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Escrow Info

Escrow opens when the buyer and seller sign a sales contract, commonly called a real estate purchase agreement and receipt of deposit. The contract, along with any additional instructions, serves as instructions for the escrow officer.

Escrow assures that the lender releases the home purchase funds at or about the same time that the deed is recorded to reflect new ownership. Escrow includes depositing, with a neutral third party, funds, documents and instructions necessary to complete the transfer.

Because the real estate transaction involves large sums of money and reams of documentation, escrow is not always a predestined, step-by-step process, but can become a confusing end game of details, nit picking and overlapping procedures. It requires preparation, attention to detail, and desire from both sides to close the deal.

Regional custom will dictates who (the buyer or the seller) chooses the neutral third party and who that third party will be. A neutral third party can be an escrow officer from an escrow company, someone from a title company or from a title and escrow company. Some regional areas use title and escrow attorneys. Custom and market conditions also dictate which escrow costs the buyer or seller pays. The amount typically totals about 1 to 2 percent of the cost of the home.

Choosing an escrow officer is much like choosing any real estate professional. Get several referrals from trusted people, then compare services, cost and convenience.

Your escrow officer opens escrow by assigning your escrow an account number and collecting the contract and other instructions, the buyer's deposit and perhaps additional proceeds or documents related to the transaction. Deposits are either applied to the purchase price, or returned should the deal fall through.

The buyer orders title insurance, to protect him or her against blemishes on the title, and he or she orders a preliminary title search to determine if there are any claims against the title.

The contract and escrow instructions likely contain contingencies for home insurance, flood insurance, home inspections, financing, repairs and other tasks either the buyer or seller must complete before the transaction can progress. Each time a contingency is met, the buyer or seller signs off with a contingency release form or letter copied to all parties, including the escrow officer.

At some point, parties will receive a preliminary title report which summarizes the condition of the title, including easements and liens, claims and encumbrances against the property. The seller must resolve any claims against the title, or they could stall the deal.

The title company may check once again and produce a final report to be sure existing claims have been removed and that no claims have been filed since escrow opened.

Once the loan is funded, contingencies are released, the title is cleared, the buyer inspects the property and decides how to take title, only a few loose ends must be tied before close of escrow.

Remaining paperwork to sign a few days before close includes the buyer's grant deed, any final escrow instructions or contingency releases, the settlement sheet of disbursements, title reports, the deed of trust lender forms, inspection reports, tax statements -- and a rental agreement if the seller will live in the home for some time after escrow closes.

Escrow closes and the deal is sealed when the escrow office records a new deed in the buyer’s name, the seller gets paid for the home, and all other monies are disbursed.

Money may be held in escrow after the close to pay contractors for unfinished work.

Tax Shelters

You save taxes when you buy it. You save taxes while you own it. You save taxes when you sell it.

The mortgage interest deduction and the deduction for property taxes are, to most Americans, sacred. These deductions have been around since time immemorial and the purpose was to encourage home ownership, said Leonard W. Williams, a certified public accountant in Sunnyvale, CA.

All but the very wealthy homeowners deduct all the mortgage interest they pay and consider that the primary tax benefit to home ownership.

IRS Publication 936 "Home Mortgage Interest Deduction" says, in general, joint tax filers can deduct all the interest on a maximum of $1 million in mortgage debts secured by a first and second home, plus the interest paid on a maximum $100,000 in home equity loans. The maximums are halved for married tax payers filing separately.

Watch out for those popular 125 percent equity-loans. Your equity tax deduction is limited to the lesser of the $100,000 maximum and the home's fair market value, determined by a complicated formula found in Publication 936.

The mortgage interest deduction, along with other itemized deductions are included on "Schedule A, Itemized Deductions" to reduce your taxable income and ultimately your tax bill.

"If that total exceeds the standard deduction ($3,550 for married couples filing separately, $4,250 for singles, $6,250 for heads of household and $7,100 for married couples filing joint returns) then you get it deducted from your adjusted gross income," said Peter Vernaci, a certified public accountant from San Jose.

The Mortgage Credit Certificate (MCC) program allows some first time home buyers to benefit from a mortgage interest tax credit.

An MCC, which you first must obtain from your local housing department before you get a mortgage, gives a qualified first-time home buyer a federal income tax credit of up to 20 percent each year the buyer keeps the same loan and lives in the same house.

