Escrow

Question 1

Escrow is a short lived trust arrangement for the sale of real property and the requirements does not include:

1. Required by law
2. Escrow holder (company) acts as a neutral agent of both the buyer and the seller
3. Follows every element of the agreement from both the buyer and the seller
4. Handles the details of the sale

Answer 1

1. Required by law - Escrow is NOT required by law to use for the sale of real property.

• Escrow agent neutral third person working for the escrow holder, handles the details of the sale.
• Escrow instructions reflect the understanding and agreement of the principals, the buyer and seller.
• Choice of an escrow agent is negotiable between the buyer and seller.
• Title of standard resale purchase contract is “California
Residential Purchase Agreement (RPA) and Joint Escrow Instructions”
• Escrow Agent follows every element of the Agreement

Question 2

The basic requirements of escrow are:

1. Works from a binding contract between the buyer and the seller
2. Choice of an escrow holder negotiable between the buyer and seller
3. Escrow agent Cannot change any conditions in the contact without written approval of both buyer and seller
4. All of the above

Answer 2

4. All of the above
5. Binding contract between the buyer and seller is used to open escrow.
   • can be any legal agreement, such as a residential purchase agreement,
   exchange agreements, option agreements
6. Conditional Delivery of transfer documents funds to Escrow Holder
   • Seller - Delivers instruments of conveyance (Grant Deed)
   • Buyer - and/or the lender will deliver to escrow whatever funds are required for
   the sale, per the contract

• The escrow agent will keep document and funds until all other terms of the escrow are completed
• Then distribute them according to the expressed (written) conditions of the escrow.
• Escrow agent cannot change any conditions in the contact without written approval of both buyer and seller.
• Prior to Close of Escrow, seller (Grantor) will be asked to sign a grant deed conveying title to the buyer.
• Since seller is signing over the ownership before getting the money, the escrow holder is instructed to hold the signed deed until funds from the buyer are deposited in escrow.
• Conditional delivery of the grant deed by the seller has been made.

Question 3

The elements of a valid escrow are:

1.

Answer 3

• Binding contract between the buyer and seller.
Conditional Delivery of transfer documents funds to Escrow Holder
• Seller
• Delivers instruments of conveyance (Grant Deed)
• Buyer
• and/or the lender will deliver to escrow whatever
funds are required for the sale, per the contract

Question 4

Purchase Price Reflects on the Escrow Settlement Statement how?

A. Debit Seller, Credit Buyer
B. Debit Buyer, Credit Seller
C. Credit Buyer Only
D. Debit Seller Only

Answer 4

B. Debit Buyer, Credit Seller

DEBIT is money you owe someone else. ( - negative)

CREDIT is money someone owes you. • ( + positive )

• On the BUYER SIDE, the only DEBIT is the purchase price
• The Buyer MUST have all CREDITS that total the purchase price.

BALANCE OWED WILL BE ZERO ($0.00)

Question 5

Property taxes are termed ad valorem taxes because they are based upon:

A. Income production capabilities of the property
B. The replacement value of the property
C. Assessed value of the property
D. The replacement cost of the property

Answer 5

C. Assessed value of the property

• “Ad valorem”
– Based on the assessed value, not the income producing ability of a property

Assessed Annually, Paid Semi-Annually

California Property Annual Tax Year July 1 – June 30

• First Half July 1 – Dec 31 (Delinquent after Dec 10)
  
  • Paid in ARREARS July 1 - Nov 1 (Due)
    
    • Closing Proration - Debit Seller, Credit Buyer
  • Paid in Advance Nov 1 - Dec 31
• Second Half January 1 – June 30 (Delinquent after April 10)
  
  • Paid in ARREARS Dec 31 - Feb 1 (Due)
  • Paid in ADVANCE Feb 1 - June 30
    
    • Closing Proration - Credit Seller, Debit Buyer

Question 6

Property taxes are due on:

1. July 1st and Feb 1st
2. June 30 and Dec 31
3. Nov 1 and Feb 1
4. None of the above

Answer 6

3. Nov 1 and Feb 1

California Property Annual Tax Year July 1 – June 30

Assessed Annually, Paid Semi-Annually

Question 7

A completed escrow include:

1. When all terms of the instructions have been met.
2. When the agent gets their commission
3. When the property taxes and all other expenses during the closing are paid
4. None of the above

Answer 7

1. When all terms of the instructions have been met.

Completed Escrow
• Properly drawn and executed escrow instructions become an enforceable contract.
• An escrow is termed a “completed escrow” when all terms of the instructions have been met.
• After the escrow has been completed and recorded,
the buyer (Grantee) gets a grant deed, and the seller (Grantor) gets the money.
• The escrow closes immediately thereafter.

Question 8

Home Closes on September 15. Property Taxes are $10,000 / Year. What is the proration on the settlement statement between the buyer and seller?

