Wednesday, May 22, 2013

What is Title? What Is Escrow?

Title is the right of ownership in real property, evidenced by a deed or some other legal certificate. If you have title to a property, you own the property.

This concept sounds simple, but it's not. "Title" refers to a so-called "bundle of rights," some of which you may not have when you take ownership. In many parts of the West, for example, homeowners may discover that someone else owns the mineral rights to their new home. Someone else may own the water rights. These rights are examples of sticks, if you will, in the bundle of rights that comes with title.

Easements and other deed restrictions owned by other entities are quite common. Power companies have utility easements over most urban and suburban properties. Homeowner Association (HOA) covenants are deed restrictions on individual properties allowing the HOA certain controls. State and local property tax liens supersede all others.

Among the most time-honored features of real estate law is with the recordation of deeds and any lien, easement or other restriction on the deed. Say the seller had some work done and didn't pay the contractor. If the contractor recorded a contractor's lien, he'll get paid from the proceeds of your transaction.

But say the seller also had a home equity loan whose lender recorded a second trust deed (a lien) before the contractor did, and there wasn't enough money to pay the contractor. He'd get stuck, because the second lender's recordation happened before his and was therefore senior (see more below if you're interested).

When you buy a home, the seller should provide you with a title insurance policy. You, in turn, will have to provide your mortgage lender with a different one (see more below if you're interested). The title officer will research the chain of title on the property you're buying and will show all the title exceptions, even the cleared ones, on the title report. The insurance policy will pay any claimant not shown who has a valid claim.

Read the title report. Besides the exceptions noted above, there could be court judgments, including unpaid child support payments, easements not immediately obvious (maybe your neighbor to the rear has the right to cross your property), and the like. The title insurance you pay for will insure against any claims not shown on the title report. The seller should clear any exceptions before escrow closes

Which leads us to escrow. What is it? Escrow is the process through which all contractual terms between buyer and seller are deemed complete, and the deed transfers to the buyer and the funds to the seller. Your real estate broker, if you're using one, and your lender will frequently refer to "Close of Escrow," which is essential the close of the transaction.

The escrow officer will prepare a set of Escrow Instructions, which say what the buyer will do, the seller will do, and who gets what. The Escrow Instructions supersede the sales agreement, so read them carefully. Anyone who gets anything out of the transaction--buyer, seller, lender, broker (for a sales commission), lienholders, etc.--have an interest in these.

Escrow fees are generally set by law and don't vary from company to company. Usually, one of the brokers in the transaction will recommend an escrow officer, but buyer and seller can use whomever they wish. The escrow officer will prepare both an Estimated Closing Statement and a Final Settlement Statement, often called a HUD 1, when all the details are determined.

In Nevada, Oregon and California, the escrow officer and title officer, in my experience, were  the same person, with title companies also being escrow companies. Colorado is not an escrow state, but some title companies offer the service. An escrow officer is truly a disinterested, objective third party and will not advocate for either buyer or seller.

Okay, so here's the "see below if you're interested" stuff.

Regarding seniority of recording deeds: In the so-called "robo-signing" scandals, lenders routinely sold the loans they'd just issued to someone else, who would resell it and so on. Recording new owners became cumbersome, so the lenders came up with an entity called MERS (Mortgage Electronic Registration System). MERS would become the nominal owner of the mortgage no matter who the actual holder was or who had servicing rights. But when the foreclosure crisis hit full swing, some borrowers, and their attorneys, claimed that the foreclosing lender had no right to do so, since MERS was the recorded owner. This issue has not been fully decided.

Regarding title policies: In general a seller will provide the buyer with a CLTA (California Land Title Association) policy, whereas the lender will require the borrower to buy a more expensive ALTA (American Land Title Association) policy, which covers more exceptions. I've never understood why.

More errata: Maybe the most common easement few know or think about is the maintenance easement between detached homes. In the states where I worked, it's usually five feet, and you can't do stuff like install an air conditioning unit and concrete pad over this easement. The easement is there so both you and your neighbor can have access to maintain your houses. When the zero-lot-line home I live in now was built, the city's code didn't address the issue, but the HOA documents did. We have a three-foot easement the HOA is supposed to enforce, but it won't, and our neighbor is encroaching.