ACCELERATION CLAUSE: This is a provision that often appears in a Note and provides for payment of the Note in full prior to the maturity date (date of the last scheduled payment). The clause will call out the circumstances under which the beneficiary may impose the requirement. It is most commonly instituted for the purpose of establishing that the borrower must pay off the Note at such time as he sells or otherwise divests his interest in the property which has been pledged as collateral under the Deed of Trust. When a Note contains an acceleration clause, it is usually restated in the Deed of Trust. In this way, the requirement becomes evident as a matter of public record (because the Deed of Trust is recorded).
ACKNOWLEDGMENT: An acknowledgment is a written declaration by a person executing (signing) an instrument (a document). The term ‘acknowledgment’ is most commonly used to refer to the signature of a person given before an officer authorized to deliver an oath (such as a Notary Public). In a standard Notary Acknowledgment, the person executing the document proves his identity to be the person who is signing. A Notary Public requires evidence of identity in the form of Official Identification, such as a current passport, driver’s license, or military ID.
AGENT: An agent is a person who acts on behalf of another. In a real estate sale transaction, agents are present in the form of a Real Estate Broker or Salesperson who represents one (or sometimes both) of the principals, a Mortgage Broker who represents a buyer or borrower in obtaining financing, and an attorney or attorney-in-fact. The escrow holder is a limited agent for both of the principals in a sale transaction; their duty and obligation being limited to the content of the escrow instructions.
ASSESSMENT: An assessment is a charge or levy placed on property – in the case of real property, land and the improvements thereon. Assessments most commonly appear in the form of a lien for general (regular) and special taxes collected by the County in which a property is located. In addition to the regular tax bill, the tax collector also receives taxes assessed by special taxing districts for items such as street improvements, flood and air pollution control, and other matters affecting the property. Real property may be subject to other, private assessments, such as community and homeowners’ association assessments. Such assessments do not typically present in the form of a lien against the property unless scheduled payments become delinquent.
ATTACH: Property taxes and mortgage loans are the kinds of encumbrances that most people associate with real property but there are other, personal, obligations which can affect the rights of an owner (or potential owner) to manage his property. An unpaid personal debt or judgment can be secure a lien position against real property by various legal remedies, and some obligations automatically assume a position, or ‘attach’ to a property, at the moment it is acquired by the debtor. It is for this reason that a Statement of Information is required of all parties as a condition of purchasing title insurance. The title company compares the personal information furnished by the principals with matters of public record to ensure that no unintended obligations will encumber the property at the time the escrow closes.
ATTORNEY-IN-FACT: An attorney-in-fact is a person who holds authority to act on behalf of another under a Power of Attorney. The signature of the attorney-in-fact may be relied upon with the same legal authority as though the signature had been placed by the principal who granted the authority. Powers of Attorney usually present in two common forms: a General Power of Attorney conveys authority over a broad range of activities, whereas a Special Power of Attorney is specific to duties associated with a particular property or transaction. As such, a Special Power of Attorney is the form most commonly used in real estate transactions.
BOOT: This is the term that has been designated by the Internal Revenue Service to describe the consideration (sale proceeds) realized by a taxpayer outside of his Tax-Deferred Exchange pursuant to Internal Revenue Code 1031. The rules of a 1031 exchange require that all consideration must flow directly into the replacement investment property(ies). Should a taxpayer elect to receive any portion of the proceeds directly, then this ‘boot’ becomes subject to any applicable taxation for the year of the sale.
CHAIN OF TITLE: This terms refers to the sequence of ownership records – typically Grant Deeds – which have recorded against a particular property. The ‘chain of title’ is the ownership interest as evidenced by a chronological list of recorded instruments.
CLOSE OF ESCROW: The close of escrow technically signifies the moment at which the associated documents are recorded, but the terms is also used to refer to the procedures that are performed in the escrow office in relation to that event. This includes the completion of final settlement calculations and the distribution of payments called for in the escrow instructions – loan payoffs, broker commissions, insurance premiums, and the like. This process is also loosely referred to as the ‘closing’; however, it is important to distinguish the closing of the (sale) escrow and the closing of the loan, which is the term lenders use for the moment when a borrower executes their final loan documents (and this may variously be referred to as the ‘closing’ or the ‘consummation’ of the financing).
