What It Means to Be 'In Escrow'

By Robert J. Bruss
Saturday, August 11, 2007

Q: DEAR BOB: I used to live in California, where the word "escrow" referred to the closing of a real estate sale. For example, we said, "We're in escrow for the sale of our house." But then I moved to Florida, where the term seems to have an entirely different meaning. Here, it refers to the mortgage lender requiring the borrower to deposit a stated amount each month into an account for payment of the property taxes and insurance bills when they come due. Which is the correct use of the word? -- Myron A.

A: DEAR MYRON: As you discovered, there are at least two real estate meanings for the term "escrow." The word refers to putting something of value, usually money, into the care of a third party. Escrow companies operate in many states. Sometimes there are also title or abstract companies that arrange for owner's and lender's title insurance policies.

The primary purpose of an escrow for a real estate title transfer or closing settlement is to have a trusted, neutral stakeholder hold the seller's deed to the property, which will be delivered to the buyer upon payment of the sales price and fulfillment of other sale conditions. The second meaning refers to the mortgage lender requiring the borrower to pay each month 1/12th of the annual estimated property taxes and hazard insurance into an account maintained by the lender. When the property tax and insurance bills for the property become due, the lender pays them from these funds.

Meanwhile, the lender gets the use of the escrow funds, thus earning itself a modest amount of extra income. A few states have laws requiring lenders to pay borrowers interest on escrow funds, typically about 2 percent. These escrow accounts are required for Veterans Affairs, Federal Housing Administration and PMI (private mortgage insurance) home loans. Because lenders tend to overcharge on these escrow accounts, making annual adjustments to refund any overcharge, borrowers often dislike them and try to avoid them whenever possible.

DEAR BOB: We own a condo in a resort area, and we have been trying to sell for more than a year. Our real estate agent agreed to a 7 percent sales commission, with 4 percent going to the buyer's agent. We are also offering $10,000 to the buyer at settlement. The unit is priced at $135,000, which is the lowest in the community. Everyone agrees that it shows well, with new paint and carpet. There has been a steady stream of showings, but we have had no offers. Because we didn't pay much for this condo, we are considering contacting the "We Buy Houses" people to get their offer. The property is debt-free, but we pay property taxes and substantial condo fees. What do you know about these companies, and how can we avoid being swindled? -- Marty D.

DEAR MARTY: The "We Buy Houses" companies you see advertising in newspapers and on billboards want to earn a big profit. As a result, they will offer a price substantially below the fair market value of your condo.

If your condo hasn't sold in more than a year, something is seriously wrong. Chances are, your condo is overpriced. Having the lowest price listed in your condo complex is irrelevant. What is the latest sales price for a similar nearby condo? Your asking price should be at or below that amount if you want to sell. Slash your asking price.

Because you own your condo free and clear, have you thought about carrying back an installment-sale mortgage for the buyer? With a 10 to 20 percent down payment, such a mortgage would be a good investment, earning about 6 percent interest. Advertising "easy seller financing" is sure to create buyer interest.

Also, if your listing agent couldn't sell your condo in a year, maybe it's time to get a new agent.

DEAR BOB: I have been reading in your columns and elsewhere about reverse mortgages. I am retired and younger than 62. My wife is older than 62. Can we qualify for a reverse mortgage? -- Ronald B.

DEAR RONALD: To obtain a reverse mortgage, all principal-residence co-owners must be at least 62. You could quitclaim your title to your wife, but then you wouldn't hold any ownership interest in the home. The reason for this rule is that the life expectancy of a co-owner under 62 is too long. Reverse mortgages provide your choice of a lump sum, lifetime monthly income, credit line or any combination.

DEAR BOB: The loan specialist for the mortgage lender that financed my recent condo purchase said I would receive 100 percent financing with no private mortgage insurance premiums. While reading the numerous documents I signed at the closing settlement, I noted that one says the lender will pay the first year's PMI. After I made the first loan payment, the lender sold my mortgage to another lender. The new lender describes my mortgage as one with PMI. Does this mean I have to start paying PMI after 12 months? Was I misled by the loan officer? Do I have any recourse? Is this another case of lender abuse? -- Robert M.

DEAR ROBERT: Did you read the loan documents before signing? Apparently not. If they didn't state that the monthly PMI fee begins after 12 months, then you don't have to pay it, but it appears that the PMI explanation is in the paperwork someplace.

Yes, it appears that you were misled by the loan officer. You could have completely avoided PMI by obtaining an 80 percent first mortgage and a 20 percent home equity loan or second mortgage. Or the lender could have charged a slightly higher interest rate and paid the PMI premiums for you. But it appears that you have little recourse, especially since your mortgage was sold to another lender.

