrow fee (this is a fee the title company charges for taking care of funds from the buyer's new loan and payoff to the seller's existing lenders), messenger and wire fees, as well as recording fees charged by the County.

Other title charges paid by the SELLER include County and /or City transfer tax, 1/2 of the sub-escrow fee, messenger and wire fees, and in the case of rural property (like property in Acton for instance) and some types of commercial property, the title company may also charge an inspection fee.  The seller may also pay recording fees, in certain instances, like when the seller has a quitclaim recorded from a spouse not on title.

What I’ve given you here about title insurance is very simplified. There are other differences in the coverage between an ALTA and CLTA policy of title insurance, but it is a bit technical, and if you want more information, I suggest that you contact a title company.

If you have questions, please send them my way.  Call me to open escrow; I would love to work with you and your clients!

GOT ESCROW QUESTIONS? ASK CYNTHIA! Recurring and Non-recurring Closing Costs

Question:   Cynthia, how does a lender define Recurring and Non-Recurring closing costs?  Will Banks selling Foreclosure properties pay Recurring closing costs?

Answer:  The best way to define Recurring and Non-Recurring closing costs is that Recurring closing costs are ongoing expenses of home ownership that buyer will have after the close of escrow, and Non-Recurring closing costs are costs that are paid only at closing. 

Ongoing expenses, or Recurring Closing Costs, include interest on buyer’s new loan, property taxes, fire insurance, private mortgage insurance (PMI) or on FHA loans mortgage insurance premiums (MIP) and HOA dues.  At closing, the buyer can expect to pay as much as a month of prepaid interest, twelve months or more of fire insurance, one month or more of HOA dues, two months of PMI and/or MIP and property taxes that can be as little as a few days or several months.  The amount of recurring closing costs will depend on the type of loan the buyer is getting, if the buyer is going to impound taxes and insurance on their new loan, and the time of year that the escrow is closing.

Non-recurring closing costs are Loan Fees, Escrow Fees, Title Insurance premiums and fees, Endorsements, Recording Fees, Notary Fees, Messenger Fees, Realtor Transaction Fees, etc.  These are fees and charges in connection closing of the escrow, not ongoing expenses.

Whether or not the seller can pay Recurring AND Non-Recurring closing costs on behalf of the buyer will depend on two things:

First of all, the buyer’s new lender may limit how much and what type of closing costs can be paid by seller on behalf of the buyer, depending on the type of loan the buyer is getting.

Secondly, the seller, either an individual seller or a Bank-Owned property, or even a lender approving a short sale, may counter to limit what they pay to Non-Recurring closing costs only.  This is an attempt by the seller to limit their exposure to the buyer’s expenses.  There is really no hard and fast rule as to which type of seller will or will not pay the buyer’s Recurring closing costs.

The most important thing to remember is that if you negotiate a large credit on behalf of your buyer, make sure, by working with your Lender and Officer that the buyer’s expenses will use up all of the credit.  Remember, in our current lending environment, there are no credits to the buyer allowed in escrow for things like repairs, carpet and painting allowances, etc.

Please keep your questions coming.  Give us a call to open escrow, and we will take good care of your clients.

GOT ESCROW QUESTIONS?  ASK CYNTHIA!  Property Trades

Question:  Cynthia, I have two clients who have agreed to trade houses, but I am not sure how to put together a trade.

Answer:  It’s great when you can put a trade together.  It can get very confusing if you think about the transaction as a "trade", or one single transaction.  The best way to approach a transaction like this is to think about it as two separate and distinct deals.  You will need two separate purchase agreements, because each of the clients is both a seller on one property, and a buyer on the other.

Take the first client, and look at the property they own:

(1) What is the value (and will it appraise) of this property?

(2) How much does the owner owe to their existing lenders?

(3) How much will the owner net when the escrow closes?

Now take that same client, and look at the property they want to purchase:

(1) What is the value (and will it appraise) of this property?

(2) Taking the net from the previous property, will this client qualify for the loan they need?

(3) Figure out how much total cash will be needed at closing, including closing costs.  Are they netting enough from their sale, or will they need to come up with additional cash?

You need do the same thing for the other client.  One or both of the parties may want to add cash to the transaction, to reduce the amount of loan they end up with on their purchase, or they may want to keep some of the equity from their sale, and get a bigger loan. 