CLOSING DISCLOSURE: The Closing Disclosure is a consumer disclosure document required under the authority of the Consumer Financial Protection Bureau (CFPB) when new financing is being obtained in connection with a refinance or purchase of real estate. The new lender is required to deliver the Closing Disclosure to the borrower not later than three days prior to the consummation of the loan transaction, when the borrower will be signing the new loan documents. Because the escrow holder assumes responsibility for the accurate settlement of the overall transaction, the lender relies upon the escrow holder to collect and report many of the charges and adjustments which must be included in the lender’s disclosure document. In addition, the escrow holder assists the lender by delivering the seller’s Closing Disclosure when the loan is related to a real property sale.
CLOSING STATEMENT: A closing statement -- also referred to as a settlement statement -- is the official statement which reflects the complete accounting (“settlement”) of a real estate closing. The escrow holder prepares this statement to report the allocation of expenses and adjustments for each party, and to demonstrate how all of the funds deposited into escrow were distributed. The purchase price, plus all charges and credits associated with the transaction, are each presented as line-item entries within the statement. The final closing statement is delivered to the parties according to their instructions when the escrow is closed. It is an important record for buyers and sellers to retain for income tax filing purposes.
CONDITION: Conditions imposed on an escrow are the requirements of the transaction. Examples of conditions of the closing would be the delivery and payment by the seller of a termite inspection report and the buyer’s agreement to deliver homeowner’s (hazard) insurance coverage for the benefit of the lender. The escrow cannot close until all conditions have been met.
CONSIDERATION: In a real estate transaction, the word ‘consideration’ refers not to careful thought or deliberation, but to the value of property or funds which are being given in exchange for an interest in property – the payment for the property. When the term ‘consideration’ is used in escrow, it usually means the amount of the purchase price. It is interesting to note that the payment of the purchase price is memorialized in the Grant Deed which will be recorded to transfer property from a seller (“Grantor”) to a buyer (“Grantee”). The opening statement contained in a Grant Deed reads: “FOR A VALUABLE CONSIDERATION, receipt of which is hereby acknowledged…”
CONTINGENCY: A contingency is a condition of closing that is dependent upon an uncertain future event. The contingency is removed when performance or occurrence is complete. Contingencies of a sale might include a buyer’s ability to sell an existing residence, the subject property appraising at a certain value, or acceptance of the seller’s pending offer to purchase a replacement property.
CONVEYANCE: A written instrument which transfers an interest in real property. This term is not limited to the transfer of an ownership interest by a Grant Deed, but also includes the transfer of a leasehold interest under an Assignment of Lease or a lienholder’s security interest under a Deed of Trust (which in turn is reconveyed when the obligation has been paid in full).
COMMUNITY PROPERTY:Traditionally assets acquired by a married person while living with a spouse, the law also now applies to Registered Domestic Partners. As with Tenants in Common, the community property estate is divided equally if there is no written agreement which provides otherwise. Holding title as Community Property allows couples to retain separate interests in property that may be devised by will. The more recently established Community Property with Right of Survivorship permits couples to enjoy the comparatively simple transfer of interest on death (as with joint tenancy) while establishing the defined scope of the separate estate.
DEED: The word ‘deed’ is contained in a number of documents which are commonly used in the course of a real estate transaction. For this reason, clear communication is best achieved by using the full name of a document in a query or conversation. The deeds most commonly used in real estate transactions are the GRANT DEED, which conveys (transfers) an ownership interest from one party to another, and a DEED OF TRUST (sometimes called a ‘Trust Deed’), which is the document that secures the interest of a mortgage lender, effectively making the property the collateral for the new loan. Other common types of deeds are Quitclaim Deeds, which have the effect of removing an uncertain property interest, and Interspousal Transfer Grant Deeds, which legally waive the community property interest of a spouse who may or may not be in title to a property.
