How Escrow Works

Loan-Related Closing Costs

What is an REO?

House in Foreclosure

“REO” stands for Real Estate Owned. These are houses which have completed the foreclosure process that the bank or mortgage company presently owns. This is not the same as real estate up for foreclosure auction.

When buying a property during a foreclosure sale, you must pay at least the loan balance plus any interest and other fees added during the foreclosure process. The buyer must also be able to pay with cash in hand. Finally, you’ll receive the property entirely as is. That possibly may consist of current liens and even current denizens that may require eviction.

A bank-owned property, conversely, is a more tidy and attractive transaction. The REO property did not find a buyer during foreclosure auction. Now the bank owns it. The lender will take care of the elimination of tax liens, evict occupants if needed and generally arrange for the issuance of a title insurance policy to the buyer at closing.

Do be aware that REOs may be exempt from standard disclosure requirements. For instance, in California, banks do not have to give a Transfer Disclosure Statement, a document that normally requires sellers to make known any defects they are aware of. By hiring Pinnacle Estate Properties, you can rest assured knowing all parties are fulfilling California state disclosure requirements.

Is REO property in Calabasas a bargain?

It’s frequently assumed that any REO must be a steal and an opportunity for guaranteed profit. This isn’t always the case. You have to be prudent about buying a REO if your intent is profit from the sale. While it’s true that the bank is typically eager to sell it fast, they are also motivated to get as much as they can for it.

Look closely at the listing and sales prices of competing homes in the neighborhood when considering the purchase of an REO. And factor in any repairs or upgrades necessary to prepare the house for resale or moving in. There are bargains with potential to make money, and many people do very well buying and selling foreclosures. But there are also many REOs that are not good buys and may not be money makers.

Ready to make an offer?

Most banks have staff dedicated to REO that you’ll work with in buying REO property from them. To get their properties advertised on the local MLS, the lender will typically use a listing agent.

Prior to making your offer, you’ll want to contact either the listing agent or REO department at the bank and discover as much as you can about what they know regarding the condition of the property and what their process is for receiving offers. Since banks most commonly sell REO properties “as is”, you’ll want to be sure and include an inspection contingency in your offer that gives you time to check for hidden damage and terminate the offer if you find it. As with making any offer on real estate, providing documentation showing your ability to pay may make your offer more attractive, such as a pre-approval letter from a lender.

After you’ve submitted your offer, it’s customary for the bank to respond with a counter offer. Then it will be your choice whether to accept their counter, or submit another counter offer. Your transaction could be final in one day, but that’s rare. Since offers and counter offers usually give the other party a day or longer to respond (and employees at a bank don’t work nights or weekends) you could be looking at a week or longer.

Escrow

To finalize the sale of the home a neutral, third party (the escrow holder, a.k.a. escrow agent) is engaged to assure the transaction will close properly and on time. The escrow holder insures that all terms and conditions of the seller’s and buyer’s agreement are met prior to the sale being finalized, including receiving funds and documents, completing required forms, and obtaining the release documents for any loans or liens that have been paid off with the transaction, assuring you clear title to your property before the purchase price is fully paid.

The documentation the escrow holder may be collecting includes:

• Loan documents
• Tax statements
• Fire and other insurance policies
• Title insurance policies
• Terms of sale and any seller-assisted financing
• Requests for payment for various services to be paid out of escrow funds

Upon completion of all instructions of the escrow, closing can take place. All outstanding payments and fees are collected and paid at this time (covering expenses such as title insurance, inspections, real estate commissions). Title to the property is then transferred to the buyer and appropriate title insurance is issued as outlined in the escrow instructions.

At the close of escrow, payment of funds shall be made in an acceptable form to the escrow. As your real estate agent, I’ll inform you of the acceptable form.

The Escrow Holder Will:

• Prepare escrow instructions
• Request title search
• Comply with lender’s requirements as specified in the escrow agreement
• Receive funds from the buyer
• Prorate insurance, tax, interest and other payments according to instructions
• Record deeds and other documents as instructed
• Request title insurance policy
• Close escrow when all instructions of seller and buyer have been met
• Disburse funds and finalize instructions

The Escrow Holder Won’t:

• Give advice – the escrow holder must maintain neutral, third-party status
• Offer opinions about tax implications

Mortgage Escrow Account

A Mortgage Escrow Account is established to pay on-going expenses while there is a loan on the house. These expenses include property taxes, home insurance, mortgage insurance, and other escrow items. Generally, the Escrow Account is partially funded at closing and the home buyer makes on-going contributions through their monthly mortgage payment.

This covers the administrative expenses in setting-up and processing the loan. The loan origination fee may be a percentage of the mortgage amount.

Points (optional)

An option for the home buyer is to pay points to lower the interest rate at which the loan will be repaid. Each point equals 1 percent of the mortgage amount. For example: on a $150,000 loan, 1 point would equal $1,500.

Appraisal Fee

The fee for having the house appraised may be incorporated into the closing costs or payment may be required by the lender at the time the loan application is submitted.

Credit Report

The lender uses a credit report to determine the creditworthiness of the loan applicant. This fee is often paid when the loan application is submitted.

Interest Payment

Typically the buyer is required to pay interest on the mortgage loan to cover the time between the closing date and when the first mortgage payment period begins. For example: If closing is on May 15. Your first monthly payment begins to accrue interest on June 1 with your first mortgage payment due July 1. At closing an interest payment covering the accrual period between May 15 and May 31 may be required.

Escrow Account

At closing a payment may be required to fund the escrow account if the lender is paying home insurance, property taxes and/or other expenses out of the escrow account.