Category: Escrow

Good Faith Estimate

 

Understanding the Good Faith Estimate
good faith estimate expression

A lot of buyers are completely shocked when they receive their good faith estimate (GFE) from their lender in escrow. That is because the GFE greatly exaggerates the buyer’s closing costs. It is not uncommon to see a GFE with three times the amount of the actual closing costs. Why does this happen?

The government made The Good Faith Estimate mandatory after the mortgage meltdown in 2007 because they thought that lenders were taking advantage of consumers by making them overpay for a mortgage. The Good Faith Estimate discloses to the buyer all of the costs upfront.

good faith estimate 1

GFE page 1

good faith estimate page 2

GFE page 2

 

 

The problem with the GFE in practice I find, is that the GFE isn’t very useful because it has exaggerated costs. Lenders inflate the costs a little bit because they can’t charge anything more than what is on the GFE which puts them in a bind because they don’t know all the transaction costs yet, so they give themselves a little padding. In addition to this, don’t ask me why this is a rule also, but a lot of seller side closing costs are put on the GFE that make it appear like the buyer will be paying those when they are not.

With the Good Faith Estimate above is from a transaction I recently did. Compare the GFE with the HUD1 in this transaction and you can see how dramatic the difference was:

Item GFE HUD1
Origination Charge $1,575 $1,575
Credit Report $75 $60.59
Appraisal Fee $750 $500
Flood Cert. $19.5 $19.5
Tax Service $85 $85
HOA Cert $450 (seller) $0
Lenders title insurance + escrow $4,300 $790
ESCROW   $1856
Owners Title Insurance $2600 (seller) $0
Pest Inspection $150 (seller) $0
Government Recording Charges $150 $100
Transfer Taxs $2912 (seller) $0
Daily Interest Charges $657 (16 days at $41 per day if closing date is X) $123 (3 days)
Homeowners Insurnace $639.96 $639.96
TOTAL $14,364 $5,748

The GFE in this transaction overstated buyer’s actual closing costs by $8,616!

The HUD1 Prepared by escrow has the accurate numbers for closing costs and should the document you reference to find your true cost. At the very least, when you get a GFE you can talk to your lender about it. 

 

Are you in the closing process? Do you have more questions? 

 

Please call me directly at (310) 388-7332 or click the button below and I will be in touch!

 

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Los Angeles Final Walk-Through

final walkthrough

 

The Final walkthrough inspection is a real estate tradition in Los Angeles. The purpose of conducting a final walk through is to guarantee to the buyer that the property is in the same condition as when the buyer first saw the property, and also to confirm that any work that was agreed to be done in escrow with a request for repairs was completed. Really, what a final walk through is all about is the buyer taking one last look at the property before closing.

Paragraph 16 VP in RPA

Residential Purchase Agreement Paragraph 16

 

The residential purchase agreement by default schedules a final walk through 5 days before the close of escrow.  Since a final walk through is not required to complete the sale, it can be waived if the buyer chooses.

After conducting the final walkthrough the buyer will fill out the Verification of Property Condition (VP) form, that will note if the buyer was satisfied with the condition of the property, or will point out anything further that must be done prior to close. Make sure the property is in “Broom Swept” condition. If its dirty, you may ask to have the seller hire a cleaning company to clean it. I recommend doing your final walk through before you receive loan docs, that way if anything is wrong, you can hold off on signing them until its fixed.

 

 

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What is Escrow and a Typical 30 Day Escrow Timeline

Escrow los Angeles storefront

West Coast Escrow on Larchmont

Escrow Fee Calculator

What is Escrow?

Escrow is a neutral third party that serves as an intermediately between buyer and seller during a real estate transaction. Escrow’s main duty is to handle the money. When you are dealing with large dollar figures of real estate deals, it is best to hire an escrow company- imagine how horrible it would be if someone ran off with the earnest money, or spent it! Or what if the deed was recorded in the buyers name before they paid for the property! These kinds of disasters can be avoided with escrow.

Sometimes buyers complain that they think escrow companies are overpaid. This is because a lot of what escrow does is behind the scenes. In truth escrow companies do a whole lot of work coordinating all the different people involved to make a real estate purchase happen.

escrow diagram

Escrow is the hub for all the different parts of the transaction to come together

 

Escrow companies coordinate with: the Buyer, the Seller, the Listing agent, the Selling Agent, transaction coordinators, the Buyer’s lender and their appraiser, the seller’s lender, the HOA if there is one, the title company, the city of Los Angeles and the state of California, the termite company, insurance company, home warranty company, and retrofit company, package shipping companies, and traveling notaries. Escrow make sure each state required item to complete a sale is taken care of before closing.