DEMAND: A demand is a formal, detailed statement issued by a beneficiary, lienholder, or judgment creditor, in which the exact requirements for releasing an obligation will be officially stated. Demands may require performance or the delivery of documentation in addition to the payment of sums due. The escrow holder requests demands for the purpose of eliminating liens which affect the title to real property. This includes obligations which appear of record at the time a purchase agreement or loan application is executed, and also personal liens which will ‘attach’ to the property at the time an ownership interest is conveyed to a new purchaser. Depending on the source, a creditor may respond to an escrow request and furnish a demand within just a few hours (many institutional mortgage lenders), or may take weeks to arrive (IRS).
DUE-ON-SALE CLAUSE: The most common form of acceleration clause, it is the provision in a Note (and Deed of Trust) which requires that creates the automatic maturity (at the lender’s option) on a sale or transfer of the real property to a third party. It is also referred to as an ‘alienation’ clause.
ENCUMBRANCE: A lien or charge on a property which restricts the use and/or equity of the subject parcel(s), requiring payment or performance for removal of the documentation which creates the restriction.
ESCROW: Escrow is the deposit of money and documents by two or more parties with a neutral third party who will secure the items until certain conditions [of a Purchase Agreement, usually] are met. So, the escrow holder is a neutral third party stakeholder, and escrow is the process by which an agreement is consummated by a fair and equitable method. No documents or funds are distributed from escrow without mutual written instructions of the parties. The escrow holder receives deposits; prepares and distributes the necessary forms and transfer documents, along with the escrow instructions that support their use. Finally, the escrow holder prepares the settlement statements which reflect how all funds are distributed at closing. It is unlikely that the escrow process is at all familiar until a person has made his first purchase of real estate. It is primarily the western states use independent escrow practitioners as settlement agents. In much of the country, lawyers typically oversee the closing process.
EXCHANGE: (“1031 Exchange”). This is the common term for the transaction vehicle -- detailed in Internal Revenue Code Section 1031 -- by which capital gains tax payments may be delayed on sales of investment properties, where one property is exchanged for another like-use property. A complete exchange involves at least one sale and one purchase transaction, but may include multiple sales or purchases. Investment property owners secure the services of an exchange expert called the Qualified Intermediary or “QI” to complete the precise and restrictive process, including adherence to completion timelines. The process requires cooperation by the other principal in each transaction, usually in the form of signature to a simple instruction, and the escrow holder typically facilitates those signature requirements.
FIRPTA (Foreign Investment in Real Property Tax Act): This Federal law requires that a buyer must either (1) confirm that the seller of a property is not a foreign person, or (2) withhold from the seller’s proceeds of the sale and pay a sum equal to 15% of the total consideration (sales price) to the Internal Revenue Service. The law states that the buyer (transferee) is the withholding agent responsible to withhold as required; however, the escrow holder usually facilitates the holding of any funds necessary as a fiduciary for the parties. The seller and buyer must complete all necessary IRS withholding forms, and then the escrow holder usually submits the forms -- and funds, when applicable -- to the IRS. For more information on the requirements of FIRPTA, parties are advised to seek the counsel of a tax professional (CPA) or attorney. More information is available on the website of the Internal Revenue Service at https://www.irs.gov/individuals/international-taxpayers/firpta-withholding
FULL RECONVEYANCE: When a Note is paid, the note holder must initiate the activity that will release the security interest in the property that was given to the beneficiary at the time the loan was made. The Deed of Trust conveys the security interest to the beneficiary, and the beneficiary must reconvey that interest when the obligation is fulfilled. The document which typically releases the beneficial interest is called a Full Reconveyance; however, when problems occur in locating the trustee, a Substitution of Trustee form may be executed to identify a new trustee. In another alternative, a beneficiary may execute aSubstitution of Trustee and Full Reconveyance, which document allows the beneficiary to substitute himself in as the trustee and release the Deed of Trust directly. This last option is very commonly used with private party beneficiaries in order that the release document may be secured at the time of closing, rather than risk delay or failure in the recording of the reconveyance after the payoff.
