Ask the Expert: Security Deposits, 30 Day Escrow

Q.  I am buying a residential income property as an investent, and I am wondering what happens with the rental income and tenant’s security deposits.  How do I get credit for those income items and how are they handled in the final escrow and closing?

The appropriate credit and debit to buyer and seller are handled by prorations, or dividing up the income or expense items according to a specified date, usually the closing date.

Prorations can have a significant effect on the amount of cash a buyer needs to come up with in order to close escrow.  The date and allocation of the prorations should be calculated carefully.  Rental income and security deposits are normally prorated as of the date of the close of escrow.  This means that the seller makes all the payments due on the property and collects rents until the actual transfer of title takes place.  After the close of escrow, the payment obligations and income revenue become the buyer’s.

Assume you will close escrow on January 15.  If rents are all due on January 1st, the seller must credit the buyer (whether he has collected those rents or not) for the rents covering the period January 15th through January 30th, the 15 days remaining in the month of purchase.  In addition, all the advance rent and security/cleaning deposits the seller has collected from his tenants will be a credit to the buyer.  To be certain that you are credited for all the income due to you, be sure that there is a “rent and deposit schedule” attached to your escrow instructions which shows the unit number, amount of rent when last paid, rental due date, and deposits paid.  Have each tenant sign a “Tenant Estoppel Certificate” (typically used when the owner of an income property wants to sell or refinance the property, and the buyer or lender requires confirmation of the status of all leases in the property, to ensure that the tenant(s) do not have any claims against the landlord which would allow the tenants to offset or withhold future rents.). In addition, request that each tenant attach a copy of his application to rent, and his existing lease or rental agreeement.

The seller of an income property should also provide the buyer with all the leases and rental agreements currently in force along with a written assignment assigning the rents to the buyer.  By comparing all the documents, you can be sure that all parties concur about the state of the agreements between landlord and tenant.

A tenant estoppel certificate is used to verify the current status of the tenant and landlord’s rights and obligations under an existing lease when a landlord is seeking a loan on the leased property. The estoppel certificate identifies the tenant and landlord; the leased property location; the lease commencement date, termination date and option period, if any; the status of rent, prepaid rents and security deposits; status of any defaults by the landlord, among other information. It usually contains a statement by the borrower indicating the amount owed on their mortgage loan along with the interest rate.

You typically get these papers through your escrow officer, or directly from the seller. If you need a copy of a typical estoppel certificate, just call me or email me.

Q.  The seller is asking me to complete a 30 day escrow, which seems short.  What are the typical problems that could delay the recording of my property purchase?

A.  First of all, you must check with your mortgage broker or banker to find out if they can even accomplish a thirty day escrow.  There is a backlog of applications right now, due to low interest rates and higher than average number of closings.  In addition, due to new appraisal regulations, appraisals are coming in much later than ever before, often as long as 3 to 4 weeks from the date they are ordered.  Neither you, nor the lender, have any control over the appraiser’s scheduling.  In addition, loan documents and underwriting are at the mercy of the lender’s time line, so you have no control over that part of the process as well.  It’s a good idea to sit down and do a chronology of events with your lender, just so they, and you, can have a good idea as to whether this short closing is possible.

On the seller’s end, a meeting with the escrow officer is in order.  The items below will require added clearance and processing time for escrow and title.  The seller can avoid delays by providing information known to them on any of the below.

· Establishing Fact of Death – Joint Tenancy
· Power of Attorney – use of Proper Execution
· Physical Inspections Results – Encroachment, Off-Record Easements
· Clearing Liens, Judgments
· Clearing Child/Spousal Support Liens
· Probates
· Transfer/Loans Involving Corporations/Partnerships
· Bankruptcies
· Proper Execution of Documents – Grantees Compare to Trustors, Proper Jurats, Notary Seals
· Last Minute Change in Buyers or Loan Documents
· Last Minute Change in Type of Title Insurance Coverage
· Recent Construction
· Family Trust
· Business Trust
· Property Recently Foreclosed

After escrow, title, and lender concur that a thirty day escrow is possible, go ahead and attempt it, knowing that any small glitch along the way will easily send you over that mark.  Be sure you have a backup plan in place to extend the escrow at no penalty to you, if the lender or title officer cannot complete their duties in time to meet the closing.

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