Chapter 5 - Transfer of Property Flashcards
Title Insurance - Description
A policy of TITLE INSURANCE is the contract under which a title insurance company reimburses or holds harmless a person who acquires an interest in real estate against a monetary loss caused by an ENCUMBRANCE on title that:
- is not listed in the title insurance policy as an exception to coverage and
- the insured policyholder was unaware of when the policy was issued.
Title insurance is paid during escrow. It is a one-time payment for a lifetime guarantee. thus Title Insurance insures against things that happened prior to the date of issuance and guarantees against those conditions forever. It is a one-time expense, not reoccurring, we just paid during escrow. The title company has no obligation under a policy to clear title of the unlisted encumbrance.
Title insurance policies are issued on one of several General forms used by the entire title insurance industry in California. The policies are typically issued to:
- BUYERS of Real Estate
- TENANTS acquiring long-term leases and Military on base for 4 years and
- LENDERS who’s loans are secured by real estate.
Title Insurance - Types of Title Coverage
Several types of title insurance coverage are available, including:
- the California Land Title Association (CLTA) standard policy
- an American Land Title Association (ALTA) owners extended coverage policy.
The CLTA standard policy is purchased solely by buyers, carry-back Sellers and private lenders.
The CLTA standard policy insures against all encumbrances affecting title which can be discovered by a search of PUBLIC RECORDS prior to issuance of the policy. Any encumbrances not recorded, whether or not observable by an inspection or survey, is not covered due to the clta policy exclusions and standard exceptions.
The CLTA standard policy contains PRE-PRINTED EXCEPTIONS listed in the policy as Schedule B. Also called STANDARD EXCEPTIONS or REGIONAL EXCEPTIONS. It is the inclusion of these pre-printed boilerplate exceptions that makes the CLTA policy a standard policy.
PRE-PRINTED/STANDARD/REGIONAL EXCEPTIONS
An ALTA owners policy does not contain pre-printed exceptions, only the TYPEWRITTEN EXCEPTIONS listing the encumbrances which ARE KNOWN to the title company and effect title to the property. The ALTA owners policy provides greater coverage then the CLTA policy.
Title Insurance - Preliminary/Abstract Title Reports
The title search reviews the CHAIN OF TITLE of a property, covering all documents of record affecting title since the original patent was issued in 1870. The summary of the search is called an ABSTRACT OF TITLE. From this summary a PRELIIM is produced, and the eventual policy will be written subject to any changes that might be made.
A preliminary title report, also called a prelim, is intended to disclose the current vesting and encumbrances which may be reflected on the public record affecting a property’s title. A prelim is not a representation of the condition of title or a policy of title insurance. Unlike an abstract of title, a prelim cannot be relied on by anyone and imposes no liability on the title company.
Alternatively, an abstract of title is an accurate, factual representation of title to the property being acquired, encumbered or leased collected from the public records. Thus, an abstract of title may be relied on by those who order them as an absolute representation of the condition of title.
A claim, encumbrance or condition which impairs the title to real property until disproved or eliminated is known as a cloud on title.
Deeds - Description
A deed is a written instrument which conveys title to real estate. Title by deed passes either:
- VOLUNTARILY by agreement with the owner, as in a sale in the open market or foreclosure on a trust deed or assessment Bond or
- INVOLUNTARILY without agreement, such as the enforcement of a creditor judgement or tax lien.
No matter the form of writing, the individual conveying real estate is called the grantor. The individual acquiring title is called the grantee. (give it to me, EE).
Fee simple ownership is presumed to pass by a grant of real estate, unless a lesser possessory interest is stated, such as an easement, life estate or leasehold interest.
NOTE - A special assessment bond is a type of municipal bond used to fund a development project. Interest owed to lenders is paid by taxes levied on the community benefiting from the particular bond-funded project
Deeds - Types
There are several Deeds that can be used to transfer an interest in real estate. The types of deeds most commonly used to convey a real estate interest are:
- Grant deeds and
- Quitclaim deeds
To pass a fee simple interest in real estate, only the word GRANT needs to be used in the conveyance. No other precise words of conveyance are necessary in a deed to convey a fee simple ownership, such as between a seller to buyer, or parent to child.
The COVENANTS, sometimes called WARRANTIES, implied in a grant deed include:
- the interest conveyed in the real estate has not been previously conveyed to another, except as disclosed in the grant deed and
- the real estate has not been further encumbered by the grantor, except as disclosed in the grant deed.
A quitclaim deed conveys only the grantor’s interest in a property, if any exists. Thus, to convey real estate with covenants relating to the interest conveyed, a grant deed is used. To simply convey any interest in real estate without an Assurance the individual holds that interest conveyed, a quick claim deed is used. Quit claim deeds are most commonly used in the event of divorces and inheritances. For example from spouse to spouse or from all siblings to one sibling.