HOME WARRANTY PLAN: A home warranty plan, or home protection plan, is a private insurance plan which insures a property owner against defects which are not covered under a standard homeowner’s insurance policy. Typical coverages include plumbing, heating, air conditioning and electrical systems, and many insurers also include options for appliances, pool and spa equipment, and garage door openers, among other coverages. Obtaining a home warranty plan is not mandated by any law or condition of financing, but may be negotiated under a purchase agreement or simply purchased by a buyer during the escrow term. Most home warranty plans may be renewed annually following the initial property purchase.
HOMEOWNERS INSURANCE POLICY: A homeowners insurance policy insures a property against such hazards as fire and other damage or loss. Unlike a Home Warranty Plan, procurement of a Homeowners Insurance Policy is routinely required of buyers by their new mortgage lender, who will be named as an additional insured under the policy. Evidence of a new homeowners insurance policy must be furnished to the lender before escrow may close, and the first annual premium for the policy will be paid from the buyer’s funds through the closing. Borrowers may be required to procure flood insurance, or other types of coverage, lenders will establish minimum requirements for coverage and deductible values. Borrowers are advised to address property insurance requirements early in the escrow term to avoid closing delays.
IMPOUNDS: Under certain conditions, borrowers may be required to establish a reserve (holding) account with their new lender for the purpose of covering periodic property maintenance expenses such as property taxes and insurance premiums. These accounts are variously referred to as escrow accounts, reserve accounts, and impounds accounts. The lender will collect additional funds each month along with the regular mortgage loan payments, in amounts prescribed by the lender. The lender will draw funds from the reserve account as tax and insurance payments become due, and issue the payments on behalf of the borrower. Lenders typically review these reserve accounts annually, and adjust to amount to be collected according to changes in tax and insurance premium values.
INTERSPOUSAL TRANSFER GRANT DEED: Usually referred to as an “Interspousal Deed”, it is a document that was developed specifically for the purpose of transferring the Community Property interest of a spouse in real property, whether or not the spouse previously held a recorded interest. (Community Property interest is automatically assigned to spouses in the State of California, and so an Interspousal Deed often serves the simple purpose of waiving an interest which would otherwise be gained when one’s spouse purchases real property).
JOINT TENANCY: This is a form of title vesting which affords a 100% interest to all of the joint tenants and provides for transfer of the share of one joint tenant to the remaining joint tenant(s) upon death. The remainder interest is typically evidenced by delivery of a death certificate and an affidavit (from a surviving joint tenant) to a title insurer. This vesting option was historically popular among married couples with modest estates, although more recently introduced options have gained popularity since the turn of the new millennium.
LIEN: A lien is a burden upon property related to the payment of a debt or performance of an obligation; it is a form of encumbrance. Common liens include taxes and special assessments, mortgages, judgments, and mechanics liens. Once paid and satisfied, a release document must be recorded in order to remove the item from the County records.c
LOST NOTE BOND: When a Note is paid, the procedure for eliminating the associated lien from real property is for the paid Note and Deed of Trust to be surrendered to the Trustee (as named in the Deed of Trust), along with a signed Request for Full Reconveyance. A Note is a negotiable instrument; its being marked ‘Paid’ and surrendered is essential to eliminating its potential future use and effect, and a Trustee will typically require a Lost Note Bond when the original Note is cannot be presented. The bond is a form of insurance policy which may be purchased to cover any attempted future presentation of the lost Note as a viable instrument.
MECHANICS LIEN: A lien in favor of laborers and materials providers who have contributed to a work of improvement on real property. A contractor has 60 days following the filing of a Notice of Completion during which a mechanic’s lien may be filed on a property if payment for the contractor’s service has not been made. (This lien can be filed by a sub-contractor even if the property owner has paid the general contractor in full). If a builder/owner wishes to procure a title policy on a newly constructed building without waiting for 60 days to pass, them the title insurer will require that the builder/owner execute an Indemnity Agreement.
