Chapter 12: Closing Real Estate Transactions

A set of practice flashcards covering the closing process, escrow duties, settlement statement entries, proration calculations, and legal requirements including RESPA and tax withholding.

What is the definition of escrow in the context of California real estate?

An arrangement in which the buyer and the seller have a neutral third party (an escrow agent) hold money and documents on their behalf until the transaction is ready to close.

In California, what is the status of the escrow agent regarding agency representation?

The escrow agent acts as a dual agent, representing both the buyer and the seller until the escrow instructions have been fully executed.

What are escrow instructions?

A bilateral contract between the buyer and the seller that directs the escrow agent to take necessary steps to prepare the transaction for closing in accordance with the purchase agreement.

According to the lecture, what happens if there is a conflict between the purchase agreement and the escrow instructions?

The escrow agent is generally supposed to comply with the escrow instructions.

Under what three circumstances does an escrow terminate?

1. The transaction closes; 2. The terms of the escrow instructions have not been fulfilled by the closing date; or 3. The parties mutually agree to the termination.

What action should an escrow agent take if a dispute arises over funds in escrow?

The agent should file an interpleader action nearby and turn the money over to the court, which will decide who is entitled to the funds.

What is a debit on a settlement statement?

An amount to be paid by one of the parties (e.g., the purchase price is a debit for the buyer).

What is a credit on a settlement statement?

An amount to be paid to one of the parties (e.g., the loan amount is a credit for the buyer).

How is the purchase price recorded on the settlement statement?

It is listed as a debit to the buyer and a credit to the seller.

How is the buyer's Good Faith Deposit treated on the settlement statement?

It is listed in the buyer's credit column only, as it is applied toward the purchase price at closing.

What is a reserve account (also called an impound or escrow account)?

An account into which the borrower makes periodic payments to cover property taxes and homeowners insurance, protecting the lender's interest.

What is proration?

The process of dividing and allocating an expense proportionately, according to time, to determine what part of it a particular party is responsible for.

What are the three main steps in the proration process?

1. Determine the per diem (daily) rate; 2. Determine the number of days for which one party is responsible; 3. Multiply the number of days by the per diem rate.

In California, what are the dates for the property tax year?

The property tax year runs from July 1 to June 30.

What does it mean that mortgage interest is paid in arrears?

It means interest is paid after it accrues (e.g., the May 1 payment covers interest that accrued during April).

How is prepaid interest (interim interest) calculated for a buyer at closing?

It is calculated from the closing date through the end of the month in which the closing takes place.

Are security deposits prorated at closing?

No, security deposits are never prorated; they are simply transferred to the new owner of the rental property.

How is the 'Balance Due From Buyer' calculated?

By adding up all the buyer’s debits and subtracting all the buyer’s credits.

What is the purpose of IRS Form 1099-S?

To report the gross proceeds of a sale of real property to the IRS, including the seller's name and Social Security number.

What are the requirements for IRS Form 8300 reporting?

An escrow agent who receives more than $10,000$ in cash must report the payment within $15$ days.

Under FIRPTA, what is the default withholding percentage if the seller is not a US citizen or resident alien?

The buyer must withhold $15.00\%$ of the amount realized, unless the amount is between $300,000$ and $1$ million, in which case it is $10.00\%$.

What is the standard withholding rate under the California Withholding Law?

The buyer or escrow agent generally must withhold $3.33\%$ of the sales price from the seller.

What does the Real Estate Settlement Procedures Act (RESPA) prohibit?

It prohibits the payment of kickbacks (referral fees) and unearned fees between settlement service providers.

Under RESPA, what is the 'two-month cushion' rule?

A lender may not require a borrower to deposit more than the amount necessary to cover recurring costs plus a two-month cushion into an escrow account.

What is the timing requirement for a lender to provide a Loan Estimate?

The lender must give the borrower a Loan Estimate within three business days of receiving a loan application.

What is the timing requirement for the Closing Disclosure?

The lender must provide the borrower and seller with the Closing Disclosure at least three business days before the closing date.