What is an Impound Account?

A: An impound account, also know as an escrow account, is a money reserve funded monthly by you to pay annual recurring ownership obligations together with payments of principal and interest (PI) through your mortgage payments.

The impound account is maintained by your lender to pay your annual property taxes and hazard insurance premium (TI).

Payment from an impound account ensures your lender’s security interest in your property will not be impaired by defaults in your payment of TI obligations.

An impound account is created when you agree to the terms of an impound account addendum attached to your lender’s trust deed. If not required at origination, you may request the lender set up an impound account when they provide this service.

An impound account provision establishes:

  • Monthly deposits to be paid in amounts based on your annual TI obligations;
  • Reserves initially deposited as prepaid installments when future monthly payments will be insufficient to cover TI obligations on their due dates; and
  • Interest to be paid to you by your lender on the impound account balance.

When you have an impound account, your lender will provide accounting, statements and analyses prepared and delivered to you at least once yearly. These will include itemizations of:

  • Surpluses when the balance is greater than necessary to satisfy TI disbursements and reserves, which are either returned to you or credited toward the next year’s impound account payments; or
  • Deficiencies and shortages, arising when the impound account balance is insufficient to pay upcoming TI obligations or the impound account has a negative balance after a TI payment.

The formulas for setting initial impound account deposits, monthly TI payments and limits on reserves for any mortgage are set by California law.
Impound accounts are also subject to some enforcement rules. A lender:

  • Is prohibited from requiring an impound account at origination on a first mortgage secured by an owner-occupied one-to-four unit residential property when the loan to value ratio is less than 90%; and
  • May demand and enforce the establishment of an
  • Impound account on a mortgage secured by a one to-four unit residential property when the owner is delinquent on two or more consecutive property tax payments.

Rules for terminating enforceable impound accounts vary based on the lender’s policies. Your lender is also required to pay 2% annual simple interest on any balance in the impound account.

For business mortgages, including carryback business mortgages, impound accounts are optional requirements for the mortgage holder, but are neither common nor compulsory.

A Buyers’ and Sellers’ Guide to Multiple Offer Negotiations

Information for Buyers

  • In some situations sellers will have several competing purchase offers to consider. Sellers have several ways to deal with multiple offers. Sellers can accept the “best” offer; they can inform all potential purchasers that other offers are “on the table”; they can “counter” one offer while putting the other offers to the side awaiting a decision on the counter-offer; or they can “counter” one offer and reject the others.
  • While the listing broker can offer suggestions and advice, decisions about how offers will be presented – and dealt with – are made by the seller – not by the listing broker.
  • There are advantages and disadvantages to the various negotiating strategies you can employ in multiple offer negotiations. A low initial offer may result in buying the property you desire for less than the listed price – or it may result in another buyer’s higher offer being accepted. On the other hand, a full price offer may result in paying more than the seller might have required. In some cases there can be several full price offers competing for the seller’s attention – and acceptance.
  • Your buyer-representative (agent) will explain and advise on the pros and cons of these (and possibly other) negotiating strategies. The final decision, however, is yours to make.
  • Purchase offers generally aren’t confidential. In some cases sellers may make other buyers aware that your offer is in hand, or even disclose details about your offer to another buyer in hope of convincing that buyer to make a “better” offer. In some cases sellers will instruct their listing broker to disclose an offer to other buyers on their behalf.
  • Listing brokers (the sellers representative) are required to follow lawful, ethical instructions from their clients in the same way that buyer-representatives must follow lawful, ethical instructions from their buyer-clients. While some REALTORS® may be reluctant to disclose terms of offers, even at the direction of their seller-clients, the Code of Ethics does not prohibit such disclosure. In some cases state law or real estate regulations may limit the ability of brokers to disclose the existence or terms of offers to third parties.
  • You may want to discuss with your buyer-representative the possibility of making your offer confidential, or of establishing a confidentiality agreement between yourself and the seller prior to commencing negotiations.
  • Realize that as a represented buyer, your broker likely has other buyer-clients, some of whom may be interested in the same properties as you are. Ask your broker how offers and counter-offers will be presented and negotiated if more than one of his buyer-clients are trying to buy the same property.
  • Appreciate that your buyer-representative’s advice is based on past experience and is no guarantee as to how any particular seller will act (or react) in a specific situation.