MORTGAGE: A mortgage is a written document executed by a land owner in which the land is given as security for a debt. While the term ‘mortgage’ is routinely used in casual conversation to describe loans against real property located in the State of California, the legal document called a mortgage is not actually used in this state. Instead, California uses the document known as the Deed of Trust to secure such loans.
NOTE: A note is the document executed by a borrower which evidences a debt to a lender/creditor – the ‘beneficiary’. In the note, the borrower promises to repay the debt according to a prescribed schedule. A note will typically state the principal sum borrowed, the rate of interest being charged against the principal by the beneficiary, the date upon which a late payment will incur an additional charge, and the ‘maturity’ date of the note, which is the day all sums of principal and any accrued interest become due and payable in full. If the obligation is secured by a Deed of Trust, then the note will so state. An original note is a negotiable instrument, and some lenders sell notes among themselves as a regular investment practice. When the obligation has been paid in full by the borrower, the original note must be submitted to the Trustee named in the Deed of Trust in order that the lienholder’s interest can be reconveyed (released). For these reasons, it is important to store a note in a secure location. If lost, a note holder must purchase a bond for the lost instrument.
NOTE SERVICER: A service provider who collects payments from a debtor (borrower) and remits them to the creditor (lender). Private parties who have entered into a financing agreement often employ the services of a note servicer to simplify and automate the note collection process. The real estate note servicer can also manage the allocation of installment payments to multiple beneficiaries, to tax installments and their associated impound accounts, and to the Franchise Tax Board for Real Estate Withholding, as applicable.
NOTICE OF COMPLETION: Following the completion of new construction, this document is executed by the builder/owner to certify that construction has been completed according to plan, following final inspection. No sale transaction may close until the Notice of Completion has been filed.
POWER OF ATTORNEY: A power of attorney is a legal document by which individual authority may be conveyed to another person, who is called the attorney-in-fact. Principals will execute such a document when they may not be available to execute documents over the course of a real estate transaction. Often, the attorney-in-fact is a spouse or other family member; someone in whom the principal has complete trust. The form and content of a Power of Attorney must meet the requirements of the title insurer and the new lender in a transaction, if any. When real property has been transferred into the name of a trust, then the trustees who sign on behalf of the trust hold only such powers as the trust has conferred upon them. For this reason, the title insurer will usually ask for a copy of the trust under which title to the property is held to confirm that a trustee may delegate his authority to another under a Power of Attorney.
PRELIMINARY REPORT: Also referred to (more precisely) as the Preliminary Title Report, this document is issued by the title company following a search of the public records available for a given parcel of land. The report will itemize the findings of the title company, including the legal description of the property, the names of the party(ies) holding title to the property, the amounts and payment status of taxes, recorded documents which affect the use of the property (leases and other agreements, easements, covenants, conditions and restrictions), and encumbrances (such as mortgage loans, judgments, and other liens). The report is delivered to the buyer for his own review and investigation of the property, and the escrow holder uses the report as evidence of the matters which must be addressed during the terms of the escrow, in order that clear title may be delivered to the buyer at closing.
PREPAYMENT PENALTY: Loans represent investment vehicles to the lender, or beneficiary. A sum of principal is advanced to the borrower and repaid with interest at a specified rate – the greater the interest, the larger the return for the lender. Real estate loans are structured for repayment over the course of a certain number of months or years, thereby providing a stream of interest income for the lender for that period. When a note is paid in full, the lender will reinvest the principal sum, as desired, in some other investment vehicle. In order to discourage a borrower from paying off the loan early (and forcing the lender to take reinvestment action sooner), a lender may impose a prepayment penalty in the terms of the note. This prepayment penalty is sometimes referred to as a prepayment ‘bonus’ for the lender, and may be expressed as the rate of return for a specified period of time, due at the time the loan is paid in full, i.e. six months of unearned interest at the rate prescribed in the note.
PRINCIPAL: A principal is a primary participant in an agreement or action. From the perspective of the Escrow Holder, the principals are the parties who deposit instructions to the Escrow Holder. In a sale transaction, the principals are the Buyer and Seller; in a loan transaction, the Lender and Borrower. While an agent may offer direction to the Escrow Holder as to the desire of the principal, his signature is insufficient to represent the official agreement or obligation of the principal, unless the principal has executed a Power of Attorney to designate his agent as his Attorney-In-Fact.