You could take that loan officer to small-claims court and sue him or her for the amount of your unexpected PMI premiums you will have to pay after one year. However, the judge will ask if you read the documents. When you say no, the case will probably be dismissed.

DEAR BOB: For several years, my wife and I have owned an 11.2-acre parcel of land in a high-priced residential area. But it is worthless because it has no road access. If we get an easement from a street to our land, it would become very valuable. But none of the neighbors will sell us an easement. What can we do? -- Stephen E.

DEAR STEPHEN: Most states have statutes or court decisions showing how to "unlock" parcels without road access by obtaining a driveway easement over an adjoining parcel. You will need to retain the best real estate title lawyer you can find. He or she will research the titles of the adjoining parcels.

If it can be proven that at some time in the past an owner of your landlocked parcel also owned an adjoining parcel, then you could be entitled to an "easement by necessity" over that parcel, even if the owner doesn't want to give you an easement. The theory behind easement by necessity is that the common owner forgot to provide road access to the landlocked parcel, so the court can now create such an easement.

DEAR BOB: You often answer questions about Internal Revenue Code 1031 tax-deferred exchanges of rental properties. Can vacant land that is not rented be exchanged tax-free? -- Claire B.

DEAR CLAIRE: Yes. IRC 1031 says any property held for investment or use in a trade or business can qualify for a tax-deferred exchange. If you bought the land as an investment, you can make a tax-deferred exchange for other "like kind" investment or business property of equal or greater cost and equity. But "like kind" does not mean "same kind." Thus you can trade your vacant land for other vacant land, apartments, offices, warehouses, shopping centers or just about any property except a personal residence.

DEAR BOB: What is the most cost-effective way for my parents to leave me their home? They want to add my name to the title, but I would like to avoid as much tax as possible. -- Jeannine T.

DEAR JEANNINE: If your parents die in 2007, federal estate taxes will not be an issue unless they each leave net estates of more than $2 million. Your goal should be to avoid probate costs and delays, as well as to receive a stepped-up basis to market value when you inherit the property.

One method is to add your name with all three of you holding title as joint tenants with right of survivorship. If your parents die first, you would be the sole surviving joint tenant. Joint tenancy does not require probate. The surviving joint tenant simply files a certified copy of the deceased joint tenant's death certificate and an affidavit of survivorship.

But there are joint-tenancy drawbacks, especially if one joint tenant becomes incapacitated and the property needs to be sold.

The best way to accomplish your goals and your parents' goals is to deed the house title into their revocable living trust. Your parents can name you as the successor trustee if they pass on or become incapacitated. Until then, they control the property as they now do, including selling or refinancing it.

Holding title in a revocable living trust avoids probate costs and delays, allows you to distribute the living-trust assets if your parents die first and gives you a stepped-up basis to market value after they both pass on. For more details, please consult a lawyer who specializes in living trusts.

DEAR BOB: Our question pertains to Internal Revenue Code 121. In order to receive the $500,000 exclusion, we understand, both spouses must occupy the principal residence at least 24 of the past 60 months before its sale and IRC 121 can be used only once every 24 months. Can the home be titled in just one spouse's name? -- Linda D.

DEAR LINDA: Yes. Although I think it is best to have the names of both spouses on the home's title, IRC 121 requires that title be held in only one spouse's name. I like having both spouses' names on the title because then, no matter which spouse dies first, the surviving spouse gets the benefit of a stepped-up basis to market value.

For example, suppose only your name is on the title to your home, but your husband dies first. Because his name wasn't on the title and you didn't inherit anything from him, you would not receive any stepped-up-basis benefits.

DEAR BOB: My mortgage company continued to send me monthly payment statements during my bankruptcy and even after the bankruptcy was discharged. Then they stopped. When I called, a representative admitted the mistake. Did my mortgage company violate any laws? -- Robert G.

DEAR ROBERT: It appears that your mortgage company should have discontinued sending you monthly statements while you were in bankruptcy, presuming the lender was informed of your bankruptcy filing.

However, the mortgage company is a secured lender, so you still owe the money and you were not discharged of mortgage debt in the bankruptcy. I suggest that you forget the matter.

DEAR BOB: Can a mortgage lender force me to use a specific appraiser when I am removing my PMI? -- Dave W.

DEAR DAVE: Yes. However, if you don't like the appraiser's evaluation of your home's fair market value, you can hire your own licensed appraiser and contest the lender's appraisal.

Whether you are removing PMI or obtaining a new mortgage, the mortgage lender always selects the licensed appraiser. As a borrower, I've often been asked by mortgage lenders if I have a preference for a specific appraiser. Usually I don't.

