Life of a Real Estate Escrow

For some, the escrow process can be perceived as confusing, perhaps even overwhelming at times.  Buyers and sellers are dealing with deadlines, mounds of paperwork, and signatures galore. It is not uncommon to feel anxious and have questions during the process.   As the neutral third party at the center of the transaction, escrow’s goal is to facilitate the transfer of property from the seller to the buyer. To help give buyers and sellers a better understanding of the entire process, we put together a Life of an Escrow overview flowchart.

Life of an Escrow

As the chart illustrates, the escrow company is the neutral third party that facilitates the closing process when real estate is purchased or sold.  Escrow is involved in many of the details regarding the purchase or sale transaction. It is common for there to be myriad of details, and escrow works with many different parties, such as a title company, mortgage banker, seller’s agent, etc., during the escrow process. It is important to also understand that escrow holds the money associated with the transaction until the requirements of the contract are accurately completed. Once escrow has facilitated the completion of the legal and contractual items, the transaction is recorded at the county and the buyer becomes the new legal owner of the property.

There are many details buyers and sellers should become aware of to facilitate a smooth escrow process.  Many of these details are items we discuss on our blog in an effort to help demystify this complicated process.  The chart above serves as the foundation for most transactions and can be used as a basis for further discussion or questions you may have with your escrow officer.

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Dealing with a Foreign Seller? Prevent Escrow Delays by Understanding the Process

When you’re dealing with a Seller who is not a U.S. citizen and is considered by the government as a non-resident alien for purposes of United States income taxation, you can avoid escrow delays and minimize the Seller’s frustrations by knowing and understanding the basic process that all Foreign Sellers have to go through when selling property in the United States.

First of all, the U.S. government will get its taxes when a property is sold, no matter who the Seller is. While you should always advise your clients to consult with their CPA or tax consultant for specific information for their transaction, the following information should lay the groundwork to let you know how unique the Foreign Sellers process can be. Hopefully with this information, and advice from the Sellers CPA, Sellers can get everything in order ahead of time to keep the escrow process on a reasonable timeline.

Apply for a SSN or Tax ID Number

Begin by checking whether the foreign seller who is transferring U.S. real estate has a Social Security number and/or Tax ID number. If they don’t, start the selling process by submitting an application for IRS Individual Taxpayer Identification Number Form W-7. Married sellers need to submit one for each spouse. The application must be notarized and include a current, certified U.S. passport. The process of obtaining a Tax ID number will take at least seven to eight weeks and the Seller should seek the guidance of a Tax consultant or CPA for the proper forms and further assistance.

Early Submission Ensures Proper Tax Withholding

Any non-resident of the US who sells real estate in the US will have 10% federal withholding as well as 3 1/3% California withholding. If the sellers do not start the Tax ID application process early, it delay any refund and/or reduction due to them.

Request a Reduction of Withholding

If your sellers feel that the 10% withholding exceeds their capital gains, they can submit a Form 8288-B Application for Withholding Certificate for Disposition by Foreign Persons of US Real Estate Interests. This document will be provided by the Escrow holder and should be submitted to the IRS requesting Reduction of Withholding upon receipt of the document. This document needs to be approved early so the Escrow holder processing the sale has time to obtain approval to submit less than the 10% U.S. withholding. This process takes several weeks, as well.

In summary, it’s important to remember:

• It takes seven to eight weeks to submit IRS Individual Taxpayer Identification number Form W-7. Married sellers must submit one notarized application for each spouse with a current, certified U.S. passport.

• Any nonresident who sells U.S. real estate will have 10% federal withholding and 3 1/3% California withholding. Not having a Tax ID delays any tax refunds or reductions.

• The Seller might be able to reduce their withholding, but must allocate several weeks to be approved before submitting less than the 10% U.S. withholding.