Information for Sellers

  • It’s possible you may be faced with multiple competing offers to purchase your property. Your listing broker can explain various negotiating strategies for you to consider. For example, you can accept the “best” offer; you can inform all potential purchasers that other offers are “on the table” and invite them to make their “best” offer; you can “counter” one offer while putting the other offers to the side awaiting a decision on your counter-offer; or you can “counter” one offer and reject the others.
  • If you have questions about the possibility of multiple offers and the way they can be dealt with, ask your listing broker to explain your options and alternatives.
  • Realize that each of these approaches has advantages and disadvantages. Patience may result in an even better offer being received; inviting buyers to make their “best” offers may produce an offer (or offers) better than those “on the table” – or may discourage buyers who feel they’ve already made a fair offer resulting in them breaking off negotiations to pursue other properties. Your listing broker will explain the pros and cons of these strategies (and possibly other) negotiating strategies. The decisions, however, are yours to make.
  • Appreciate that your listing broker’s advice is based on past experience and is no guarantee about how any particular buyer will act (or react) in a specific situation.

Information for Buyers and Sellers

Perhaps no situation facing buyers or sellers is more potentially frustrating or fraught with potential for misunderstanding and for missed opportunity than presenting and negotiating multiple, competing offers to purchase the same property. Consider the following issues and dynamics:

  • Sellers want to get the highest price and best terms for their property.
  • Buyers want to buy at the lowest price and on the most favorable terms.
  • Listing brokers – acting on behalf of sellers – represent sellers’ interests.
  • Buyer representatives represent the interests of their buyer-clients.
  • Will a seller disclosing information about one buyer’s offer make a second buyer more likely to make a full price offer? Or will that second buyer pursue a different property?
  • Will telling several buyers that each is being given a chance to make their “best offer” result in spirited competition for the seller’s property? Or will it result in the buyers looking elsewhere?
  • What’s fair? What’s honest? Why isn’t there a single, simple way to deal with multiple competing offers?

Knowledgeable buyers and sellers realize there are rarely simple answers to complex situations. But some fundamental principles can make negotiating multiple offers a little simpler.

  • Realize the listing broker represents the seller – and the seller’s interests, and the buyer-representative represents the buyer – and the buyer’s interests. Real estate professionals are subject to state real estate regulation and, if they are REALTORS®, to the Code of Ethics of the National Association of REALTORS®.
  • The Code of Ethics obligates REALTORS® to be honest with all parties; to present offers and counter-offers quickly and objectively; and to cooperate with other brokers. Cooperation involves sharing of relevant information.
  • Frequently frustration and misunderstanding results from cooperating brokers being unaware of the status of offers they have presented on behalf of their buyer-clients. Listing brokers should make reasonable efforts to keep buyer-representatives up-to-date on the status of offers. Similarly, buyer-representatives should keep listing brokers informed about the status of counter-offers their seller-clients have made.

Finally, buyers and sellers need to appreciate that in multiple offer situations only one offer will result in a sale, and the other buyers will often be disappointed their offers were not accepted. While little can be done to assuage that disappointment, fair and honest treatment throughout the offer and negotiation process, coupled with prompt, ongoing and open communication, can enhance the chances that all buyers – successful or not – will feel they were treated fairly and honestly.

What environmental hazards is a seller to disclose?

A: Environmental hazards are man-made hazards such as noxious or annoying conditions, not natural hazards that exist at the location of the property.

As environmental hazards, the conditions are classified as either:
• Injurious to the health of humans; or
• An interference with an individual’s sensitivities.

Environmental hazards are defects in a property affecting its use by humans. If known to a prospective buyer, the defects may affect a prospective buyer’s decision to purchase the property. Thus, the environmental conditions are material facts. When known to the seller or the agents participating in a transaction, environmental hazards are to be disclosed to prospective buyers since material facts adversely affect
the property’s value.

Environmental hazards located on the property which pose a direct health threat to occupants include:
• Asbestos-containing building materials;
• Carbon monoxide;
• Formaldehyde;
• Hazardous waste;
• Lead;
• Toxic mold; and
• Radon gas concentrations.

The seller’s agent conducts a visual inspection of the property for visible environmental hazards, as well as physical defects, before reviewing the seller-prepared Transfer Disclosure Statement (TDS) for correctness.

On review of the TDS, the agent enters on it any of their observations inconsistent with the seller’s entries to correct the TDS for seller errors or oversights. The TDS becomes one document in the marketing package used to induce buyers to acquire the property.

The timing for delivery of the TDS to prospective buyer as a disclosure is as soon as practicable (ASAP) after the buyer or their agent makes an inquiry seeking further information on the listed property, usually by delivery of a marketing package which includes the TDS.

Also, the seller’s agent delivers, or confirms the buyer’s agent has handed the prospective buyer a copy of the environmental hazard booklet approved by the California Department of Health and Safety (DHS).