PRORATIONS: Regular maintenance expenses of real property become due and payable at various intervals. To compensate for these irregular payment intervals, the escrow holder will enter settlement adjustments called prorations. These adjustments ensure that each party bears the responsibility for property maintenance expenses only during the actual period of ownership. The expenses – like property taxes and homeowners association dues, for instance – are calculated to their daily (‘per diem’) values and assessed to the buyer or seller according the date of closing, with the seller continuing to cover expenses up to his last day of ownership and the buyer assuming the expenses on the day of closing and forward. Items scheduled for payment on the first of each month are relatively straightforward and easy for most people to understand; the real property tax year follows a unique calendar and payment schedule. To better understand tax prorations, click here.
REAL PROPERTY: Land and that which is permanently affixed to the land (commonly thought of as man-made structures, but also including things like trees and shrubs), including the air space above (into infinity) and the mineral rights below (to the center of the Earth). All that which is not Real Property is considered Personal Property or “chattel”.
RECORD: Recording. This is the term that describes the act of filing documents in the office of the County Recorder, thereby making the document a part of the public record. The recording of the required documents signifies the official ‘Close of Escrow’. If a document is deemed in any way deficient by the County Clerk, the clerk may reject the document for recording. (Counties each set their own requirements in this regard). This is referred to as a recording pulled.
SECURITY INTEREST: An interest in real property given or pledged to a creditor to secure payment of a debt or performance of an obligation.
STATEMENT OF INFORMATION (S.I.): The form used by the title company to compare information against the public record for the purpose of ruling out liens and judgments, and to guard against forgeries.
SUB-ESCROW: As a practical matter, the escrow holder delegates certain settlement duties to the title company who is charged with insuring the delivery of a clear title at closing. As a sub-agent of the escrow holder, the title company’s payoff department – also called the sub-escrow department -- will receive the loan proceeds from the buyer/borrower’s new lender and use those funds to pay off existing property liens, such as taxes and the existing mortgage loans. When the necessary matters have been addressed, the remainder loan proceeds are distributed back into the escrow trust account for use and disbursement by the escrow holder in the final settlement of the transaction. Title sub-escrow departments charge a nominal fee for the performance of these sub-escrow duties.
TENANCY IN COMMON:This is a form of title vesting which establishes percentage shares of interest for each owner. Unless the percentage is stated outright, shares are assumed to be equal among the owners. This method is common among two or more owners who each wish to hold their interests separate from others. Upon the death of any owner, his estate will be distributed according to probate or other legal documents created within an estate plan.THIRD PARTY (DEPOSIT): A deposit into escrow made by someone who is not a principal to the transaction. The escrow holder must take a separate instruction from that party to secure authorization to use the funds. Third party deposits may not be applied to the credit of any principal until such time as the written authorization is received by the escrow holder. Also, all funds deposited for the benefit of a buyer who is obtaining new financing must be approved by the lender. For these reasons, Third Party Deposits should be made at their earliest practicable time, and/or notice of the intent to deposit should be delivered to the lender early in the transaction.
TITLE: Evidence of a person’s right, or the extent of his interest, in a property.
TITLE INSURANCE: An insured statement of the condition of title or ownership of real property. For a one-time premium, the named insured and their heirs are protected against title defects, liens and encumbrances existing as of the date of issuance, except those which have been specifically accepted and excluded. In the event of a claim, the title company provides legal defense as to the insured content and pays any covered losses resulting from such a claim.
TRUST: A trust is a fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary. Trusts are established to provide legal protection for the trustor’s assets, to make sure those assets are distributed according to the wishes of the trustor, and to save time, reduce paperwork and, in some cases, avoid or reduce inheritance or estate taxes.
VEST: To give an immediate, fixed right in property, with either present or future enjoyment of possession; it also denotes the manner in which title is held: the vesting.