For further information and forms, seller’s should consult their CPA or tax adviser and can visit:

• IRS: http://www.irs.gov/pub/irs-pdf/p515.pdf
• Tax ID Number: http://www.irs.gov/businesses/small/international/article/0,,id=96696,00.html
• Withholding Reduction: http://www.irs.gov/pub/irs-pdf/f8288.pdf

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Mello-Roos: What it is and How it Affects Your Property Taxes

When purchasing real property in California you may discover that the property is subject to Mello-Roos. Mello-Roos is the common verbiage used to describe a tax that is imposed upon real property that falls within a Mello-Roos District. This tax or fee, which is a form of financing, can be used by cities, counties, and special districts (such as school districts) to help pay for major improvements and services within the district which might include schools, roads, libraries, police and fire protection services. Mello-Roos taxes are imposed in addition to the normal tax base applied to the real property for that area or development.

The tax was initially developed due to the limited ability of local governments to use property taxes to construct public facilities and services. The taxes usually are levied on a specific development for approximately 10-15 years or until the infrastructure bonds are paid off. You will need to check with your County Assessor’s office for the fees for your particular property.

It is important to know about this long-term additional expense when buying a home within a Mello-Roos District due to the costs added to the property’s tax base.

The California Land Title Association has written an in-depth description of Mello-Roos. You can read the full article. Below are key points from that article:

What is a Mello-Roos District?

A Mello-Roos District is an area where a special tax is imposed on those real property owners within a Community Facilities District. This district has chosen to seek public financing through the sale of bonds for the purpose of financing certain public improvements and services. These services may include streets, water, sewage and drainage, electricity, infrastructure, schools, parks and police protection to newly developing areas. The tax you pay is used to make the payments of principal and interest on the bonds.

What are my Mello-Roos taxes paying for?
Your taxes may be paying for both services and facilities. The services may be financed only to the extent of new growth, and services include: Police protection, fire protection, ambulance and paramedic services, recreation program services, library services, the operation and maintenance of parks, parkways and open space, museums, cultural facilities, flood and storm protection, and services for the removal of any threatening hazardous substance. Facilities which may be financed under the Act include: Property with an estimated useful life of five years or longer, parks, recreation facilities, parkway facilities, open-space facilities, elementary and secondary school sites and structures, libraries, child care facilities, natural gas pipeline facilities, telephone lines, facilities to transmit and distribute electrical energy, cable television lines, and others.

When do I pay these taxes?
By purchasing an interest in a subdivision within a Community Facilities District you can expect to be assessed for a Mello-Roos tax which will typically be collected with your general property tax bill. These special tax payments are subject to the same penalties that apply to regular property taxes.

How much will the Mello-Roos payment be?
The amount of tax may vary from year-to-year, but may not exceed the maximum amount specified when the district was created. In the case of the purchase of a new house within a subdivision, the maximum amount of the tax will be specified in the public report. The Resolution of Formation must specify the rate, method of apportionment, and manner of collection of the special tax in sufficient detail to allow each landowner or resident within the proposed district to estimate the maximum amount that he or she will have to pay.

How are Mello-Roos taxes affected when the property is sold?
The Mello-Roos tax is assessed against the land, but is not based upon the value of the property, therefore, the possible increased value of the property does not affect the amount of the tax when property is sold. The amount of the tax may not exceed the original maximum amount stated in the Resolution of Formation. Any delinquent payments must be satisfied before the sale of the real property, since the unpaid amounts are a lien against the property.

When purchasing a home in California, buyers should be proactive in ascertaining if the home falls within a Mello-Roos District so they are knowledgeable about the additional tax on the home. Here are some avenues to obtain more information about the precise amount of taxes that will affect the property you are considering purchasing:

• Inquire with your Realtor who has the resources to investigate if the property has a Mello-Roos tax associated with it.
• The information can be found on the Seller’s transfer disclosure statement disclosing if the property is in a Mello-Roos District.
• The information is in the Mandatory Natural Hazard Disclosure report that the seller is required to provide to the buyer during the escrow process.

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Loan Documents are in Escrow. We’re Ready to Close Then, Right? Not Necessarily…

As the close of escrow date draws near, the buyer and seller are usually eager to close. And, loan documents arriving in escrow represent a big step towards the completion of the escrow and the transition of the property to the new owner. However, it is often mis-understood that the close will occur immediately after loan documents are received at escrow and signed. That is not always the case. There are many details (such as lender conditions) that escrow must still verify, and depending on the lender, the funding process may take several days after the signing. This post is designed to educate the buyer as to the steps that escrow goes through in dealing with loan documents that are received in escrow. As you will see, there are several items that have to happen once loan documents are received at escrow before a transaction can close. Understanding this process can help to set the proper expectations about the closing process and help buyers be better prepared to work with both their lender and escrow to facilitate a smoother escrow process.