The seller is not obligated to hire a third party to investigate and report on whether an environmental hazard is present on or about the property. It is the seller’s and the seller’s agent’s knowledge about hazardous environmental conditions affecting the property which is disclosed on the

Will I pay taxes if I sell my home?

A: When you sell your primary residence, it is excluded from taxation up to $250,000 profit per individual owner when you qualify for the principal
residence profit exclusion. When you own your home with another person, together you may exclude up to $500,000.

To qualify for the exclusion, you need to have occupied the property as your principal residence for at least two of the last five years. When you own your home with another person, you both must be owners and meet the two-out-of-five year occupancy rule. If only one of you meets the occupancy rule, then the profit exclusion is limited to $250,000.

However, when you and your spouse have not simultaneously owned and occupied the residence for at least two of the last five years, you still qualify for the $500,000 exclusion if:

  • One of you owned the residence;
  • You both meet the two-out-of-five year occupancy rule;
  • You file a joint tax return for the year of the sale; and
  • Neither of you has taken a principal residence profit exclusion on another property within two years prior to the sale.

You do not need to occupy the home at the time of sale to qualify for the principal residence profit exclusion under the two-out-of-five year rule.
If you do not meet the two-out-of-five year occupancy rule, you do not qualify for the tax exclusion — with one exception. If you relocated due to personal difficulties, you may still qualify for a partial tax exclusion. Personal difficulties include:

  • A change in employment when your new job is located at least 50 miles farther from your home than your old place of employment or, if you were
  • Unemployed, the job is at least 50 miles away from your home;
  • A change in health, such as age-related infirmities, emotional issues or even severe allergies; and
  • Unforeseen circumstances, such as death, divorce or natural disasters.

With the personal difficulties exception, when you relocate after occupying the property for less than 24 months, you qualify for a profit exclusion
amount equal to the fraction of the ceiling amount ($250,000/$500,000) attributable to the portion of the 24 months you occupied the property.

What are HOA Assessments?

A: Ownership of a unit in a condominium project or other residential common interest development (CID) includes compulsory membership in the project’s homeowners’ association (HOA). The HOA is in charge
of managing and operating the entire project.

The obligations you undertake when you purchase a unit in a CID, and the HOA’s documentation of those obligations, fall into two classifications:

  • Use restrictions contained in the HOA’s:
  • Articles of incorporation;
  • By-laws;
  • Covenants, Conditions and Restrictions (CC&Rs) of record;
  • Age restriction statements; and
  • Operating rules.
  • Financial obligations to pay assessments as documented in annual reports which include:
  • Pro forma operating budgets;
  • A Certified Public Accountant’s (CPA’s) financial review;
  • An assessment of collections and the
  • Collections enforcement policy;
  • An insurance policy summary;
  • A list of construction defects; and
  • Any notice of changes made in assessments not yet due and payable.

There are two types of assessment charges to fund the expenditures of the HOA:

  1. Regular assessments fund the operating budget to pay for the cost of maintaining the common areas. Regular assessments are set annually and are due and payable in monthly installments.
  2. Special assessments are levied to pay for the cost of repairs and replacements that exceed the amount anticipated and funded by the regular assessments. Special assessments are generally due and payable in a lump sum on a date set by the HOA when making the assessment or added to the regular assessment monthly installments for a specified amount of time.

Annual increases in the dollar amount levied as regular assessments are limited to a 20% increase in the regular assessment over the prior year. An increase in special assessments is limited to 5% of the prior year’s
budgeted expenses.

It is recommended you review all readily available HOA information with your agent before making an offer. With this information, you and your agent are able to better determine the price you will pay for the unit and whether or not you have the ability (and desire) to carry the cost of ownership after acquisition.

What documents do I need from the HOA when selling?

A: At the listing stage, your agent on your behalf prepares a form requesting homeowners’ association (HOA) documents. It is sent to the HOA
or management company to request their delivery of copies of the common interest development’s (CID’s) governing documents concerning the project’s use restrictions and HOA finances.

The HOA or management company will deliver the documents within 10 days of the request’s postmark or receipt of the hand-delivered request.

The HOA will charge a service fee to prepare and deliver the documents requested. This upfront fee is the same amount regardless of whether the documents are delivered by hand, by mail or electronically.

The HOA will also charge a transfer fee to change its internal records to reflect the new ownership of the unit. This fee is sometimes demanded to be paid up front with the HOA document request — before a buyer is even located.

