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Lesson 9
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. You
should usually even try to provide the information in your purchase offer, as
this might affect the seller'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. As the sole owner, you decide how you
want to dispose of your property. You
may sell it, divide it, gift it, or bequeath it to your heirs in accordance
with your desires. Upon your death the property would pass in accordance
with your wishes pursuant to your will.
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. As in joint tenancy, both spouses
must consent in writing for the transfer or sale of the property. as in
joint tenancy, the surviving spouse would receive the entire property upon
the death of his or her spouse.
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:
a.
Property which is held
as either joint tenancy with right of
survivorship, tenants by the entireties or tenants in
common requires
the written consent of all owners to transfer the entire property to
another person. If a parent wants to sell a property which has their
children on the deed, that parent must get their children's consent. In
addition, all of the co-owners are entitled to their undivided
proportional share of the use or income of the property during their
lifetimes. If a co-owner has a falling out with one of their other
co-owners, which occurs quite often, the co-owner would be unable to transfer
the entire property without their co-owner's consent.
b. Property
which is held as joint tenancy
or as tenants in common
may be attached by the creditors of any one of the co-owners as to that
co-owner's share. If one co-owner were to have a creditor, such as from
personal injury claim, their undivided interest in the property could
potentially be at risk and attached by such a creditor. In addition, if
any co-owner gets divorced, their spouse may claim a portion of the
co-owner's share in the property.
c. In
either joint tenancy or
tenancy by the entireties,
there is no control over the property after your death. It would go
directly to the surviving co owners. in addition, if all your co-owners
predecease you, then the property would not "avoid probate" nor
necessarily be transferred to the persons you intended.
d. Joint
tenancy does not guarantee that all
of your heirs would receive equal shares of your estate. Certain parcels
of property or other accounts may appreciate differently or earn different
amounts of income. Without consent monitoring and changing the shares or
interest of the co-owners, it would be almost impossible to guarantee that
all of your heirs receive their intended shares of your estate.
5. The basic
forms of business ownership are:
- Sole proprietorship.
A single person owns the business, receives all tax benefits, and is
personally liable for all matters related to the business.
- Partnership. In a general partnership, all partners are jointly and severally
liable for the acts of other partners that are performed on behalf of
the partnership. In a limited partnership, the general partners
have the same liabilities as above, while limited partners are usually
liable only to the amount of their investment. In both cases tax
benefits flow through to the partners, with the allocations not
necessary based upon share of capital contribution.
- Corporation.
A "person" created by state
law, a corporation has shareholders (owners), a board of directors,
and officers. These three classes usually overlap. For
example, a director or officer is usually a shareholder and someone
can be all three. Shareholders are liable only to the amount of
their investment. Directors and officers are also protected from
corporate liabilities, but can incur liability if they commit acts
that allow piercing of the "Corporate Veil.? For a regular
"C" corporation tax benefits are not passed through to
shareholders, the corporation is taxed on profits, and shareholders
are taxed on dividends (double taxation). By electing to be an
"S" corporation, certain tax benefits can be passed through
to shareholders and double-taxation can be avoided.
- LLC, Limited Liability Company. The LLC attempts to combine the benefits of the corporation and the
partnership
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 and/or
permits might be required for rental properties. Many jurisdictions
require business licenses, with the cost usually depending upon number of units
or the gross income. 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. The frequency of reporting and paying taxes owed often
depends upon gross income. For example, under a certain total gross rent
for the property requiring quarterly reports and payments and over that amount
requiring monthly.
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. It is even possible that a lease could have been amended or
a new lease executed. On this subject, as discussed in the Lesson about
writing offers, your purchase offer should have given you control over any lease changes after its
acceptance.
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. Again, 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.
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. Also, if current information is not already on file from documentation provided
by the seller, obtain current off-premises addresses, phone/fax numbers and/or
e-mail address for each tenant, including for emergencies.
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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