Title & Escrow
What is an Escrow?
By definition, escrow is a financial arrangement in which a neutral third party holds and manages funds or assets on behalf of two parties to a transaction until all contractual obligations are met. The Actual escrow process for a note purchase is outlined below.
This is an overview of Investopedia’s definition of escrow.
What is a Beneficial Interest assignment?
A mortgage or Trust Deed assignment is the transfer of the beneficial (economic) interest in a mortgage and promissory note from one party to another. The assignment is recorded with the county and becomes a matter of public record.
Important to Note: A beneficial interest assignment is not a transfer of ownership of real property, such as a deed transfer, a warranty deed, for example.
Real Estate Sale Compared to a Note Sale. What is the difference?
The transfer or sale of real property ownership is complete when the current owner executes and records a deed of transfer with the county. In many cases, this would be a warranty deed or another instrument, such as a quitclaim deed.
A mortgage assignment (also called an assignment of mortgage or assignment of deed of trust) is the legal process by which the current lender or note holder transfers their interest in a mortgage loan to another party.
Why do we need title work? It’s just a money grab.
When you buy or sell real estate, you’re relying on the assumption that the seller truly owns the property and that nothing else is attached to it. Title insurance covers things that won’t show up clearly or at all in a regular title search, such as:
- Undisclosed heirs
- Forged or fraudulent deeds
- Clerical or recording errors
- Old liens or judgments
- Boundary or survey disputes
- Unknown easements that limit property
- Errors made by the title company itself
Title insurance is important in real estate because it protects your legal ownership of a property. Many times, there are hidden problems in its past, such as undisclosed heirs, forged documents, unpaid liens, recording errors, fraud, or boundary disputes. Even after a thorough title search, certain issues may not be discovered until years later, and without title insurance, you could face expensive legal battles or even risk losing your property.
Lenders require a lender’s policy to protect their loan. This includes banks and private note buyers. An owner’s title policy protects the buyer’s personal investment. Unlike most insurance policies. If one of these issues is disclosed preventaing a sale of a note or deed transfer.
The Issuing Title Insurance Company is responsible.
Title insurance protects against past issues with the property’s title that were not discovered before closing. If there is ever an issue or claim, the title company that issued the policy would handle and defend the claim on your behalf, according to the terms of the policy.
- Pays legal defense costs
- Covers financial losses
- Work to resolve title defects (such as liens, recording errors, or ownership disputes)
- Without it, you pay.
Why lenders require it (and why owners should care.)
- Protects the bank, or Mortgage note buyer, and not you, the seller.
- Required on almost every financed purchase.
- These policies end when the loan is satisfied.
- Lenders require it because title defects are one of the few things that can wipe out their collateral.
One last note, the title policy lasts as long as you own the property with a one-time premium.
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Why are 90% of Mortgage documents not recorded?
In a typical financed real estate transaction, only two primary documents are recorded in the public records: the transfer deed and the security instrument. The transfer deed, such as a warranty deed, grant deed, or quitclaim deed, conveys ownership from the seller to the buyer.
The security instrument, whether a mortgage or a deed of trust, depending on the state, creates a lien on the property to secure repayment of the loan. These two documents establish both ownership and the lender’s secured interest in the property.
The promissory note, which is the borrower’s promise to repay the debt, is usually not recorded in the public record. As a negotiable instrument governed by the Uniform Commercial Code, it is enforceable through possession and endorsement rather than recording.
Because it contains private financial terms and is not required to perfect the lien, it typically remains outside the public record. In limited circumstances, such as certain seller-financed transactions or in a few states where local practice allows it, the note may be recorded at the discretion of the title company or closing attorney, though this is uncommon in institutional lending.
Another surprising fact for your note holders and real estate investors is 90% of the escrow documents needed to complete a promissory note purchase are not recorded.
We hear this time and time again. People call and then say their attorney handles the sale of the property and the creation of the note, and that it is legitimate. Everything is recorded. We can get everything from the county recorder.
This is simply not the case. With any mortgage, a bank or escrow company prepares multiple documents to complete the sale of real property.
- Bank Lending Disclosures.
- Escrow company-related disclosure documents that are signed.
- Title work and closing documents to be approved by the principal parties.
- Closing statements, truth-in-lending disclosures.
- HOA documents.
- Contact information for parties, especially if it’s private financing.
- Documentation to verify proof of Hazard insurance.
- Along with other private documents.
Which documents are recorded as public records, and what are they?
- The deed transfer, and, in most cases, a warranty deed or a quitclaim deed.
- Mortgage or Trust Deed.
To initiate the escrow process for the note sale, we need copies of the following:
- Closing or Settlement statement.
- Promissory or Installment Note.
- Verifiable payment history for the last 6-8 months.
- Phone and contact information for the payor/borrower for the file.
If there is a third-party account servicing collection company, they typically have everything we need, except in some cases, the declaration page showing the property’s hazard insurance coverage.
Other than that, the account servicer can provide all documents to any note buyer upon request when the note is being purchased.
The Good news! Central Valley One’s escrow team, with over 100 years of combined experience, has streamlined the process for setting up escrows with note holders seeking to sell their promissory note.
In most cases, we make quick work of gathering the necessary escrow documents for any client, in other words, for the note holder, in order to sell their promissory note with the least amount of effort.
Overview of a Real Estate Sale during Escrow
- All parties must sign the escrow Instructions and the title company-required items.
- Title Insurance is issued in favor of the owner.
- Seller signs the deed Transfer, either a Warranty Deed or other deed type.
- The deed will be recorded with the county and will become a matter of public record.
- Once the deed is recorded, the sale is complete.
- Above is the short document version.
- There may be multiple inspections and lender financing requirements. The above overview details the recorded documents and highlights the title requirement.
Real Estate Sale with a lender or seller financing.
- All parties must sign the escrow Instructions and the title company-required items.
- Title Insurance is issued in favor of both parties.
- If private financing is involved, a lender’s title insurance is not always requested.
- Purchaser signs the promissory note at closing.
- Purchaser signs the mortgage or trust deed.
- The transfer deed, Mortgage or Trust Deed will be recorded with the county and will become a matter of public record.
- A few other items will be recorded on a case-by-case basis.
- Above is the short version.
- There may be multiple inspections and lender financing requirements. The above overview details the recorded documents and highlights the title requirement.
Quick Important Tips for Note Holders:
If anyone is planning to retain a note and Mortgage from the real estate sale. Detailing a list of objectives will be very helpful for anyone holding a promissory note. The following documents should be requested and retained after the close of escrow:
- It is highly advisable to purchase a Lender’s title insurance policy.
- Verification of hazard insurance, providing documentation of coverage.
- Contact information for the borrowers. Preferably phone and email.
- Contact and account info If any third-party account servicing company is utilized.
These items are important for any Mortgage Buyer, for end-of-year tax reporting, and of course, if you are ever looking to sell your promissory note for a cash-out in the future.
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