Escrow Fee Calculator

Escrow fees range from one to two thousand dollars for sales up to $1,000,000 and only a few thousand more for multimillion sales. The most I would expect to pay on an escrow for a transaction of any size is $6,000. The best practice for filling out a purchase agreement is to use the language “each shall pay their own fee” for escrow fee.

each shall pay own fee

Paragraph 4 C of residential Purchase Agreement “Escrow And Title”

 

It is almost impossible for buyer to select the escrow company. I have never heard of it. The seller reserves the right to select services for escrow and title. Sometimes you can get your title company if you ask, but not escrow. Escrow companies are suppose to be neutral, but in reality they do play favorites within the boundaries of the rules. One example would be an escrow officer having a conversation with the buyers agent, then when they get off the phone, immediately calling the listing agent to report.

Escrow cannot take any action unless both parties agree and give their signed permission in writing. If both sides don’t agree the money sits in the escrow company’s trust account until there is resolution.

Escrow produces escrow instructions that outlines the details of the sale. Buyer and Seller receive a copy of the escrow instructions within a few days of escrow opening. Review and sign these right away, or it might hold up the sale. Any change to the instructions, such as an escrow extension  or a seller concession, must be made with an escrow amendment signed by both parties.

escrow process

 

This is a typical 30-day escrow timeline. Within the first three days the 3% earnest money is deposited into escrow, and the escrow instructions are delivered and signed. From then, the buyer’s lender will order an appraisal, and the buyer will conduct their inspections. Once the inspection period is up, it’s a waiting game for the loan to get approved. Within 5 days of closing the buyer may conduct their final walk through. The day after a loan is approved the lender will send Loan Docs. Loan Docs must be signed by the buyer with a notary. The day after loan docs are received is funding- the remaining balance of the down payment must be delivered to escrow via certified check or Wire transfer. The next business day recording takes place. Once the grant deed is recorded with the county you are officially the new owner of the property. Your agent can collect the keys and any other items that pass along with the property from the listing agent and you can move in!

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Earnest Money Deposit [EMD]

It is customary in Los Angeles for The Earnest Money Deposit (EMD) to be 3% of the purchase price. For example, on an offer of $1,000,000- the security deposit would be $30,000. Everything in real estate is negotiable, so you could put down more or less. Most listing agents will think it is strange if the Earnest Money Deposit is less than 3%. For special sales, like probates they may require larger earnest money deposits of 10%.

Initial Deposit

Residential Purchase Agreement Paragraph 3 A Initail Deposit

Earnest money must be made within 3 days of acceptance. It is a good idea to deposit the Earnest Money on the first day after acceptance to get the escrow started on the right foot. If you can’t get the EMD into escrow right away because you need to sell some mutual funds or something just let escrow and the listing agent know, they will be more willing to work with you if you give them a heads up.

Earnest Money may be delivered to escrow via certified check/cashiers check, WIRE transfer, or personal checks (Never cash!). Not all escrow companies accept personal checks so make sure to double check they accept them before going with this method.

Wire transfer is my favorite way to send in the EMD to escrow and it is the easiest. If you are wiring, you will need wiring instructions, which escrow will give you. The wiring instructions will have their bank account number and bank routing number which you will need when filling out a wire transfer form at your bank. Wire transfers cost $25 or so. There is a cut off for banks at around 2pm or 3pm  for a wire to go out in the same day. So if you want the wire to go out the same day make sure you get into the bank early!

One common mistake I see buyers make all the time with Wire Transfers is transferring money from one of their accounts to another before making the wire. Lets say the earnest money deposit is $30,000 and the buyer has two bank accounts: a checking and a savings. The checking account has $20,000 and the savings has $10,000. Some buyers will mistakenly try to transfer money from one account to the other so they have the total $30,000 in one account to do the wire. The problem with this is that when you transfer money from one account to another it “disappears” from the banking system for a day or two before it “shows back up” in the account you moved it to. This delays the wire by two or three days. In most situations you can notify the listing agent and they will be ok if the Earnest Money deposit comes in late- but in some deals this error could cost you the deal. The best thing to do in the scenario above is to make (2) wire transfers, from each account to escrow. You will incur the wire transfer fee of $25 twice but there will be no delay. Wires time deadline for being sent out the same day is 2pm, so make sure you get to the bank before 2pm if you want it sent the same day.