1. Once your loan has been approved and all prior to loan document conditions have been received and approved by the Lender, the Lender will prepare loan document and send them to escrow for signing.

2. Escrow reviews the loan documents to comply with the Lender’s requirements and reviews the escrow file for any outstanding conditions.

3. Escrow will prepare the buyer’s estimated HUD1/closing statement and put together any required paperwork needing the buyer’s signature. Escrow will make arrangements for signatures on these papers.

4. Escrow will prepare the seller’s estimated HUD1/closing statement and put together any required paperwork needing seller signature. Escrow will make arrangements for signatures on these papers.

5. In some instances the Lender may have documents that may also need signatures from the listing agent, selling agent or loan agent, so escrow will also make arrangements for these items to be signed.

6. If still needed, escrow will order insurance, closing protection letter, etc as required by the lender.

7. Once the buyer’s loan documents have been signed and/or received back into escrow, escrow will package the documents to be returned to the funding Lender. This package of documents is referred to as the loan package. Ideally, by this time, all paperwork that has been sent for signature to the seller, listing agent, selling agent and loan agent have been signed and returned to escrow to include in this package. Lender’s work differently, and some will be prepared to fund the loan when they receive the loan package, others will require 24-72 hours after the loan package is received by the lender to review the package prior to advising if there are any additional requirements/conditions to fund the loan (this is the most common scenario we run across on the West coast). Buyers are advised to understand the timeframe associated with funding the loan from the lender that they are working with. This timeframe is outside the control of escrow.

8. Escrow will request funds from the lender. It is important to note, that although the loan package has been completed and received by the lender, there may be other issues/conditions related to the transaction (for example, outstanding termite repairs) that will hold up the request of loan funding from escrow. In other words, escrow has to be in a position to close escrow, meaning all conditions of the escrow have been met and all the Buyer’s closing funds have been received.

As you can see there is more to getting the Escrow closed once loan documents are in escrow than just signing, so coordinating and getting conditions cleared with your loan officer in an efficient manner is very important for a timely closing. It is important to reiterate that all loan documents are time sensitive and each Lender works differently.

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Reappraisal Exclusion Program–Tax Savings For Sellers 55 And Over

To help homeowners over the age of 55 be able to afford to move to a different home in California or purchase a “move down” home and not suffer an increase in property taxes, Propositions 60 and 90 were passed. The Propositions, also known as the Reappraisal Exclusion Program, provide a one-time property tax relief by preventing a property valuation increase when someone over the age of 55 sells their home and purchases another home of equal or lesser value, effectively saving the seller thousands of dollars each year.

Both Sellers and REALTORS need to understand that there are specific timelines to apply for the exclusion, they need to know which counties in California allow the transfer, and what are the qualifications for the exclusion. Let’s start by defining Proposition 60, 90 and 110.

What are Propositions 60 and 90?

Propositions 60 and 90 are constitutional amendments passed by California voters that provides property tax relief for persons aged 55 and over.

It allows these persons, under certain conditions, to transfer a property’s factored base year value from an existing residence to a replacement residence. Typically the property tax of a newly purchased or constructed residence is based on its current market value upon change of ownership. However, the provisions of Propositions 60 and 90 may result in substantial tax savings since it allows the property tax of the original (sold) property to be transferred to the newly purchased or constructed home if eligibility requirements are met.

Proposition 110 allows the transfer of a base year value for severely and permanently disabled persons. Except for the disability factor, the qualifications for Propositions 60/90 are same as Proposition 110.
What is the difference between Proposition 60 and Proposition 90?

Proposition 60 allows transfers of base year values within the same county (intracounty). Proposition 90 allows transfers from one county to another county in California (intercounty) and it is the discretion of each county to authorize such transfers. As of January 2007, only seven counties have passed an ordinance authorizing intercounty transfers; however, it is recommended that you call your assessor for verification as it could change at any time.

