Vesting and Escrow - Part 2 - Chapters 57-58

Question 1

Explain how a policy of title insurance indemnifies a person who acquires an interest in real estate against a monetary loss caused by an undisclosed encumbrance on title

Answer 1

A policy of title insurance is the contract issued by a title insurance company agreeing to reimburse or hold harmless and insured 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.

Depending on the type of transaction, a buyer’s agent advises their client to include in the purchase agreement title coverage in the form of either
either:
* California Land Title Association policy (CLTA)
* American Land Title Association policy (ALTA)
* American Land Title Association Residential policy (ALTA-R)
* a title insurance binder.

The buyer’s choice of a title policy is initially stated in the purchase agreement, including whether the buyer or seller pays the title insurance premium.

Question 2

Differentiate between the various types of title insurance policies, endorsements and binder available, such as those presented by the CA Land Title Association (CLTA) and the American Land Title Association (ALTA)

Answer 2

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 may be discovered by a search of public records prior to issuance of the policy. A lower premium is charged to issue a CLTA policy since the title company undertakes a lower level of risk for indemnified losses due to the CLTA pre-printed exceptions, as compared to the extended risk of LOSS by the more expensive ALTA owners policy.

Most policies issued today are of the ALTA variety since the CLTA policy format with pre-printed standard exceptions does not provide protection for unrecorded encumbrances or claims to title. The ALTA-O owners policy provides greater coverage than a CLTA policy. If the pre printed exceptions are included in schedule B and attached to the ALTA policy, the policy becomes an ALTA standard policy, comparable in cost and coverage to the CLTA standard policy since unrecorded encumbrances will not be covered.

For buyers of parcels of real estate containing 124 residential units, an ALTA-R residential policy is available in lieu of the ALTA-O owners or ALTA-H homeowners policies. Parcels insured include lots and units in common interest development such as Condominiums. The ALTA-R is referred to by the title companies as the plain language policy. The premium for an ALTA-R policy is price lower than the premium for an ALTA-O owners policy. This is due to the fact that the ALTA-R policy is usually issued only on Parcels in an existing subdivision or CID which has no known problems with easements, encroachments or legal access.

The ALTA-H homeowners policy exists to provide more coverage than the ALTA-O owners or the ALTA-R residential policies. many title insurance companies use the ALTA-H homeowners policy as their default policy which is used if a specific title policy is not requested by escrow. The premium for the policy is approximately 10% more than the CLTA owners policy.
CLTA
ALTA-R residential (for CIDs)
ALTA-O owners (if pre printed exceptions are included in schedule B, then this policy becomes an ALTA-S standard policy, comparable in cost to a CLTA.
ALTA-H homeowners
Title Insurance Binder (for flippers or resale within 2 years 10-15% more expensive than a CLTA)

A buyer acquiring property for resale within 2 years after their purchase, usually an equity purchase investor, is best served by having the seller provide a title insurance binder on closing, also called a commitment to issue, in lieu of a policy of title insurance. A title insurance binder is an important component of real estate transactions when the buyer intends to sell or flip the property acquired within two years. The cost of a binder is 10 to 15% more expensive than a CLTA policy. If the seller refuses to Bear the extra cost, it is still cost-effective for the buyer to pay for it rather than buying two policies - 1 when the property is purchased, and another on the later resale or refinance.

Question 3

Comprehend the six operative sections of a title insurance policy

Answer 3

Title insurance is purchased to assure real estate buyers, tenants and lenders the interest in title they acquire is what they bargained for. A policy of title insurance is broken down into six operative sections, including:

1. the risks of loss covered, called insuring Clauses, which are based on a completely unencumbered title at the time of transfer
2. the risks of loss not covered, comprised of encumbrances arising after the transfer or known to or brought about by the insured, called exclusion, which are a boilerplate set of title conditions
3. identification of the insured, the property, the vesting, the dollar amount of the coverage, the premium paid and the recording, called schedule a
4. the recorded interests, for example any encumbrances affecting title and any observable on-site activities which are listed as risks agreed to and assumed by the insured and not covered by the policy, called exceptions, which are itemized for all types of coverage in schedule B
5. the procedures, called conditions, for claims made by the named insured and for settlement by the insurance company on the occurrence of loss due to any encumbrance on title which is not an exclusion or exception to the coverage granted by the insuring Clauses and
6. any endorsements for additional coverage or removal of exclusions or pre-printed exceptions from the policy.

Question 4

Observe the dollar limitations placed on coverage provided under the policy exclusions

Answer 4

The buyer’s choice of a title policy as selected in the purchase agreement depends on whether the buyer or seller is paying the title insurance premium. Customarily, the seller pays the premium, except in some Northern California counties, since it is the seller’s deed of conveyance that is insured.