With the help of your favorite escrow officer, and a good lender, you can do net sheets and buyer's estimates, and put together a smooth transaction for all involved, generate some healthy commission checks, and move on to the next deal!!!!

I look forward to helping you put together trades, sales and purchases, and any other type of escrow transaction.  Please call to open escrow on YOUR NEXT DEAL!

Got Escrow Questions?  ASK CYNTHIA!  Mobile Homes

Question:  Cynthia, I have been showing my buyers mobile homes, and they now want to write an offer.  Since I have never worked on a mobile home transaction, can you give me any pointers?

Answer:  The first pointer I can give you is to make sure you write Valleywide, Cynthia Moller into the contract!  My assistant Lynn and I work on Mobile Home Escrows, and are familiar with the local parks, lenders and transfer paperwork.

The second pointer I can give you is to make sure your buyer applies with the park manager as soon as possible.  I have been involved with several transactions where the buyer qualified for new financing, but was rejected by the park.  The parks do a background check and credit check, and even check out the size of the buyer's dog (in some cases), so you never know what might cause a buyer to be rejected.  Many agents that sell mobile homes don't even open escrow until after the buyer gets park approval.

The third pointer I could give you is to make sure you have a home inspection done by an inspector familiar with mobile homes, and make sure you write a home warranty into the contract.

Finally, as you would on any transaction, have your buyer pre-qualified by a mobile home lender.  I have the names of a few lenders in the area, and would be happy to give you a referral.

I look forward to working with you, give me a call and let’s open escrow on YOUR NEXT DEAL!

GOT ESCROW QUESTIONS?  ASK CYNTHIA!  Quitclaim Deeds

Question:  Cynthia, my client just found out she has failing health, and wants to add her kids to title on her house, can you prepare a quit claim deed?

Answer:  Escrow Officers get asked to do these kinds of deeds, along with quitclaim deeds between spouses, all the time.  The short answer is that yes, we know how to do them, and we prepare them during escrow all the time.  The long answer is that when we don’t have an open escrow, preparing deeds as a favor to a client can be a very bad idea.

A quitclaim deed or a grant deed is no substitute for estate planning.  If a person adds their kids on title to someday avoid probate, they (or their heirs) may be for a big surprise.  Adding their kids on title could create the potential for liens on the property, if their kids get sued, have to file bankruptcy, or end up in trouble with the IRS or other taxing agency.  Changing title to a property with out the lender’s consent could result in the mortgage loan being called due.  A quitclaim or other deed recorded without title insurance can cause problems getting title insurance in the future as well.  Most importantly, adding someone to title could have tax ramifications that would be avoided if the parents created a family trust or other estate plan instead.

A quitclaim deed seems like an easy, inexpensive way to take care of the future, but the money spent on consulting with an attorney or tax accountant, and exploring the possibility of creating a family trust, could save the family many thousands of dollars in the long run.  Encouraging your client to get to estate planning advice, from someone qualified to give it to them, will serve their needs, and your reputation much better than helping them to get a quitclaim deed prepared.

Do you have escrow questions?  If you do, please send me an email, or give me a call.  I won’t quote you, and chances are, if you have a question, a lot of other people probably wonder about the same thing!

GOT ESCROW QUESTIONS? ASK CYNTHIA: City of Los Angeles Requirements

Cynthia, what is a 9A report, and what are the requirements of a seller in the City of Los Angeles?

Answer:  There are three things that impact a seller for any residential property in the City of Los Angeles:

(1)     Increased Transfer tax.  (This applies to all real estate, residential and non-residential.)  The County of Los Angeles charges a seller $1.10 per thousand dollars of the purchase price.  When the property is in the City of Los Angeles, you have to add $4.50 per thousand.  At a sales price of $400,000.00, properties outside of the City of Los Angeles would pay $440.00.   If the property is located in the City of Los Angeles, the total County and City Transfer tax is $2,240.00.  BIG DIFFERENCE!

(2)     Certificate of Compliance for Water Conservation Retrofit, for the Department of Water and Power. This Certificate of Compliance has to be signed by a Licensed Retrofitter, a Plumbing Contractor, or a Licensed Real Estate Agent, as well as the buyer and seller, certifying that the property is in compliance with City of Los Angeles ordinances regarding low flow toilets and showers.  The completed Certificate of Compliance is filed at close of escrow with a filing fee of $15.00 paid by the seller, by the Escrow Officer.