 

 Liquidated Damages parage 25

A lot of buyers wonder why the Earnest Money Deposit is 3%. Paragraph 25 of the residential purchase agreement, Liquidated Damages clause is the reason it is 3%. Liquidated damages protects the buyer in the event that they default. With this provision, the maximum damages the seller can seek from buyer due to non performance (only after ALL contingencies have been removed) is 3% of the purchase price. If Liquidate Damages is not initialed  the damages the seller could claim are unlimited. I recommend for buyers to always initial this provision.

Many buyers are worried about putting their Deposit in Escrow, because if they don’t purchase the property they are afraid that they will lose it. The California state purchase agreement is very bias towards the buyer and has a lot of protection for  buyers, so you shouldn’t worry.

There are 3 scenarios that can happen with your EMD

1. Wrote offer but not accepted

Earnest Money is never deposited with escrow

2. Wrote an offer, offer was accepted, but cancelled during contigency period

Earnest was deposited with escrow, and then returned to buyer (Buyer may incur costs of any inspection fees, a loan appraisal fee, and an escrow cancellation fee)

3. Wrote an offer, offer was accepted, contigencies were removed, buyer breaches contract and doesn’t complete purchase.

Seller may retain the Earnest Money deposit as liquidated damages. Make sure you are absolutely certain you will buy the property before you removal ALL contingencies. The first contingency to be removed is usually the inspection contingency, followed by the appraisal contingency, and finally the loan contingency. Don’t remove the loan contingency until you have final loan approval from your lender.

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Legal Title

When buyers open escrow, they need to specify their vesting. ‘Vesting’ is the way you want to hold title to the property.

Here are the options you have to choose from to hold title:

Vesting Cost
-Sole Ownership Free
-Tenants in Common Free
-Joint Tenants Free
-Community Property Free
-Community Property with right of survivorship Free
-Business Entities (LLC, LP, General Partnership, Corporation, S-Corp) $500-$1500 set up fee plus $800/year registration fee
-Trusts and Estates cost


What form of holding title is right for you?

The answer is complicated because it depends on you, any people who are going on title with you, and deals with tax, inheritance, and transfer issues. Since title crosses paths of several different professionals, you will need to talk with a few people. I recommend speaking with an accountant, a real estate attorney or estate planner, and/or a probate attorney.

If you are single, then Sole ownership will probably be best. Tenants in Common, Joint Tenants, Community Property, and Community Property with the right of survivorship, are all group forms of ownership.  These are all free options. I address Business Entities and Trusts and Estates separately because most residential buyers do not need them.

It is important to note that sole ownership, Tenants in common, Joint Tenants, and Community Property provide no liability protection for owners. Only business entities can provide limited liability.

Right of survivorship is an inexpensive estate planning tool that avoids the expense, lengthy, and complication probate process, and saves the cost of  having an attorney write a will or create a trust.

Sole Ownership

There are no special tax or other advantages of holding title in sole ownership. When the sole owner dies, the property goes through probate.  This is the way most single people hold title.  The deed for a sole ownership is recorded as “John Doe, a single man”.

Occasionally a married couple will choose to hold property as Sole Ownership. This situation comes up when one spouse owned the property before getting married, and wants to ensure their spouse doesn’t acquire a community property interest in the property. California is a community property state, and ownership of the property held in the community is split 50/50 between spouses or domestic partners.  Title would be recorded as “Jane Doe, a married woman as her sole and separate property”.  You have to be very careful if you are married and you are trying to hold property as sole ownership- speak with a family lawyer who can explain it in more detail, the state can declare in court sole ownership property as community property if funds are commingled or it is shown that it was indented to be held in the community. Occasionally a spouse who has good credit will take title as Sole Ownership when the other does not because lenders will give them a reduced interest rate by having the “good credit” spouse take title to the property as a sole owner, and having the “bad credit” spouse Quitclaim (give up) all their rights to the home.