Deeds - Validity
To be valid, a deed needs to be in
- in writing
- identify the grantor and the grantee
- contain a granting clause stating the grantor’s intention to convey
- adequately describe the real estate involved
- be signed by the grantor and
- be delivered to and accepted by the grantee.
The signing of a deed by the grantor naming another person as the grantee is not enough to divest the owner of their title to the real estate.
DELIVERY OF THE SIGNED DEED IS REQUIRED TO TRANSFER OWNERSHIP.
Delivery refers to two separate Acts:
- the grantor’s present INTENT TO CONVEY TITLE, not just the act of physically handing the deed to the grantee and
- the grantees ACCEPTANCE of the grant deed as in immediately effective conveyance.
A DEED DOES NOT NEED TO BE RECORDED TO CONVEY REAL ESTATE.
A DEED TAHT IS DELIVERED CONVEYS AN INTEREST IN REAL ESTATE EVEN WHEN TEH DEED IS INCAPABLE OF BEING RECORDED.
Deeds - Recording
Recording is the process of placing a document on file with a designated public official known as the County Recorder. All documents filed with the County recorder put the general public of that County on notice of the contents of the document. Claims against a property are generally given a priority on the basis of the time and the date they are recorded. This type of notice is referred to as CONSTRUCTIVE NOTICE (it is a formal notice). ACTUAL NOTICE is the express or implied knowledge of a fact (you see a For Sale sign across the street).
Documents which need to be recorded include:
- HOMESTEAD EXEMPTIONS which provide protection against a judgement only on a primary residence up to a certain dollar amount
- ABANDONMENT OF HOMESTEADS for example if you move
- a LIS PENDENS, which is a notice of pending legal action and
- MECHANIC’S LIENS.
A DEED NEEDS TO BE ACKNOWLEDED IN ORDER TO BE RECORDED. Acknowledgement is a formal declaration made before a NOTARY PUBLIC by the person executing an instrument confirming they are the person signing the document and the execution is made of their free will.
Another alternative means of transferring property is through a LAND SALES CONTRACT. Under a land sales contract, the seller retains title to the property until all or a prescribed part of the purchase price has been paid.
Escrow
ESCROW is a process employing an independent agent to manage and coordinate the closing of a real estate transaction through the exchange of documents and money between two parties such as a buyer and seller. Escrow activities are typically based on a primary agreement, such as a purchase agreement.
The services rendered by an escrow agent typically include:
- receiving funds and collecting necessary documents, such as property reports, disclosure statements and title reports called for in the ESCROW INSTRUCTIONS
- preparing documents necessary for conveyancing and mortgaging a property required for escrow to close
- calculating prorations and adjustments and
- disbursing funds and transferring documents when all conditions for their release have been met
The escrow agent can be an Independent Corporation (foreign or domestic), a lawyer or real estate broker under certain conditions. An independent escrow’s activities are overseen by the Department of Business oversight, while non-independent escrows are regulated by the regulatory Authority that they operate under.
Escrow agents cannot do anything without instructions from the principles, and they are equally responsible to both parties during the escrow process. Most modern real estate sales transactions depend on both the purchase agreement and the escrow instructions working in tandem to close a transaction. Note escrow does not work for the listing or the selling agent, they work for the principles to close a transaction.
Both the purchase agreement and the escrow instructions are contracts regarding interest in real estate. Both documents must be in writing to be enforceable under the statute of frauds.
On the close of escrow, buyers and sellers receive a credit for a charge for their proportionate share of income or expenses involved in the ownership or operations of the property conveyed, called prorations. This means they either have a credit or charge.
Prorations are usually calculated based on the date escrow closes. However, they may be set based on any date agreed to by the buyer and seller. For calculating prorations based on the date of closing, the entire day of closing is the first day of the buyers ownership, unless the escrow instructions specify otherwise. Once again prorations are based on the date escrow closes. The entire day of closing escrow is the very first day of ownership of the buyer, unless specified otherwise.
Tax Aspects - Documentary Transfer Tax
There are tax consequences to any real estate transaction.
The DOCUMENTARY TRANSFER TAX is imposed on a recorded document when Real Estate is transferred. The transfer tax is based on the consideration paid in the transaction, the selling price minus existing loans assumed by the buyer. The County transfer tax rate is usually a percentage of the sales price based on increments of value, it is $0.55 per $500 of transferred value, though some cities impose an additional transfer tax as well. All transfer tax calculations are based on multiples of this amount. The manner in which a transfer is accomplished affects the income tax reporting for both principles.
Transfers of property between spouses and family members are normally exempt from this tax. States determine whether this tax must be paid by the buyer or by the seller.
