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 “escrow” 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 escrow for payment of the property taxes and insurance bills when they come due. Which is the correct use of the word “escrow”? –Myron A.
DEAR MYRON: As you discovered, there are at least two real estate meanings for the term “escrow.” The word itself refers to putting something of value, usually money, into the care of a trusted third party.
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Escrow companies are located in many states, not just in California. 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 neutral trusted stakeholder to hold the seller’s deed to the property, which will be delivered to the buyer only upon payment of the sales price and fulfillment of other sale conditions.
The second meaning of escrow 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 escrow impound account maintained by the lender. When the property tax and insurance bills for the property become due, the lender then pays them from funds it holds in the borrower’s escrow account.
Meanwhile, the lender gets the use of the escrow funds, thus earning the lender a modest amount of extra interest income. A few states have laws requiring lenders to pay borrowers a low interest rate on escrow funds, typically around 2 percent.
These escrow impound accounts are required for VA, FHA 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 these escrow accounts whenever possible.
DON’T EXPECT BIG PAYMENT FROM THE “WE BUY HOUSES” FOLKS
DEAR BOB: We own a condo in a resort area that we have been trying to sell for over a year. Our experienced realty agent agreed to a 7 percent sales commission with 4 percent going to the buyer’s agent. We are also offering $10,000 back to the buyer at the closing settlement. The unit is priced at $135,000, which is the lowest price in the community. Everyone agrees the unit shows like new, with new paint and carpet. Although there has been a steady stream of showings, we have had no offers. Since we didn’t pay much for this condo, we are considering contacting the “We Buy Houses” people to get their offer and be relieved of the fees we are paying. 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 you a price substantially below the fair market value of your condo. But it’s worth giving them a call.
If your condo hasn’t sold in over a year, something is seriously wrong. I realize there is a glut of condos for sale in some markets, but 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.
Since you own your condo free and clear with no mortgage, have you thought about carrying back an installment-sale mortgage for the buyer? With a 10 to 20 percent cash down payment, such a mortgage will be a good investment for you earning around 6 percent interest. Advertising “easy seller financing” is sure to create buyer interest.
If your listing agent couldn’t sell your condo in a year, maybe it’s time to get a new agent. In the future, please don’t sign a listing for longer than 90 days unless it has an unconditional cancellation clause after 90 days.
ALL REVERSE-MORTGAGE CO-OWNERS MUST BE AT LEAST AGE 62
DEAR BOB: I have been reading in your articles and elsewhere about reverse mortgages. I am retired and under age 62. My wife is over 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. However, you could quitclaim your title to your wife who is over 62. But then you wouldn’t hold any ownership interest in the home.
The reason for this rule is the life expectancy of a co-owner under 62 is too long. Reverse mortgages provide your choice of a lump sum, lifetime monthly income, a credit line, or any combination. More details are in my special report, “Everything You Need to Know About Reverse Mortgage Pros and Cons for Senior Citizen Homeowners,” available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010, or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com.
CONFUSION ABOUT WHEN PMI PAYMENTS BEGIN
DEAR BOB: The loan specialist for the mortgage lender that financed my recent condo purchase said I would receive 100 percent financing with no PMI (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 the monthly PMI fee begins after 12 months, then you don’t have to pay it. But it appears the PMI explanation is in the paperwork someplace.
Yes, it appears 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 you now have little practical recourse, especially since your mortgage was sold to another lender. You could take that loan officer to the local 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.
HOW TO UNLOCK A LANDLOCKED LAND PARCEL
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 completely landlocked and is worthless because it has no road access. If we can get an easement from a street to our land it will 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 and/or court decisions showing how to “unlock” landlocked parcels by obtaining a driveway easement over an adjoining parcel.
You will need to retain the best real estate title attorney you can find. He or she will research the titles of the adjoining parcels.
If it can be proven 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 of easement by necessity is the common owner forgot to provide road access to the landlocked parcel so the court can now create such an easement.
CAN VACANT LAND BE EXCHANGED?
DEAR BOB: You often answer questions about Internal Revenue Code 1031 tax-deferred exchanges of rental properties such as apartments. My question is 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 your personal residence. For full details, please consult your tax adviser.
The new Robert Bruss special report, “Everything Home Sellers and Their Realty Agents Need to Know About the $250,000 Tax Exemption Rules,” is now available for $5 from Robert Bruss, 251 Park Road, Burlingame, Calif., 94010, or by credit card at 1-800-736-1736 or instant Internet delivery at www.BobBruss.com. Questions for this column are welcome at either address.
(For more information on Bob Bruss publications, visit his
Real Estate Center).