Here are the counties currently allowing the Exclusion Program:

Alameda, Orange, San Mateo, Los Angeles, San Diego, Santa Clara and Ventura.

Here is a list of counties that have rejected Prop 90:

Butte, Calaveras, El Dorado, Fresno, Lake Madera, Mendocino, Merced, Mono, Monterey, Napa, Nevada, Placer, Sacramento, San Benito, San Bernardino, San Luis Obispo, Santa Barbara, Santa Cruz, Shasta, Siskiyou, Solano, Sonoma, Stanislaus, Tulare, Trinity and Yolo.

What does “equal or lesser value” mean?

Sellers are able to take advantage of the Reappraisal Exclusion Program when they sell a home and purchase another home of equal or lesser value. What does that entail?

Equal or lesser value means that the fair market value of the replacement property does not exceed one of the following:

100% of the market value of the original property as of the date of the sale if the replacement property is purchased before an original property is sold.

105% of the market value of the original property as of its date of sale if the replacement property is purchased within 1 year after the sale of the original property.

110% of the market value of the original property as of its date of sale, if the replacement property is purchased within the 2nd year after the sale of the original property.

If you purchase a property of greater value than the original sale property, there will be no exclusion.

Timeline:

You must buy the replacement property within two years of selling the original property in order to qualify. You have three years following the purchase date or new construction completion date of the replacement property to file an application for the exclusion. As of the date the original property sold, the seller or the spouse of the seller must be 55 years or older or be permanently disabled.

Proposition 110 creates an exception to the one-time-only limitation for anyone who becomes permanently disabled after having received a reappraisal exclusion as a claimant over the age of 55 years. If a person over the age of 55 years transferred the base year value from an original property to a replacement property and subsequently becomes disabled, then that person may now transfer his or her base value a second time.

A seller may apply for this exclusion in the county of the replacement property by completing and submitting the necessary application form. Contact the County Assessor or download the application directly from the County Assessor’s website.

For more information about the Propositions, frequently asked questions and more, go here.

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What Buyers Need to Be Aware of After Close Of Escrow – Part 1: Taxes

As Escrow Holders we often get inquiries from Buyers and Sellers well after the close of an escrow. It is a common belief that our responsibility as Escrow Holder continues after the close of escrow, when, in fact, escrow no longer has any connection with the transaction once it is officially closed. As a neutral third party in the transaction, escrow may not always have all the answers but your escrow officer can guide you to a source that can help you.

In this series of posts, we will address some of the most common questions asked by new home owners after the close of escrow. This first post addresses the issue of taxes.

TAXES

Almost always, we get calls from Buyers after the close of escrow, asking about property taxes. As a new home owner it is important to remember the following dates:

• The fiscal year begins July 1 and ends June 30 of the following year.
• The first installment of taxes is due November 1 and is delinquent December 10.
• The second installment is due February 1 and is delinquent April 10.

It is the Homeowner’s responsibility to make tax payments on time. Keep in mind the County Tax Collector will not waive tax penalties, regardless of the reason. To avoid paying any penalties, make sure to pay the bill on time. If you have not received a bill as the due date approaches, contact your County Tax Collector and request for a duplicate bill.

Keep an eye out for our next post where we will explain what a home buyer needs to know about the Residential Property Report.

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Dealing with a Foreign Seller? Prevent Escrow Delays by Understanding the Process

When you’re dealing with a Seller who is not a U.S. citizen and is considered by the government as a non-resident alien for purposes of United States income taxation, you can avoid escrow delays and minimize the Seller’s frustrations by knowing and understanding the basic process that all Foreign Sellers have to go through when selling property in the United States.

First of all, the U.S. government will get its taxes when a property is sold, no matter who the Seller is. While you should always advise your clients to consult with their CPA or tax consultant for specific information for their transaction, the following information should lay the groundwork to let you know how unique the Foreign Sellers process can be. Hopefully with this information, and advice from the Sellers CPA, Sellers can get everything in order ahead of time to keep the escrow process on a reasonable timeline.