A. Debit Seller, Credit Buyer
B. Debit Buyer, Credit Seller
C. Credit Buyer Only
D. Debit Seller Only

Answer 8

A. Debit Seller, Credit Buyer

Four step process:

1. Who owes, buyer or seller?
2. Number of Days seller used property.
3. Cost per day.
4. Multiply number of days times cost per day

• Seller – Number of Days Used
• Escrow (Statutory) Year = 360
• Calendar Year = 365
• Buyer Normally Owns Day of Closing
• Example: Close on September 15
• Escrow: July (30) + August (30) + September (14) = 74
• Calendar: July (31) + August (31) + September (14) = 76

Question 9

Property taxes are paid:

1. Paid in arrears
2. Paid in advance
3. Paid annually
4. Paid both in arrears and in advance

Answer 9

4. Paid both in arrears and in advance

California Property Annual Tax Year July 1 – June 30 (Fiscal tax year)
First Half July 1 – Dec 31 with a due date of Nov 1 (late after Dec 10 +10%)
- If taxes are paid prior to Nov 1, taxes are paid in arrears
–> Closing proration would be Debit Seller, Credit Buyer
- if taxes are paid after Nov 1 for 1st half of fiscal year prior to Dec 31, taxes are paid in advance

Second half of fiscal tax year Jan 1 - Jun 30 with a due date of Feb 1st (late after Apr 10 +10%)

• If taxes are paid prior to Feb 1, taxes are paid in arrears
• if taxes are paid after Feb 1 for 2nd half of fiscal year prior to June 30, taxes are paid in advance
  
  • -> Closing proration would be Credit Seller, Debit Buyer

Question 10

Home Closes on October 1, how would this reflect on the Escrow Settlement Statement?

A. Debit Seller, Credit Buyer
B. Debit Buyer, Credit Seller
C. Credit Buyer Only
D. Debit Seller Only

Answer 10

A. Debit Seller, Credit Buyer

House closed prior to the due date of Nov 1. Nothing has been paid yet. Seller must pay the taxes for the period they were in the house from Jul 1 - Oct 1. Seller expenses are always debits to the seller and will credit the buyer so they can combine their taxes from Oct 1 - Dec 31 when they submit them.

Question 11

Owners has not paid their current year property taxes. Home closes December 8. How would this reflect on the Escrow Settlement Statement?

A. Debit Seller, Credit Buyer
B. Debit Buyer, Credit Seller
C. Credit Buyer Only
D. Debit Seller Only

Answer 11

A. Debit Seller, Credit Buyer

Escrow will ask that all the taxes for that period are paid (from July 1 - Dec 31).
Seller will pay July 1 - Dec 8 (Debit) since not paid yet
Buyer will pay Dec 9 - Dec 31 (Credit)

House closed after the due date of Nov 1 but prior to being paid. Nothing has been paid yet. Seller must pay the taxes for the period they were in the house from Jul 1 - Oct 1. Seller expenses are always debits to the seller and will credit the buyer so they can combine their taxes from Nov 1 - Dec 31 when they submit them.

Question 12

Home Closes on June 20, how would this reflect on the Escrow Settlement Statement?

A. Debit Seller, Credit Buyer
B. Debit Buyer, Credit Seller
C. Credit Buyer Only
D. Debit Seller Only

Answer 12

B. Debit Buyer, Credit Seller

House closed after the due date of Feb 1 but prior to end of fiscal year. The due date has past, so unless stated, we assume the taxes were paid for the rest of the period. Seller paid more than needed - period from June 20 to June 30 was the buyers responsibility. Seller will receive a credit for this time and the buyer will pay that during closing.

Question 13

Owner has not paid their previous year property taxes. Home closes July 10. How would this reflect on the Escrow Settlement Statement?

A. Debit Seller, Credit Buyer
B. Debit Buyer, Credit Seller
C. Credit Buyer Only
D. Debit Seller Only

Answer 13

D. Debit Seller Only

Buyer is responsible for current year taxes only. Prior (fiscal) year is always the seller. If the seller is unpaid for prior year when the year ended June 30, the seller is responsible. Debit seller tax amount plus % interest and penalties.

Tax would become a lien against the property at the end of that calendar year, Jan 1st for the unpaid tax period July 1 - Jun 30 of the previous fiscal year.

Question 14

California property tax amounts are based upon:

1. Sale price of property
2. No more than 1% or property value
3. Real property in California is taxed at the local level through ad valorem property taxes and special assessments set by local tax authorities.
4. Based on comparable properties in the area

Answer 14

3. Real property in California is taxed at the local level through ad valorem property taxes and special assessments set by local tax authorities.

• Real property in California is taxed at the local level through ad valorem property taxes and special assessments (ex, Mello Roos) set by local tax authorities.
• Ad valorem means “according to value.”
• Taxes are imposed on real property as a percentage of the fair market value based on the most recent sale or improvement of the property.

Proposition 13 (Article 13A of the California Constitution) • Limits ad valorem taxes to 1% of the full cash value of a given parcel.
• The full cash value is based on the fair market value— not necessarily, the actual sales price of the property.
• Commonly, local taxes are added to the 1% assessment.
• The county assessor can also increase the assessed value of each property if property values in the community have generally been increasing.
• However, regardless of how much other properties may have gone up in value, Proposition 13 limits this annual increase to 2% above the previous year’s value.
• When a parcel changes hands, the increase in taxes over the previous year’s ad valorem tax can therefore be dramatic if the property has not been sold for many years.
• A supplementary tax bill will be sent to the new owner, reflecting the change in taxes as of the date of transfer.