(3)     Residential Property Report (formerly known as a 9A report).  This report is required and issued by the City of Los Angeles Department of Building and Safety.  It has many different aspects to it.  First of all, the purpose of the report is to inform buyers of potential special assessments to properties, such as for new sewers or sidewalks, which the Department of Building and Safety may be working on.  Over the years, Building and Safety has tagged other items onto this report in order to make sure properties are in compliance with minimum requirements.  The seller has to complete an application, (which we have in Escrow) including answering questions about the property’s compliance with the minimum requirements.  This application is then sent to building and safety during escrow and a fee of $70.20 is paid at the time of application.  During escrow, the report is provided to the buyer to approve. 

Here are the things covered by the Residential Property Report:

a.      Smoke Detectors

b.      Water Conservation (yeah, the same as the Certificate of Compliance for DWP)

c.       Impact Hazard Glazing on sliding glass doors and shower doors

d.      Seismic Gas Shut Off Valves

e.      Oak Tree compliance (for properties over 1 acre)

f.        Specific requirements for bars on windows of sleeping rooms

g.      Apartments of three or more units have to have security lighting and locks

The best way I have found to deal with items (2) and (3) during an escrow, is to employ a retrofit company to inspect the property.  They will issue and sign the Certificate of Compliance (item 2 above), and they will let the seller know if the property is in compliance with the Department of Building and Safety Requirements for the Residential Property Report (item 3), so that the Seller can complete the application.  They will typically give an estimate of any work that needs to be done to bring the property into compliance.

Give me a call, to care for YOUR NEXT DEAL!

GOT ESCROW QUESTIONS?  ASK CYNTHIA!  Cancellations

Question:  Cynthia, my buyer couldn’t get approved for a loan, and so we cancelled escrow.  The seller hasn’t signed cancellation instructions yet, how can my buyer get the deposit back?

Answer:  Just to let you in on a little escrow secret, there is a draw full of pending cancellations in the office of every Escrow Officer.  Some files are in that drawer for a few days or even weeks, some of those grow spider webs, gather dust, and remain for years.

The CAR contract is very clear about the necessity for mutually executed cancellation instructions by the buyer and seller before funds can be released from escrow (See page 5 of the 8 page Deposit Receipt, Item 14E.) In that same section, the contract refers to civil penalties that a party might have to pay if the “unreasonably” withhold cancellation instructions, but that would be enforced by a court, not by escrow.

There are only three ways for your buyer to get their funds back, or for a seller to keep the buyer’s deposit when a file cancels:

(1)     Mutual Agreement:  The CAR Cancellation of Contract, Release of Deposit and Joint Escrow Instructions form, which you can get on winforms, is one way of getting a mutual agreement.  Just make sure it is completed, including escrow number, and signed in all the places required.  The party (buyer or seller) who initiates the cancellation will need to sign the form twice, the other party only once.   Make sure the boxes are checked in the bottom section to indicate what is to be done with the deposit. 

In the absence of the CAR Cancellation form, a written request can be submitted to escrow, and we will draw cancellation instructions to be signed by both parties.  Sometimes we get conflicting instructions where the seller asks for the deposit, and so does the buyer.  One thing we can’t do in escrow is act as the judge and jury and make a decision as to who is right.  We will send out two versions of the cancellation instructions, and wait until we get one back signed by both parties.

(2)     Arbitration Award:  This means the parties go to arbitration, and a decision is made there.  In 23 years of escrow, I have yet to actually see one of these, but I know they exist.

(3)     Judicial Decision:  This means the parties have gone to court (if the deposit is small enough, small claims court can work well), and have gotten a court order.  Sometimes a buyer will go to small claims court and try to name the Escrow Company, because they don’t understand our role as neutral third party.  The judge will explain to them that they need to sue the seller, and the buyer will have to start over.

My advice to a buyer or seller who is frustrated in their attempt to get a deposit when an escrow is cancelled: Don’t mess around, go to small claims court.  It is a relatively painless way to prevail if you are in the right.

GOT ESCROW QUESTIONS? ASK CYNTHIA! Third Party Deposits

QUESTION:  Cynthia, my buyer gave me a cashier’s check to open escrow, and the remitter’s name was different from the buyer.  How do you handle this in escrow?