In California, the seller traditionally pays the transfer tax. Depending on local market conditions, transfer taxes can become a negotiating point during closing. For instance, in a strong seller’s market, the seller may have multiple offers and will likely find a buyer who agrees to pay the transfer tax.
Tax Aspects - Property Taxes
Property taxes are paid on Real Property, though not personal property. Property taxes are an ad valorem tax based on the value of the thing being taxed. The original basis of valuation is the price paid for the property. Over the years this amount is adjusted upwards based on improvements made to the property, and downward based on depreciation. This adjusted basis is then balanced against the net sales proceeds, sales price minus the costs of sale, to arrive at a capital gain or loss.
No loss can be reported on a personal residence, and any gain on a personal residence can be offset up to $250,000 for an individual or $500,000 for a couple filing jointly when reporting the sale to the IRS.
Property taxes in California are affected by Proposition 13, Prop 13. Prop 13 establishes a maximum rate of 1% of the transferred value as a basis for annual state taxes. This amount is adjusted upward by a maximum of 2% annually, plus special service area charges by local authorities, as is the case with Mello-Roos districts .
Interest paid on mortgages originated to PURHCASE OR SUBSTANTIALLY IMPROVE an owner’s first or second home when the mortgage is secured by either home is deductible on combined mortgage balances of up to $750,000 for an individual, and for couples filing a joint return. The mortgage balance is limited to $375,000 for married persons filing separately.
Tax Aspects - Tax Loopholes
As a tax loophole for personal use expenditures, the home MORTGATE INTEREST DEDUCTION (MID) rule for income tax reporting allows mortgage homeowners to deduct from their adjusted gross income (AGI) the interest paid on first and second homes to reduce their taxable income. The mortgage interest is reported as an itemized deduction if:
- the mortgages funded the purchase price or paid for the cost of improvements for the owners principal residence or second home and
- the mortgages are secured by either the owner’s principal residence or second home.
When the amount of permissible itemized expenditure exceeds the amount of the standard deduction, it is more beneficial for a taxpayer to itemize their deductions.
Special processes
An occupant may also establish title to a property through adverse possession. These are known as professional squatters. To establish Title by adverse possession an occupant needs to show:
- their possession is based on a claim of right or color of title
- they have occupied the property in an open and notorious way which constitutes reasonable notice to the record owner
- they’re occupancy is hostile and inconsistent with the owner’s title
- they have been in possession for a continuous and uninterrupted period of at least five years and
- they have paid all taxes assessed against the property during their occupancy.
The government may also take title to private property for public use through eminent domain, a process called condemnation.
Transfer through court supervision
A number of Property Transfers occur through Court action.
PROBATE TRANSFERS happen in a probate court. Probate refers to the process in which the court supervised is the transfer of legal title of property from the estate of the deceased person to the descendant’s heirs.
A TAX DEED is given to someone who purchases a property through a tax deed sale. The purpose of a tax deed sale is to collect unpaid property taxes due on a property and convey title to the purchaser. During a tax deed sale, the property is usually sold for the unpaid tax amount plus any fees, interest charges and court costs.
In a tax deed sale, the property itself is sold. The sale takes place through an auction, with a minimum bid of the amount of back taxes owed plus interest, as well as costs associated with selling the property. The highest bidder wins the property.
Types of Vesting
A vesting is a method of holding title to real estate.
Title to real estate in California is held in one of four basic vestings:
** Joint Tenancy - ownership of fractional interest in real estate by two or more individuals each holding an equal share with the right of survivorship. Once again equal share with the right of survivorship. When a joint tenant dies, their interest is eliminated and the surviving joint tenants share the remaining ownership equally. Joint tenants take title together on the same deed, at the same time, hold equal shares in the ownership of the property, and each has the right to possess the entire property, known as the four unities. Joint tenancy equals FOUR Unity.
**Tenancy In Common - tenants-in-common may have varying percentages of ownership in a property, may take title at different times, and have centralized rights of possession. If a joint tenant conveys their interest in the property to another person, that person takes title as a tenant-in-common. A tenant-in-common may will (give), their interest in the property to others on their death since a tenancy in common interest carries no right of survivorship with it.
**Community Property - all property acquired by married couple in California during a marriage is presume to be community property, unless acquired as the separate property of either spouse. Under the community property vesting, the ownership interest are equal. ONLY TWO OWNERS
**Community Property with right of survivorship - identical to the community property investing but with the inclusion of words creating the right of survivorship. On the death of a spouse, the surviving spouse automatically becomes the sole owner of the property.
Joint Tenancy Vesting Four Unities
Although most joint tenancy laws are created between a married couple, a joint tenancy can exist between non married persons. Conversely, community property vesting are only available to married couples or registered domestic partners.
