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Lesson 6 -
Closing Escrow
Vesting
Sometime before closing escrow you need to decide on the vesting, that is
how you will hold title. This is an important decision that should be made
after careful study and even consultation with an attorney. The way title is
vested can impact estate planning and taxation. In practice, you will actually
have to make this decision prior to applying for financing, as the vesting can
sometimes affect the lender's decision. If you expect the seller to carry any financing, he will need to know
the vesting in order to judge his risks as a lender. Even if no seller
financing is involved, the seller is tying up his property for a period of time
(sometimes several months) and the vesting can affect his decision. While you
may get away with using "John Doe and/or nominee" in your offer, a knowledgeable
seller (or his agent) should not allow you to do so.
The basic forms of real estate ownership are:
1.
Sole Ownership. Sole proprietorship means
that one person has complete ownership of, and control over, the property.
You may sell it, divide it, gift it, or bequeath it to your heirs in accordance
with your desires.
2.
Joint Tenancy With Right of
Survivorship.
Join tenancy is the
concurrent ownership by two or more persons of a parcel of property which the
ownership and control would be shared equally among all the joint owners during
their lifetimes. The entire property may only be sold or transferred with the
written consent of all joint owners. Upon the death of one of the joint owners
the remaining joint owners would receive their departed joint owner's interest. The surviving joint owners would then share equally in the ownership and control
over the property
3.
Tenancy by the Entireties.
Tenancy by the entireties is basically a joint tenancy with right of
survivorship between a husband and wife. Only a husband and wife may hold
property as tenants by the entireties.
4.
Tenancy in Common. Tenancy in common is
a type of concurrent ownership in which each tenant owns and controls an
undivided interest in the property. The amount of their interest may not
necessarily be equal. The entire property however, can only be transferred or
sold with the written consent of all owners. However, a co-owner can sell,
transfer or dispose of their interest in the property at any time, including
bequeathing it to their heirs by will or otherwise.
There are
several problems and risks in inherent in owning or attempting to transfer your
property to your heirs or others by one of these types of concurrent ownership.
5.
The basic forms of business
ownership are:
- Sole
proprietorship
-
Partnership
-
Corporation
- LLC, Limited
Liability Company
Pre-Closing
Tasks
Licenses
& Permits
Depending upon the city, county, and/or state in which the property is
located, it is possible that a variety of licenses, permits, and/or inspections might be
required for rental properties. Many jurisdictions require business licenses. While
these items are not legally required for you until close of escrow, it is best
to know what's needed and have your all your ducks in a row prior to closing.
You also need to know whether any inspections are required to obtain the
licenses or permits. If required, it is best to have them performed before
close of escrow.
Some locations have a rental tax at the city,
county, or state level, some at two or even all three levels. Some
jurisdictions tax only commercial properties, while others also tax residential
at the same or a different rate.
At least get all the necessary forms and fill them out so that you can get
your account set up soon after closing.
Estoppel Certificates
If closing is delayed, it might be necessary to
get updated amendments to the certificates to cover rents collected since the
previous versions were executed or certain other special changes in
circumstances.
Insurance
While the lender will usually require that insurance be in place prior to
closing, if you are buying with seller financing or cash you may not be
reminded. The insurance required by the lender will be of minimum coverage
needed to protect the lender's position. You will want a number of additional
coverages beyond those minimums, as well as perhaps higher levels on some
coverages. A good insurance agent can advise you on this matter.
Using an independent broker rather than a company agent (such as Allstate,
State Farm, and Farmers) gives access to a number of competitive companies. It
doesn't hurt, however, to also get quotes from the company agents, since they
are often competitive with or better than the independents. Because there are
so many varieties and levels of coverages available, be sure that all the quotes
are for the same coverages and dollar limits.
Additional information regarding insurance can also be found on the RHOL
web site.
Preview
Loan Documents
If at all possible, try to obtain copies of the loan documents that you
will be signing ahead of the time of signing. The documents are usually many
pages of small type and not easy reading. Accordingly, it is best that you have
plenty of time to read them under relaxed conditions rather than when several
busy people are sitting around waiting for your to sign them. As an
alternative, it may be possible, by prior arrangement, to simply arrive an hour
or so ahead of the scheduled signing appointment review the documents. If it is
not possible to review the documents in advance, take your time prior to signing
no matter how many people are waiting.
Pre-Closing Statement
A pre-closing statement showing credits and debits to each party should be
provided a day to more prior to the closing date. You should check this over
carefully, questioning any amounts that you don't understand or disagree with.
It is much easier to correct errors before closing than after funds have already
been disbursed, which usually happens within two or three hours after
recording. In particular, check pro-rations of rents, property taxes, and
interest and be sure that you received credit for deposits, as you will be
responsible to the tenants for them.
Transfer/Initiate Services
Discontinuance of utilities or other services by the seller before you
have them turned on in your name can create havoc with your relations with your
newly-acquired tenants. You can cover this issue in your purchase contract, but
it is usually handled informally without serious problems. Do, however, make
arrangements for transfer of services with electric, gas, water/sewer before
close of escrow so that everything can be taken care of by a few phone
calls. Unless you are already a large customer, expect to put up deposits for
gas, electric, and maybe even water, the amounts often equal to or 1-1/2 times
the historical monthly bill.
There may be services other than utilities that must be considered. Find
out from the seller if he has contracted services of pest control, landscape
maintenance, or other service and remind him to terminate those services at
close of escrow. Be sure to set up the necessary services in your own name,
using your own new vendors or those of his you'd like to use at least until you
have time to evaluate them and/or get other quotes.
After Closing
Check the final closing statement carefully.
Contact the tenants - meet them in person and
give them a written notice including payee and address for rent payments as well
as your phone/fax numbers and/or e-mail address for future communications.
Prepare new leases and other documentation for tenants whose leases expire
in the near future. If you are buying pre-1978 residential property and the
seller did not have required lead paint disclosure documents for each tenant as
should have been required by your purchase offer, get them executed
immediately. The required pamphlets and forms are available on the members-only
Forms Web.
File the closing statement where you will be able to find it when it's
time to prepare income tax returns for the year of purchase.
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