 GROUP OWNERSHIP

  Tenancy In Common (TIC) Joint Tenancy Community Property(section 682.1 of Civil Code) Community Property with right of Survivorship
People Two or more people (may be husband and wife or domestic partners) Two or more people  (can be husband and wife or domestic partners) Only husband and wife or domestic partners Same as Community Property
Ownership Division Ownership interest can be divided into any fraction  of the whole.E.G. three owners may have a 5% a 25% and 70% interest Ownership interest must be divided equally. Two owners 50/50. Three owners 1/3, 1/3, 1/3 etc. Ownership interest is in the community and equal.Husband ownership 100%Wife ownership 100% Same as Community Property
Title Each Tenant in Common has their own separate legal title for their ownership interest There is only one title to the whole property. (Joint ownership in undivided equal shares) Title is held in the “community”. Same as Community Property
Possession Equal right of possession Equal right of possession. A joint tenant can be in exclusive possession of the property or he can lease his intrest to a third party without affecting the nature of the joint tenancy. Such lease will terminate upon the death of the lesser. Joint tenant, with the surviving joint tenants taking the interest therein. Both co-owners have equal management and control with similar absolute power of disposition. Same as Community Property
Selling Selling a TIC is similar to selling a stock. Each owner can sell their share of the property individually whenever they want. The new buyer replaces them in the TIC. Owners can sell their share on their own, but it breaks the joint tenancy and turns it instead into a TIC for everyone. Need permission from BOTH spouses or domestic partners to sell the property. Cannot sell a fractional interest. You must sell the whole thing. Same as Community Property
Death & Inheritance Deceased owner’s Interest in the property transfers to next of kin. Might have to go through probate. Deceased owners’ interest automatically transfers to surviving joint tenant(s). No probate. Death of spouse or domestic partner triggers community property to be divided in half. 50% of the property transfer to the surviving spouse or domestic partner and the other 50% of the property transfers to the deceased person’s heir or next of kin through probate. The inheritor of the 50% owns the property as Tenants in common with surviving spouse. Same as Join Tenancy
Tax No tax advantage “Stepped-up” tax basis for 50% of the property upon death of first spouse or domestic partner. “Stepped-up” tax basis for 100% of property upon the death of first spouse or domestic partner. To qualify, IRS Revenue Ruling 87-98 Same as Community Property
Liability Protection None None None None
 Debt  ???  ??? ???   ???

 

Tenancy in Common
Tenancy in common offers the most flexibility of transferability and ownership division for group ownership. An owner can sell their interest in a tenancy in common without the permission of the other owners and without the need to sell the entire property (although banks usually don’t like to lend on TIC interest so the sale of an interest will probably need to be cash). In addition, Tenant in common ownership can be divided anyway, and does not need to be equal. You could have three owners, with one owning 50% interest, another owning 30%, and the other owner owning 20%- no other form of group ownership aside from Business Entities and Trusts allows you to do this. Tenant in common is generally the vesting chosen by small investors, or unrelated and unmarried owners holding title in a group. Tenancy in common can still be used by married couple but they usually choose to hold title as community property because of the tax advantages and possible estate planning advantages.  Tenancy in common ownership goes through probate.

Joint Tenancy

 There are two primary advantages to Join Tenancy: right of survivorship and a half stepped up tax basis. The right of survivorship is an inexpensive estate planning tool that avoids probate. Joint Tenancy is usually used for family members or unmarried couples that want their interest in the property, upon their death, to automatically transfer to the surviving joint tenant(s).  Joint tenants can be married too. One disadvantage of joint tenants is that ownership interest has to be equally divided among owners unlike tenants in common. So if there are two joint tenants, then they must own the property 50%/50%. If there are three joint tenants, then they own the property 1/3, 1/3, 1/3. The right of surivivorship which is Joint Tenancy’s advantage could also be its disadvantage if you don’t want the joint tenant to inherit your interest and want it to go somewhere else.

 Example of tax advantages of half stepped-up basis of 50% for Joint Tenancy:

Suppose two people bought a property in 1990 for $200,000. The property is now worth $1,000,000. Each owner has an original basis of $100,000 (half of the original purchase price). When on joint tenant dies, the other joint tenant receives a step up in the basis on the half of the property that is transferred to them through right of survivorship. So in this scenario, the surviving joint tenant’s original half still has a basis of $50,000, however the second half transferred receives a stepped up basis to the current market value of the property at the time of death of the co-tenant, which would be $500,000 instead of $100,000. What does this mean?

The basis for the property is used to determine the capital gain upon sale. The long-term capital gain tax rate is 20%. If you sold the property for $1,000,000 with no stepped up basis, the capital gain would be $800,000- which is well above the capital gain exemption of $250,000 for single person, and $500,000 for married couples. In this scenario $550,000 would be subject to capital gains tax which would be $110,000 in capital gains tax.

Since the basis steps up to $500,000, the capital gain is only $400,000 ($1,000,0000 sale price – $500,000 basis on ½ and $100,000 on other half) when the property is sold for $1,000,000. After subtracting $250,000 for the single person capital gain exemption, this leaves $150,000 capital gain that is subject to tax which would be $30,000 in capital gains tax.

This is a tax benefit you do not get with Tenants in Common. However Community property offers an even bigger tax advantage than joint tenancy but is only for people who are married.