ANSWER:  This is what is known as a “third party deposit”.  Escrow receives the authority to deposit and use the good faith deposit from the purchase agreement (and joint escrow instructions) which are signed by the buyer and seller.  A “third party”, such as a parent or non-buying spouse, is not a party to the purchase agreement.  For this reason, escrow will require an instruction by signed (and notarized) by the third party, to give escrow permission to use the funds.  If the third party makes additional deposits later in the escrow, like contributing to the closing funds, a new instruction will again need to be signed and notarized.

When dealing with a third party deposit, make sure you check with your buyer’s lender.  As we are all painfully aware these days, underwriting guidelines have gotten very strict and the buyer’s lender is going to want to “source” all funds in escrow.  So borrowing the good faith deposit from the Mother in Law may seem like a great idea, but it isn’t such a good idea if it is going to cause underwriting problems down the line.   There are many loan programs, including FHA, that allow gift funds, but it’s a good idea to clear it with the lender before funds are deposited in escrow.

In the case of a cancellation, the funds will not automatically be returned to the third party, unless buyer and seller agree to it on the cancellation instructions.

Please send me your escrow questions, and I will do my best to research the best possible answers for you.

I look forward to working with you, on YOUR NEXT DEAL!

GOT ESCROW QUESTIONS?  ASK CYNTHIA!  Family Trusts

Question:  Cynthia,  my client's parents home is in the name of the parents trust, and both parents are now deceased.  What will my client need in escrow to show that she can sign for the trust, since she is the Executrix of their estate?

Answer:  First of all, of course the client needs to speak to her attorney.  A lot of time the client will be unaware that their attorney has already taken care of the necessary paperwork.

Basically, here is how it works.  In order to convey title to this home two things need to be established:  (1) The death of the previous trustees (the parents), and (2) The name of the Successor Trustee.

The title company will require, in most cases, the following:

(1) An original County Certified copy of the Death Certificate

(2) A complete copy of the Original Trust Agreement, and any amendments

(3) A current Notarized Trust Certificate (escrow has the form)

(4) An Notarized "Affidavit, Death of Trustee", (escrow has this form as well)

Escrow and the Title Company will review the trust agreement to confirm that your client is the Successor Trustee named in the trust, and to make sure that the trust doesn't required multiple successor trustees.  The fact that your client is the Executrix of her parent's estate does not necessarily make her the Successor Trustee, although it is very likely.

At the close of escrow, the Affidavit Death of Trustee will be recorded with the Original Certified Death Certificate attached, along with the Deed to the buyer.

When escrow closes, the proceeds from the sale need to be disbursed to a bank account in the name of the trust, and sometimes the Successor Trustee will have to arrange to have an account opened, since not everyone puts their bank accounts into their trust.  Then, after escrow closes, the Successor Trustee can arrange to disburse the money between the various heirs.   

I would like to take excellent care of YOUR NEXT DEAL, so give me a call!

Got Escrow Questions? Ask Cynthia! Short Pay Pre-Escrows

Question:  Cynthia, I have several short pay listings, and I haven’t opened any Pre-Escrows on them yet, because I didn’t want to waste your time working on a transaction that might not go through.  Is this a good idea?

Answer:  First of all, let me assure you, you are not wasting escrow’s time when you give us the opportunity to work with you.  We are all in this crazy market together.  Short pay transactions can be challenging, and we want to assist you in every way that we can.

I think Valleywide Escrows “Quick Start” pre-escrow program is very important to take advantage of on your short pay transactions.  I’ve spoken about this before during the marketing meetings, but I really think it is worth repeating.

Here is what I suggest is the best way of using the Quick Start program on your short pay transactions:

(1)     Print the “Seller Payoff Authorization” and the “Statement of Information” sheets from our website at  www.valleywideescrow.com/forms.htm, and have your seller complete them.

(2)     Contact Valleywide Escrow with these forms, together with the Quick Start form, also from the website.

(3)     As we will provide you with HUD statements as required by the Short Pay lender, a copy of your listing agreement is helpful. 

(4)     As you get ready to submit offers to the lenders, I like to get copies of offers from potential buyers, to prepare the HUD statements as accurately as possible.

(5)     Ask you seller for their most recent HOA bill, if applicable, so we now how far behind they are in dues.