As explained in IRS Publication 530, "Tax Information for First-Time Homeowners," the credit is subtracted, dollar for dollar, from the income tax owed. For example, if you paid $10,000 in interest, your tax credit would be $2,000. The remaining 80 percent of the interest _ $8,000 is taken as a typical mortgage interest deduction.

You can see the tax credit's benefit immediately in your paycheck by adjusting your W-4 exemption status to reflect the credit. In some cases, lenders will qualify you for a loan based on the monthly mortgage payment minus the tax credit, enabling you to qualify for a bigger loan.

Home buyers also get to fully deduct all points associated with a home purchase mortgage. Sometimes called "origination fees," "loan discounts" and "broker discounts," each point is one percent of the financed amount. In many cases, the buyer can also deduct points on the buyer's mortgage that are paid by the seller.

Points on refinanced mortgages are also deductible, but over time.

"If you refinance, you have to amortize the deduction for points over the life of the loan, but if you refinance again you get to write off the balance of the points from the old refinance," said Vernaci.

Property taxes, referred to as "real estate taxes" in Publication 530, are also deductible from your income. Be careful not to deduct escrow money held for property taxes, but not actually used to pay them, say until the next tax period. Local tax refunds reduce your deduction by a like amount.

Even when you sell your home, it continues to be a tax shelter, for a few homeowners.

"The broker's commission, title insurance, any of the legal fees, administrative costs, inspection fees. Those are selling costs, and as expenses of the sale, they are deductible from the gain," said Vernaci.

Your gain is your home's selling price, minus deductible closing costs, minus your basis. Publication 530 also offers a worksheet to help you figure your basis - the original purchase price, plus capital improvements, minus any depreciation.

Thanks to the 1997 Taxpayer Relief Act, however, many home sellers no longer suffer a taxable gain.

That's because, under the act, sellers get to keep, tax free, up to $250,000 in capital gains ($500,000 for married sellers who file taxes jointly) on sales of homes used as a principal residence for two of the prior five years.

"If the gain is less than the $250,000/$500,000 exclusion, then those sales expenses are a kiss-off. They aren't written off against taxable income, hence they don't save any taxes," Williams said.

Real Estate Agent

The selling process generally begins with a determination of a reasonable asking price. Your real estate agent or realtorcan give you up-to-date information on what is happening in the marketplace and the price, financing, terms and condition of competing properties. These are key factors in getting your property sold at the best price, quickly and with minimum hassle.

Marketing
The next step is a marketing plan. Often, your agent can recommend repairs or cosmetic work that will significantly enhance the salability of the property. Marketing includes the exposure of your property to other real estate agents and the public. In many markets across the country, over 50% of real estate sales are cooperative sales; that is, a real estate agent other than yours brings in the buyer. Your agent acts as the marketing coordinator, disbursing information about your property to other real estate agents through a Multiple Listing Service or other cooperative marketing networks, open houses for agents, etc. The realtorCode of Ethics requires realtors to utilize these cooperative relationships when they benefit their clients.

Advertising is part of marketing. The choice of media and frequency of advertising depends a lot on the property and specific market. For example, in some areas, newspaper advertising generates phone calls to the real estate office but statistically has minimum effectiveness in selling a specific property. Overexposure of a property in any media may give a buyer the impression the property is distressed or the seller is desperate. Your real estate agent will know when, where and how to advertise your property. There is a misconception that advertising sells real estate. The NATIONAL ASSOCIATION OF REALTORS studies show that 82% of real estate sales are the result of agent contacts through previous clients, referrals, friends, family and personal contacts.

Security
When a property is marketed with an agent's help, you do not have to allow strangers into your home. Agents will generally pre-screen and accompany qualified prospects through your property.

Negotiating
The negotiation process deals with much the same issues for both buyers and sellers, as noted above under the buying process. Your agent can help you objectively evaluate every buyer's proposal without compromising your marketing position. This initial agreement is only the beginning of a process of appraisals, inspections and financing -- a lot of possible pitfalls. Your agent can help you write a legally binding, win-win agreement that will be more likely to make it through the process.

Monitoring, renegotiating and closing
Between the initial sales agreement and closing (or settlement), questions may arise. For example, unexpected repairs are required to obtain financing or a cloud in the title is discovered. The required paperwork alone is overwhelming for most sellers. Your agent is the best person to objectively help you resolve these issues and move the transaction to closing (or settlement).