Apply for a SSN or Tax ID Number

Begin by checking whether the foreign seller who is transferring U.S. real estate has a Social Security number and/or Tax ID number. If they don’t, start the selling process by submitting an application for IRS Individual Taxpayer Identification Number Form W-7. Married sellers need to submit one for each spouse. The application must be notarized and include a current, certified U.S. passport. The process of obtaining a Tax ID number will take at least seven to eight weeks and the Seller should seek the guidance of a Tax consultant or CPA for the proper forms and further assistance.

Early Submission Ensures Proper Tax Withholding

Any non-resident of the US who sells real estate in the US will have 10% federal withholding as well as 3 1/3% California withholding. If the sellers do not start the Tax ID application process early, it delay any refund and/or reduction due to them.

Request a Reduction of Withholding

If your sellers feel that the 10% withholding exceeds their capital gains, they can submit a Form 8288-B Application for Withholding Certificate for Disposition by Foreign Persons of US Real Estate Interests. This document will be provided by the Escrow holder and should be submitted to the IRS requesting Reduction of Withholding upon receipt of the document. This document needs to be approved early so the Escrow holder processing the sale has time to obtain approval to submit less than the 10% U.S. withholding. This process takes several weeks, as well.

In summary, it’s important to remember:

• It takes seven to eight weeks to submit IRS Individual Taxpayer Identification number Form W-7. Married sellers must submit one notarized application for each spouse with a current, certified U.S. passport.

• Any nonresident who sells U.S. real estate will have 10% federal withholding and 3 1/3% California withholding. Not having a Tax ID delays any tax refunds or reductions.

• The Seller might be able to reduce their withholding, but must allocate several weeks to be approved before submitting less than the 10% U.S. withholding.

For further information and forms, seller’s should consult their CPA or tax adviser and can visit:

• IRS: http://www.irs.gov/pub/irs-pdf/p515.pdf
• Tax ID Number: http://www.irs.gov/businesses/small/international/article/0,,id=96696,00.html
• Withholding Reduction: http://www.irs.gov/pub/irs-pdf/f8288.pdf

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The Short Sell Process: Escrow Explains What You Need to Know

In a prior post we explain the terminology associated with Short Sales. In order to further clarify the short sale process, this post explains the process a seller must go through if they find themselves facing a short sale.

A Short Sale comes in to play when a seller must sell their home and the value of the property is just not sufficient to cover the balance owed to the existing lender. In order to accomplish this the seller must work with their existing lender(s), and any other existing lien holders, to request approval of the sales price, the sale terms, and payoff of their loan to be at a reduced amount.

The Short Sale process is as follows:

• The owner or their agent/negotiator must contact the existing lender.
• The lender will direct them to their website, or will advise how, to obtain specific forms, instructions and lender requirements.
• This group of documents, along with the lender’s financial forms (Short Sale Package*) is then sent to the lender as per the lender’s instructions.
• After the lender receives the package it is then assigned to a contact person in the lender’s Loss Mitigation Department. This process can take anywhere from two weeks to two months and sometimes even longer.
• At this point the Loss Mitigation Dept then reviews the package and will contact the homeowner to request any additional items that may be required by the lender. This request is usually made verbally to the homeowner or negotiator but can sometimes be found via the lender’s website.
• The lender will then request a Broker’s Price Opinion (BPO) from an agent chosen by the lender.
• Once the lender has received the BPO as well as the Short Sale Package they submit it for final review. Once the lender has completed their final review they may give approval as is or their approval may be subject to changes such as sales price changes. Or the lender, at this time may decide that the seller did not have ample reason for the short sale and therefore deny the request for the short sale.

*Short Sale Package can consist of 100 to 200 pages including, but not limited to, the following items:

1. Listing Agreement

2. Short Sale Addendum

3. Offer to Purchase

4. Proof of Buyer’s funds

5. Owner’s Tax returns

6. Paystubs

7. Owner’s Bank Statements

8. Hardship letter from owner (explaining why the short sale is needed)

Remember that every lender and every situation is a different story so it will help to keep a handle on each request by staying in touch with the lender constantly through the process.