Here’s what we can do for you:

(1)     Open title, and ask the title officer to run the seller’s Statement of Information, to look for general liens, such as Tax Liens and Judgements

(2)     Periodically request updates from Title to check for filing of Notices of Default, and/or Notices of Sale

(3)     If you want, we can order payoff statements from the existing lender to verify what the current full payoff amounts are, and to get an idea of how behind your seller might be.

(4)     Verify unpaid property taxes that might affect the net payoff amount.

(5)     Prepare estimated net sheets, so you can see approximately what your listing amount might net the lender.

(6)     Provide you with HUD-1 statements, based on the offers you receive, so you can provide them to your short pay lenders.

(7)     Be ready to open and close escrow as quickly as possible once you get that short pay approval!

Thank you for your time, and I look forward to caring for YOUR NEXT DEAL!

Got Escrow Questions? ASK CYNTHIA: Lennar Charitable Trust

Cynthia, what is this item on the prelim that shows a Private Transfer Fee to Lennar Charitable Trust?  Will this lien be eliminated at the close of escrow in the way a seller’s existing loan is eliminated at closing?

Answer:  The Lennar Charitable Housing Foundation is a permanent item against the title of the home.  At closing it is satisfied by payment, but it is not removed.  In this way, it is more like property taxes than it is like a seller’s loan.

Fortunately, unlike some Private Transfer Fees which may not be very transparent, and are sometimes difficult to discover, the Lennar Charitable Housing Foundation records a separate, distinct document that calls for the payment of 1/20^th of one percent of the sales price, each and every time the house is sold. 

On a recent transaction in the Galleria at Alta Vista tract, a sales price of $440,000.00 resulted in a fee of $220.00.  During escrow we ordered a demand from Lennar, and it was paid by title at the close of escrow.  This satisfies the lien, until the new owner in turn sells the home some time in the future.

A link for the website for the foundation is www.lchf.org

On the website, it gives a lot of information about how the funds are spent, which is for transitional housing for victims of domestic violence, unemployment, crisis pregnancies and catastrophic illness.

GOT ESCROW QUESTIONS?  Ask Cynthia: FHA Costs for Buyer

Cynthia, if I am going to write an FHA offer for my buyer, how do I determine how much to ask for in closing cost credits from the seller?

Answer:  This is an excellent and timely question!  I am hoping that FHA loans are going to be a much needed push for our slower than usual market, and I think we all need to do what we can to educate ourselves about this helpful program.

The modern FHA loan programs are very different than what we were used to “back in the day”.  A seller of an FHA property today can pay as little as $100.00 in buyer’s closing costs, or give as much as 6% of the purchase price, depending on the program. 

The best way to determine how much money your buyer will need for closing costs is to do a little homework ahead of time.  I think the best way to accomplish this is to work closely with both your favorite FHA lender, and your favorite (VALLEYWIDE) Escrow Officer. 

In my experience, if you get an estimate from the Lender, they may under-estimate non-lender closing costs, such as escrow and title.  On the other hand, loan fees vary greatly depending on the type of loan and interest rate that your buyer wants, so it is difficult for an escrow officer to accurately estimate loan fees.  My suggestion is to ask the lender for a good faith estimate, then give it to your escrow officer, who can then integrate the lender fees into a solid estimate for your buyer.

This morning in the office meeting there was a lot of discussion about what to do if a buyer negotiates with a seller for a credit for closing costs, and then does not end up needing the entire credit.  It is important to understand that credits in escrow can only be used toward ACTUAL closing costs.  This can be a problem, because of course the buyer builds the closing costs into the offer price, and buyers do not like to leave “money on the table”.  This is why it is important to get a realistic figure to begin with.  The excess closing cost credit amount could in theory be deducted from the purchase price, but this will affect the loan documents.  It is often not very practical to make adjustments to the purchase price, since loan documents are typically drawn within days (or hours!!!) of the close of escrow. 

I received a follow up question to my posting yesterday, and I thought I would share it with the group:

Cynthia,

I have been told that an approximate figure of 3% of the purchase price can usually cover the closing cost and leave a surplus, can you confirm this is a good gage?

Also, when there is money left on the table, per se, can the buyer just receive it in the form of cash? Or should we stipulate that in the purchase contract? (i.e. "Seller to credit buyer 3% towards closing cost. Any unused funds to be issued to buyer upon close of escrow?" Will this work?