All title insurance policies provide coverage FOREVER after the date and time the policy is issued. Coverage is limited to the dollar amount of the policy, which is generally adjusted for inflation. Coverage is further limited by the exclusions, exceptions and conditions on claims.

Most policy limits are established based on the value of the property, and as part of that value, the mortgage amount. Thus, once a policy loss has been paid to an insured owner, lender or carry-back seller, the amount of coverage under the policy is reduced.

Question 5

Understand the process of settling a claim

Answer 5

The process of settling a claim is as follows:

• the insured promptly give the title insurance company a written notice of claim
• upon being notified the title company has 15 days to acknowledge the receipt, provide forms and instructions, and begin any investigation of the claim
• the insured needs to provide the title company with a proof of loss statement within 90 days after incurring the loss
• after receipt of the 90-day proof of loss statement, the title insurance company has 40 days to accept or reject the claim.

The conditions section of a title insurance policy limit the amount the company is required to pay to settle a claim made by the insured.

NOTE - Losses due to eminent domain are excluded from all title insurance coverage.

Question 6

abstract of title

Answer 6

An ABSTRACT OF TITLE is a representation issued by a title company as a contact to be relied upon by the named person as a guarantee, not an insurance policy, listing all recorded conveniences and encumbrances affecting title to the describe real estate.

Question 7

encumbrance

Answer 7

ENCUMBRANCES are claims or liens on a parcel of real estate and the ownership interest in the property, such as property taxes, assessments, CCRs, easements, trust Deeds or abstract of judgment.

Question 8

exclusion

Answer 8

An EXCLUSION are risks of loss not covered under a policy of title insurance, comprised of encumbrances arising after the transfer or known to or brought about by the insured.

Question 9

exception

Answer 9

An EXCEPTION is any encumbrance affecting title and any observable on-site activities which are listed as risks agreed to and assumed by the insured and not covered by a policy of title insurance.

Question 10

preliminary title report (prelim)

Answer 10

A PRELIMINARY TITLE REPORT (prelim) is a report constituting a revocable offer buy a title insurer to issue a policy of title insurance used by a buyer and escrow for an initial review of the vesting and encumbrances recorded and currently affecting title to a property.

Question 11

proof-of-loss statement

Answer 11

A PROOF OF LOSS STATEMENT is a statement submitted to the title insurance company by the insured referencing the encumbrance discovered after the policy was issued, the amount of the loss and the basis for calculating the loss.

Question 12

Schedule A

Answer 12

SCHEDULE A is one of the six operative sections in a policy of title insurance. It provides identification of the property interest the insured acquired, the legal description of the insured property, the date and time covered began, the premium paid for the policy and the maximum total dollar amount to be paid for all claims settled.

Question 13

Schedule B

Answer 13

Schedule B is one of the six operative sections in a policy of title insurance. It provides the itemization of title insurance policy exemptions and items which need to be complete before escrow May close and title insurance is issued.

Question 14

title insurance

Answer 14

TITLE INSURANCE is a form of indemnity insurance by which a title insurance company hold 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 policy and the insured was unaware of when the policy was issued. Thus a policy of title insurance is a form of Indemnity insurance, not a guarantee of title conditions. As an Indemnity agreement, a title insurance policy is a contract typically issued to:

• buyers of Real Estate
• tenants acquiring long-term leases and
• lenders who’s mortgages are secured by real estate

Question 15

Appreciate the tandem effect of the purchase agreement and the escrow instructions to form an close a transation

Answer 15

Most modern real estate sales transactions depends on both the purchase agreement and the escrow instructions working in tandem to close a transaction. Both the purchase agreement and the escrow instructions need to be in writing to be enforceable under the statute of frauds.

Escrow instructions constitute an additional agreement entered into by the buyer and seller with an escrow company. Under the instructions, escrow facilitates the completion of the performance required of the buyer and seller to disperse monies and use documents needed to perform their purchase agreement. The purchase agreement and escrow instructions work in tandem with each other.

Question 16

Implement the steps an agent takes to ensure escrow instructions conform to the purchase agreement as intended by the seller and the buyer

Answer 16

A written and signed purchase agreement typically is the primary underlying document in a real estate sales transaction. All further agreements, including the escrow instructions, need to conform to the primary document, unless the parties intend to modify the terms of that original agreement to clarify their intent for the transaction. The document making the change needs to note a modification is involved.

The agents negotiate in a transaction are responsible for ensuring the escrow instructions conform to the purchase agreement. Thus, the escrow instructions are reviewed by both agents prior to submitting them to their clients for review and signatures.