I suggest that you speak up if you have a preference for a specific appraiser or you think the appraiser selected by the lender is incompetent. However, be aware that many mortgage companies hire appraisers through major nationwide appraisal management firms at negotiated fees.

DEAR BOB: In recent columns, you said it was necessary to transfer real estate titles into the property owner's living trust. Is this necessary if the owner has a "pour-over will" with a provision that all other assets are poured over into the trust? -- Joseph P.

DEAR JOSEPH: Depending on state law where you reside, your pour-over will may be subject to probate proceedings. The purpose of a pour-over will is to bequeath assets that you forgot to include in your revocable living trust. Its purpose is not to avoid probate proceedings.

DEAR BOB: When I was 17, my father included my name on the deed to a small plot of land in a campground community. I never signed the deed. But after seeing a copy of the deed, my name is clearly on it. I learned about this when I received a collection notice for about $10,000 of past-due maintenance fees, electricity bills, property taxes and interest.

I have contacted the community association and the collection agency to explain the situation, as I do not feel I should be obligated to pay. The president of the community association told me the main reason he is going after me is because my dad is nowhere to be found. My credit is completely ruined. I cannot get approved for a mortgage, a car loan or even a credit card. Can I sue them? If so, how would I determine my damages? -- David F.

DEAR DAVID: As the grantee on a deed, your signature is not required. However, because you were 17 when your dad foolishly added your name to the title, you could have renounced the title after turning 18. I presume that you are now well over 18 and it is too late to renounce title, especially if you have benefited from using the campground.

Depending on state law where the campground is, you might be able to deed the property to the campground association to get rid of it. This is commonly done by homeowners who want to deed property to their lenders to get out of a mortgage obligation.

For example, where I live, the grantee on such an unexpected deed has 30 days after receiving knowledge of a recorded deed to renounce it. Contact a real estate lawyer in the county where the campground is to learn whether he or she is aware of any technique that has been used to get out of ownership.

An alternative, of course, is to sell the land.

DEAR BOB: We are trying to sell our $3 million, 48-unit apartment complex and have tried to get unbiased information from the state real estate commission, the state board of Realtors and the Association of Realtors. We want to know what the typical financial disclosures are for this type of sale. None of the agencies would tell us anything.

Every prospective buyer seems to want a rent roll, income and expenses for the past three years, property taxes, and more. But we aren't comfortable complying with these requests. What are the customary disclosures expected of the seller before a purchase offer has even been produced? -- Elaina C.

DEAR ELAINA: I'm sure that when you acquired the property, you asked for the information you specified above. You would have been a fool to make a purchase offer without knowing the basic income and expense information, rent roll, etc.

After you accept a written purchase offer from a buyer, he or she usually includes a "due diligence" inspection contingency for a complete inspection of the property, including your tax returns for that property.

You went to the wrong sources for real estate sales information. The state real estate commission and the Realtor association are not there to tell people how to sell property.

I suggest that you interview at least three successful real estate agents who specialize in the sale of properties like yours. Stay away from agents who sell only houses because you need a specialist in apartment-building sales. Each agent will evaluate your apartment complex, tell you what financial information is needed and then suggest a sales price.

DEAR BOB: My husband died last year. Now I find that there is a judgment recorded against my home. Is this legal? -- Miriam S.

DEAR MIRIAM: It depends. If you and your late husband held title as joint tenants with right of survivorship, the law in most states is that an uncollected judgment against one joint tenant terminates when that tenant dies.

However, if title to your home was held by another method, such as tenants in common, then the recorded judgment lien remains on the house even if it was against just one co-owner. For details, consult a real estate lawyer.

DEAR BOB: My 92-year-old mother-in-law owns a house valued at about $650,000. It was built in 1947, and she has been the only owner. Suddenly, she wishes to give this property to her three adult children, none of whom has any interest in it. From reading your columns, this sounds like a bad idea. Where would the stepped-up basis come into play? Only she can claim the $250,000 principal-residence-sale tax exemption. What should we advise her? -- Ann W.

DEAR ANN: Don't do it. That would be my advice to your mother-in-law. If she gifts the property during her lifetime, the three children will take over her very low basis for the house. I presume that she wants to retain a life estate so she can remain in the house.

If she gifts the house to the children now and they sell it after she dies or moves out, they would have a huge capital gains tax to pay. They would be much better off inheriting the house and claiming the stepped-up basis to market value on the date of her death. They should consult a tax adviser to discuss the situation.

Readers with questions should write Robert J. Bruss at 251 Park Road, Burlingame, Calif. 94010, or contact him via his Web page, http://www.bobbruss.com.

Copyright 2007 Inman News Service