Community Property

 Community Property is only for married couples including domestic partners. California is a community property state. This means assets acquired by either spouse during a marriage are considered community property. Community property offers the best tax advantages (even better than Joint Tenants) but must go through probate (Probate code Section 100a). Each spouse has the right to dispose of his or her half of community property by will. Absent a will, title to the decedent’s half of the community property passes to the surviving spouse (Family Code Part 4, Division 4, Section 1100). Community property is usually best for married couples with adult children, or mixed families, although if the estate is very large or complicated a trust could be better.

Keep in mind that community property is liable to creditors to pay for either spouse’s debts, even debts incurred before marriage. If one spouse has debt and credit problems this may not be the best way to hold title.

Example of tax advantages of stepped-up basis of 100% for Community Property:

Suppose a married couple bought a community property in 1990 for $200,000. The property is now worth $1,000,000. Each owner has an original basis of $100,000 (half of the original purchase price). When one spouse dies, the surviving spouse and the heir or next of kin who inherits the other half receives a step up in the basis on the entire property. Let’s assuming in this example that the other half of the property goes to the surviving spouse.  The surviving spouse now has a basis of $1,000,000 for the entire property, instead of $200,000. What does this mean?

The basis for the property is used to determine the capital gain upon sale. The long-term capital gain tax rate is 20%. If you sold the property for $1,000,000 with no stepped up basis, the capital gain would be $800,000- which is well above the capital gain exemption of $250,000 for single person, and $500,000 for married couples. In this scenario $550,000 would be subject to capital gains tax which would be $110,000 in capital gains tax.

Since the basis is stepped-up to $1,000,000, the capital gain is $0.00, when the property is sold for $1,000,000. In fact an additional $250,000 of appreciation is shielded from capital gains if you do not sell immediately. But if you sold it immediately, there would not be any capital gains tax.

Community Property with Right of Survivorship
Community Property with the right of survivorship is only for married couples including domestic partners. It combines the tax benefit of community property with the right of survivorship of joint tenancy. You get the 100% stepped-up basis, and you avoid probate. When the first spouse dies, their interest in the property is automatically transferred to the surviving spouse. Community Property with Right of Survivorship is usually the best way for married people with no children, or minor children to hold title.

Keep in mind that community property is liable to creditors to pay for either spouse’s debts, even debts incurred before marriage. If one spouse has debt and credit problems this may not be the best way to hold title.

Example of tax advantages of stepped-up basis of 100% for Community Property w/ Right of Survivorship (Same as Community Property)

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Home Warranty

In Los Angeles residential real estate sales it is customary for the seller to purchase for the buyer a 1 year Home Warranty plan. Write it in your offer.

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Home warranties are great because if something goes wrong with your new home that the home warranty covers, it doesn’t cost you anything to have it fixed and you don’t have to worry about finding the right person to do the job. Home Warranty Policies offer standard coverage, with additional coverage options that can be added on. Their length is one year long. After the first year, the Home Warranty company will decide whether or not to offer you a renewal. They will mail you a notification before your policy expires- many home owners who used the policy renew.

American Home Shield is one of the Largest Home Warranty companies and they are who I usually recommend.

 

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http://www.ahs.com/

When choosing an American Home Shield policy I recommend getting the Combo plan which covers both a homes systems and appliances.

The Combo plan covers the following:

american home shield Combo Plan

 

Additional Coverage can be added on for:

-Refrigerator/Ice Maker

-Washer/Dryer

-Swimming Pool/Equipment

-Water Softener

-Guest House

**Note that American Home Shield does not offer additional Home Warranty coverage for Wine Coolers, nor do they offer coverage for Fireplaces (no home warranty companies offer coverage for fireplaces). Home Warranty plans do not cover windows, the structure, doors, or the roof (roof warranty can be purchased separately by companies that specialize in them)

Whenever you have a problem you give AHS’s 800 number a call and tell them what’s broken. They send out a trade person to take a look at it, if it can be repaired, they repair it at no cost, and if it needs to be replaced, they replace it at no cost. However depending on which Trade Service Fee Option you choose, each visit by a trade person will cost you the Trade Service fee. The Average number of trade service visits per year is 2. If you are buying a property with very old appliances and systems, where you think it is likely you will have numerous service calls then selecting a lower trade service may make more sense- after 3 service visits, the best policy to choose is the $25 service fee.

American Home Shield Chart

 

Home Warranties are also available for Duplex/Triplex/4plex, prices vary. Double check how much the Home Warranty you want costs, so you can write the correct amount for it into the offer- if you end up short you will have to come out of pocket for the difference.

 

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