Upon receiving the written request and appropriate fees, the HOA provides the governing documents you need concerning the project, which include:

  • Articles of incorporation;
  • Declaration of covenants, conditions & restrictions (CC&Rs);
  • Bylaws;
  • Rules and regulations;
  • Operating budget, assessment and reserve funding;
  • Financial records covering at least one previous year; and
  • HOA meeting minutes from at least one previous year.

Your agent makes the HOA documents available to prospective buyers for their review as part of the marketing package for your property. To avoid buyer disputes or cancellation, this information is handed to the buyer with disclosures, and before entering into a purchase agreement.

The buyer reviews the HOA documents along with other mandated property disclosures (such as the Transfer Disclosure Statement (TDS)) to determine the property’s value when preparing their offer to purchase.

Credit Freeze Basics

What is a credit freeze?

A credit freeze limits access to your credit report, making it more difficult for would-be identity thieves to open accounts in your name. You can still use your credit card normally, but you won’t be able to open new lines of credit.

How do I freeze my credit?

To place a freeze on your credit report, contact all three major credit reporting agencies:

Equifax: 800-349-9960

Experian: 888-397-3742

TransUnion: 888-909-8872

You’ll be asked to provide personal information to verify your identity, and may be a fee, depending on your age and where you live.

Are there drawbacks to a credit freeze?

The protection a credit freeze offers isn’t perfect. Credit freezes only prevent new lines of credit from being opened in your name — if an identity thief already has access to one of your accounts, a credit freeze is not an effective line of defense.

In addition, a credit freeze remains active until you decide to unfreeze it. To unfreeze your credit report and open a new line of credit, you’ll have to contact each credit reporting agency with the PIN number given to you at the time of the initial freeze. A fee may be charged for unfreezing your credit.

What are encumbrances on title?

A: An encumbrance is a claim or lien on a parcel of real estate and the ownership interests in the property.

A preliminary title report (prelim) issued by a title insurance company is intended to disclose the current vesting and all encumbrances reflected on the public record affecting a property’s title.

Encumbrances set out in a prelim include:

  • General and special taxes;
  • Assessments and bonds;
  • Covenants, conditions and restrictions (CC&Rs);
  • Easements;
  • Rights of way;
  • Liens; and
  • Real estate interests held by others.

The buyer, their agent and escrow review the report for encumbrances on title inconsistent with the terms for the seller’s delivery of title set in the purchase agreement and escrow instructions.

However, both the seller’s agent and buyer’s agent review the prelim immediately for any reported conditions that may interfere with closing the

In practice, the buyer’s agent looks for title conditions which conflict with any intended use or change in the use of the property contemplated by the buyer. Interferences with use come in the form of unusual easements or use restrictions (CC&Rs) which obstruct known plans the buyer has to make improvements.

Ultimately, the escrow officer, on review of the prelim, advises the seller of any need to eliminate defects or encumbrances on title which interfere with closing the transaction as instructed.

My Deposit: Will I lose it if escrow is cancelled?

When the escrow period begins, your good faith deposit is held by escrow to be applied on closing toward your down payment and transactional closing costs.

The deposit is your money, even though it is held in escrow. However, it also serves as a source of the seller’s recovery, upon demand, of any losses you may have caused them to incur. Thus, your deposit may be partially or totally offset when you cancel for any reason not covered by a
contingency provision in the purchase agreement — a material breach of contract.

In this situation, the seller consents to the release of the escrowed deposit to you less any out-of-pocket money losses the seller actually incurred due to your breach.

To disburse funds, escrow first needs to have mutual instructions signed by both you and the seller. When you or the seller make a demand for the funds and the demand is opposed due to a refusal to consent, the resolution and eventual disbursement depends on who has the right to receive the funds held by escrow. A forfeiture of the deposit is not permitted in spite of wording to the contrary in some purchase agreements.

Within a period of 30 days after escrow’s receipt of the first demand for the funds, you and the seller are separately obligated to:

  • Determine who is entitled to the funds; and
  • Hand escrow cancellation and release of funds instructions to clear the deposit out of escrow.

For a seller to receive any part of your deposit, they need to provide you with evidence of the money losses they incurred due to your unexcused failure to close escrow.

Money losses a seller may have incurred on a buyer’s breach include:

  • Lost rental income caused by the terms of the sale;
  • A decline in the property’s value below the price agreed to by the date of the breach when they re-market the property for sale;
  • Transactional expenses unrecoverable when the property is resold; and
  • Other expenditures directly related to the transaction which will go uncompensated (on a resale or retention of the property).

When escrow does not receive mutual instructions to disburse funds within 30 days of a demand by either you or the seller, the escrow company deposits the funds with the court and closes their file. On the deposit with the court, escrow is relieved of any further responsibility to account for the funds.