Additionally, the number of joint tenants is not limited to two, as is a married couples ownership of community property interests. The only ownership condition is that the joint tenants take equal ownership interest in the property.
Traditionally, the creation of a joint tenancy requires the conveyance of four unities:
- Unity of TITLE, meaning The Joint tenants take title to the real estate through the same instrument, such as a single grant deed or court order
- Unity of TIME, meaning The Joint tenants received their interest in title at the same time
- Unity of INTEREST, meaning The Joint tenants on equal shares in the ownership of the property and
- Unity of POSSESSION, meaning each joint tenant has the right to possess the entire property.
The four unities of joint tenancy can be best remembered as, Time, title, interest and possession (TTIP). Upon the death of one of the parties, the other joint tenants inherit the deceased’s interest free of any debt obligations. Thus, other potential heirs to the deceased estate and creditors cannot make claims regarding the property.
Severalty ownership refers to property owned by one person only.
Owners may also hold property as general or limited partners or corporations. Couples may also take title as revocable or irrevocable trust for estate planning purposes.
abstract of title
Abstract of title - a summary or digest of all transfers, conveyances, legal proceedings, and any other facts relied on as evidence of title, showing continuity of ownership, together with other elements of record which may impair title.
adjusted basis
Adjusted basis - the cost basis of a property after the application of additions for further improvements and deductions for destruction of improvements and appreciation.
ad valorum
Ad Valorum - real estate taxes imposed on property based on its assessed value.
An ad valorem tax is a form of taxation based on the value of a transaction or a property, either real estate or personal property. It is generally calculated as a percentage of the value of the property, rather than on size, weight, or quantity. Ad valorem is Latin for “according to value.”
adverse possession
Adverse possession - a method of acquiring title to real property by a person other than the owner of record through open possession of the property for a 5-year statutory. And payment of property taxes.
California Land Title Association (CLTA)
California Land Title Association (CLTA) - the standard title insurance policy with pre-printed boiler plate exceptions.
A CLTA policy also offers protection in the event that the grantor lacked capacity to complete the transaction; the conveyance instrument was improperly recorded; or there was an instance of forgery, fraud, duress, incompetency or impersonation related to the transaction.
American Land Title Association (ALTA)
American Land Title Association (ALTA) title policy - a type of title insurance policy issued by a title insurance companies which expands the risks insured against under the standard type policy to include:
- unrecorded mechanic’s liens;
- unrecorded physical easements;
- facts a physical survey would show;
- water and mineral rights; and
- rights of parties in possession, such as tenants and buyers under unrecorded instruments.
The ALTA (American Land Title Association) policy covers the same items as the CLTA policy as well as many additional risks such as unrecorded mechanic’s liens, assessments, encumbrances, encroachments, easements, water rights, mining claims, patent reservations, conflicts of boundary lines, shortages in area access to and from the land and other visible matter, as the title company actually performs a physical inspection before it issues an ALTA policy.
The primary difference between the ALTA loan policy and the CLTA Standard Coverage Policy is the omission of the standard exceptions contained in Schedule B, Part I of the CLTA policy. No standard exceptions are set out in the ALTA loan policy. Instead, the title insurer will list specific matters that constitute exceptions to the coverage of the lender’s lien.
Matters that constitute defects, liens, or encumbrances on the title and that would be subordinate to the insured lien are set forth in Schedule B, Part II of the ALTA loan policy. In most cases, such matters would be listed in the preliminary title report issued by the insurer before closing of the transaction and issuance of the policy and the lender would require them to be deleted from the policy.
What does owner’s title insurance cover?
Sometimes undiscoverable defects can come up after the title search. Under an owner’s title insurance policy, you are protected against certain undiscovered errors in the title.
Title issues include unknown:
- Outstanding mortgages and judgments, or a lien against the property because the seller has not paid his taxes
- Pending legal action against the property that could affect you
- Unknown heir of a previous owner who is claiming ownership of the property
Unforeseeable title claims include:
Forgery: making a false document
For example, the seller misrepresents the identity of the person who sold the property.
Fraud: deception to achieve unfair gain
For example, someone steals your identity and either sells your house without your knowledge or consent, or takes out a second mortgage on the property and walks away with the money.
Clerical error: inconsistent paperwork and historical records
For example, an unforeseeable discrepancy in the property or fence line can cause confusion in ownership rights.
What does owner’s title insurance cost?
The one-time payment for owner’s title insurance is low relative to the value of your home. A typical title insurance policy costs around 0.5% of the home’s purchase price.
How long am I covered?
Your owner’s insurance policy lasts for as long as you or your heirs* own your property. Your life will change over time, but your peace of mind never will.
What happens at closing?
Closing is the final step in executing the homebuying transaction. It is the process that allows the transfer of ownership to occur. Upon completion of the closing process, you get the keys to your home!