ANSWER:  3% is typical, but unfortunately, it really DEPENDS.  There is no getting around the need to do the homework up front.  Lenders do not allow the buyer to take excess funds at closing.  If you think about it, a typical FHA program is a 97% loan, with a 3% down payment.  If the buyer takes any cash back from the seller (other than ACTUAL closing costs), what it does, in essence, is reduce the down payment.  Since the lender has to approve the final HUD-1, we cannot give money back to the buyer at closing.  There are many “creative” ways that agents/lenders (and yes, even tricky escrow officers) come up with to give back money to buyers (have the seller pay a contractor, have the seller give buyer back money outside of escrow, etc., etc.) but this is essentially lender fraud, so don’t touch it with a ten foot pole!!!!

Bottom line, get good figures from your lender and escrow up front, so you can anticipate your buyer’s actual closing cost needs.  Also, if you use a lender that will get docs a little earlier in the process (say more than 3 or 4 days before closing) if it becomes obvious that there is extra money on the table, you can have the documents re-drawn and use the extra money to buy down the buyer’s interest rate.

Got Escrow Questions? ASK CYNTHIA Re: Tax Impound Reserves

Cynthia, can you tell me how to explain to my buyer why they had two separate charges for property taxes on their closing statement?

Answer:  Good Question!  Property Taxes can be one of the more complicated items to explain to buyers and sellers in escrow. 

During the spring, the buyer will be charged at closing for the remainder of the current fiscal year.  As you may be aware, taxes go from July 1 to July 1 each year.  If an escrow closes on April 15, 2008 we charge the buyer for their share from April 15, 2008 to July 1, 2008.  That takes care of the current fiscal year.

The second entry for property taxes will be in connection with the buyer’s new loan.  If the buyer chooses or is required by the lender to include property taxes in the monthly payments of the buyer’s new loan, the lender will set up an impound account at the close of escrow.  Buyers can be required to open their impound account at closing with anywhere from 2 to 8 months of “reserves” at closing.  This will depend on the time of year that we close, and I’ve written out a detailed example below.

This is where it can get a little confusing, so stick with me.

Taxes are paid in two installments, six months in November (late December 10), and six months in February (late April 10).  So back to our April 15, 2008 closing, if you can understand that by February 2009, the lender will have paid both the first and second installment (in other words a total of twelve months of taxes), and you realize that our buyer will not make his first payment until June 1 2008, the math is pretty easy. 

From June 1, 2008 until February 1, 2009 there are a total of 9 loan payments due.  So the math is:  12 months of taxes paid by lender, less 9 months of payments by the buyer, equals 3 months of reserves required.  In reality, lenders at this time of year are going to collect 5 months of reserves, to make sure that they have enough, and to insure against skipped payments.  Lenders will almost always want a two month pad in the impound account to start.

As you can imagine, there are many variations on this, depending on when your escrow closes. If you or your buyer have questions regarding reserve requirements on impound accounts, call your favorite Lender or Escrow Officer for more details.

Got Escrow Questions? ASK CYNTHIA! Multiple Parties on Title

Cynthia, after accepting an offer, my sellers inform me that their parents are also on title.  Do I have to have the parents sign my listing agreement and the disclosures?  What about the purchase agreement and counter-offers?  Is there any way to take the parents off title during escrow?

Answer:  Management will require all sellers on title to sign all documents, including your listing agreement, disclosures and the purchase agreement.  In escrow, all sellers will need to sign Escrow Instructions, Grant Deed and the various tax reporting forms, etc…

One of the main concerns is when there are sellers on title who have never lived on the property, there may be tax withholding issues.  The sellers will need to check with their accountant, to determine how to complete the 593 C in escrow, which is the Franchise Tax Board withholding form.  There are also questions of 1099 reporting.

Sometimes parents on title were simply co-signors, and they have never claimed any part of the property on their own taxes.  In this case, it might be appropriate for them to Quit Claim off the property during escrow, and they would avoid having to complete an entire seller package.   

In other cases, the parents may have claimed the property on their taxes as an investment, and taken some of the write-offs.  In this case, it might not be appropriate for the parents to quit claim. It will be very important for the seller’s to discuss all of this with their own accountant, since we cannot give them tax advice.

Have a Super Day!