In practice, the sales escrow worksheet is used by an agent when preparing to dictate instructions for opening a sales escrow, to organize and collect supporting documents the escrow officer will need to efficiently prepare escrow instructions, clear conditions and close escrow.

Question 17

Understand how escrow facilitates the closing of a real estate sale

Answer 17

Agents negotiating a transaction are responsible for ensuring the escrow instructions conform to the purchase agreement and the intent of the parties.

NOTE - Escrow has a duty to advise a buyer in writing of the Franchise Tax Board (FTB) requirements for withholding __3 1/3%____ of the price paid the seller.

Question 18

Distinguish the various services rendered by escrow and the duties of an escrow officer

Answer 18

Escrow is a process employed to facilitate the closing of a transfer of real estate interests by two parties. Escrow activity consists of:

• one person who delivers written documents or money to an escrow company for the purpose of fully performing their obligations owed another person under an agreement
• the Escrow Company, who delivers the documents and money to the other person on the occurrence of a specified event or the performance of prescribed conditions.

The services rendered by escrow agent typically include:

• receiving funds and Gathering necessary documents, called instruments
• 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.

Question 19

Calculate prorations and adjustments for the buyer or the seller in a transaction

Answer 19

On the close of escrow, buyers and sellers receive a credit or a charge for their proportionate share of income or expenses, called prorations. Proration provisions entitle the seller to a credit for the portion of prepaid sums which have not accrued by the day of closing on items the buyer takes over or receive on the sale. Conversely, the buyer receives a credit for unpaid amount assumed by the buyer which accrued through the day prior to the close of escrow.

Question 20

Advise on who is entitled to the buyers funds held in escrow when escrow fails to close

Answer 20

When escrow fails to close, a seller or buyer who wrongfully refuses to release the buyers good faith deposit is liable for a money penalty of three times the amount wrongfully withheld. Release of deposited funds is not required when a legitimate good faith dispute exists between the buyer and the seller over entitlement to the funds.

Question 21

escrow

Answer 21

ESCROW is the depository process employed to facilitate the gathering of instruments and funds for use in the transfer of a real estate interest between two persons.

Question 22

escrow instructions

Answer 22

ESCROW INSTRUCTIONS are directives an escrow officer undertakes, such as are given by a buyer and a seller, to coordinate a closing on a purchase agreement or origination of a mortgage.

Question 23

escrow officer

Answer 23

An ESCROW OFFICER is an individual licensed and employed as an agent of an escrow company or other escrow service provider to perform Escrow Services. Individuals exempt from escrow licensing include:

• a license real estate broker either individual or corporate
• a licensed attorney who does not hold themselves out as an escrow agent
• A Bank, Trust Company, savings and mortgage Association or insurance company and
• a Title insurance company whose principal business is preparing abstracts or making searches of title used for issuing title insurance policies

The services rendered by an escrow officer 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.

Question 24

good faith deposit

Answer 24

A GOOD FAITH DEPOSIT is a money deposit made by a buyer to evidence their good-faith intent to buy when making an offer to acquire property, also called earnest money.

When escrow fails to close, a buyers good faith deposit for the payment of the purchase price is dispersed within 30 days after the person entitled to the funds demands. A seller or buyer who wrongfully refuses to release the buyers good faith escrow deposit is liable for a money penalty of three times the amount wrongfully withheld, called treble damages. Treble damages will be greater than $100 but less than $1,000, plus attorney fees.

Usually the dispute arises on the seller’s claim they are entitled to the deposit under the forfeiture of deposit Provisions contained in an outdated purchase agreements. However, the seller is not entitled to any of the buyers funds unless the seller has suffered out of pocket money losses due to a breach by the buyer, much different from forfeiture. Thus, the fully performing seller needs to release the escrow deposit to the breaching buyer, less any out-of-pocket money losses the seller actually incurred due to the buyer’s breach.

Question 25

proration

Answer 25

PRORATION is provisions entitling the seller to a credit for the portion of prepaid sums which have not accrued on obligations the buyer assumes on the day escrow closes, or entitling the buyer to credit for amounts assumed which accrued unpaid through the day prior to the close of escrow. Items which the buyer takes over and our prorated include:

• property taxes
• interest on mortgages and bonds assumed
• rent
• service contracts assumed by the buyer.

Question 26

Statute of Fraud

Answer 26

STATUTE OF FRAUD is a state law specifying those contracts to be written and signed before they will be enforced by a court, for example contracts for the sale of Real Estate. Both the purchase agreement and the escrow instructions are contracts regarding interest in real estate. Both documents need to be in writing to be enforceable under the statute of frauds. a purchase agreement sets forth the:

• sales price
• terms of payment and
• conditions to be met before closing