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Exclusion from Reassessment of Property Taxes Can Save You Money

Did you know that in several counties in California, Propositions 58 and 193 can save homeowners money in the transfer of property between parents and children and even grandchildren? These propositions are geared towards keeping property “in the family” and both propositions help avoid a forced sale if the home is reappraised and the taxes go up exponentially making it too difficult for the family member to make the payments on the home.

Proposition 58 provides property tax relief by preventing an increase in property taxes when real property is transferred between parents and their children.

Proposition 193 broadens the tax relief to include transfers between grandparent and grandchildren, or from grandchildren to grandparents. This transfer is only exempt in cases where both parents of the grandchild are deceased.

The Parent-Child Exclusion applies to any real property purchases or transfers between parents and children, which occurred on or after November 6, 1986.

The exclusion applies to natural children, children adopted before the age of 18, stepchildren (as long as the parents are still married), and sons- and daughters-in-law are considered children under this exclusion program.

What most homeowners do not know is that the claim must be filed within three years after the date of the purchase/transfer or prior to the transfer of the property to a third party, whichever is earlier or within six months after mailing of the notice of supplemental assessment.

What type of property can be transferred without a tax increase?

A parent may transfer their principal residence and any other property valued up to $1,000,000 to their children. The properties will not be reappraised providing that the proper Claim for Exclusion from Reappraisal form is filed and approved by the Assessor’s Office.

An inheritance or transfer to children within a trust may qualify for this exclusion. The trust documents must be provided with the claim.

You may request a Parent-Child or Grandparent-Grandchild Exclusion claim form by contacting your local County Assessor/Recorder/Clerk office. You may ask your Escrow Officer for the contact information for your local Assessor’s office, too.

The Los Angeles County Office of the Assessor did a great writeup on this topic, as well, and included links to the forms that are used in exclusion claims. Their summary can be found here.

The points presented here are meant as an informational summary and are not inclusive of all of the nuances of the propositions. For full definitions of Prop. 58 & 193, please view Revenue and Taxation (R & T) Code Section 63.1 online at www.leginfo.ca.gov and consult with your tax or legal professional.

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The Importance of Wiring Funds to Escrow for Foreign Investors

Do you have a foreign investor or buyer looking to purchase a home in California? If the client writes a personal check drawn on a foreign bank, it may take several weeks to be able to verify that the check has actually cleared. On the other hand, deposit checks we take from a customer drawn on a U.S. bank typically clear within 3-4 days.

Wire Transfers Expedite Process

There are steps you can take to ensure the escrow closes on time by working with your buyer to understand the need for a wire transfer to expedite the closing process. When you write an offer and are presented with a check drawn on a foreign bank, write on the first page of the purchase agreement that the buyer will arrange to wire transfer the deposit to the escrow company upon acceptance of the offer.  Sometimes Realtors will go so far as to actually take the check to present with the offer, but state that the check will be replaced with a wire transfer upon acceptance.  Either way works.  Please keep in mind, that some escrow companies may require a wire from a foreign buyer (and not accept a check at all) due to the possibilities of delay. Contact the escrow company directly to inquire what the required procedures are.

There are problems that could arise if a check drawn on a foreign bank IS deposited into escrow:

1. Buyer could call his bank to put a stop-payment order on the check and escrow may not even be notified of this for 6 to 8 weeks.  Our escrow officers have experienced buyers who decided against the purchase of the property and placed a stop payment on the check and then were unaware the stop-payment had been done.
2. Costs are being incurred on the strength of the buyers’ earnest money deposit.  If the Sellers are holding their property off the market, they deserve to be assured that the buyer has “good funds” in escrow to back up the offer they have made to purchase
3. If the escrow is scheduled to close rather quickly, for example 14 days, and the initial deposit check drawn on a foreign bank is deposited into escrow, the escrow company may not be able to verify clearance of the check as a way of guaranteeing that there are “good funds” in the escrow and allowing the escrow to close.

Generally there is little resistance from the buyer to following these suggestions when the implications are explained. When a buyer is told up-front by the Realtor that any funds coming into escrow must be made by wire transfer, it conveys to the client that we are all on the same page and have the same goal: closing the escrow successfully.

Here is an example of a wire transfer request form.

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