Let’s say you buy a million dollar house with 20% down and 80% of the money coming from the bank and you buy it from a owner who still has half a million dollar left on their mortgage when they sell it to you.
Does the bank dump $800K into your personal account from which you then write a million dollar check or wire transfer or whatever to the seller? Does the bank give the owner the $800K directly and it’s then their responsibility to send $500K of that on to their mortgage provider? Or does the bank give the other bank the $500K directly and then sends the rest of the $300K to the owner?
I’m basically wondering at any point, could someone use the ruse of buying a house as a way to control a large sum of money and then disappear with it and become a fugitive? I’m assuming this isn’t possible but I’m interested in the mechanics behind it.
I only know what happens in Japan since there is where I’ve bought and sold a house. Others can tell you how it works in the States or other countries.
We met at the bank which provided the loan. The developer was there with the company which provided his financing.
The bank dumped the money in my account, and then immediately transferred the amount to the seller who immediately transferred it to his financier. Everyone then signed the documents transferring the deed and released the lien.
It would have been very difficult to do anything funny there.
In Canada (and I believe this is common practice elsewhere) this is one of the reasons that real estate lawyers exist. If you are the buyer with an approved mortgage, when the transaction closes the bank transfers the funds to your lawyer in trust, who then conveys it to the seller’s lawyer.
I recently sold a place in the United States. I (the seller) did not have a mortgage, but the buyer did take one out.
Before the closing, the title company asked me to give them the routing number and account number of a bank account. On the closing date, they wired my money to my bank account and I was free to do what I wanted with it.
Now, I do not know for certain how the title company got the money, but I presume the bank making the loan must have wired it to them and that the buyer must have sent the down payment to the title company before the closing date. I know that the buyer’s earnest money (the deposit when they signed the contract) was in the form of a check given to the title company.
The title company also took care of deducting the money I owed to the real estate agent, my lawyer, various tax/government agencies, and themselves and getting it to all those people before sending me my share. If I had had a mortgage, I’m sure they would have wired the bank its payoff directly. At closing, you get a big long form explaining all the people who have to be paid off and how much they each get and, if you approve, the title company takes care of disbursing the funds.
Yep, same as in the UK. We often get whole chains of house movers here: A first time buyer agrees to buy a two bed terraced house. The owner is moving upscale to three bed suburban semi. That owner is moving out of town to a detached house.
All three transactions have to happen on the same day and it is up to each person’s solicitor to coordinate with the others. Before moving day, the lenders will have transferred the loan to the borrowers solicitor’s escrow account, the buyers will have all paid their deposits to their solicitors and only when they are all satisfied, can anyone legally move in.
Bearing in mind that the three transactions may well be happening in different parts of the country and everyone’s possessions will have been loaded into trucks, it is a minor miracle that it works at all.
I owned the house. The buyer paid my asking price and skipped a home inspection in exchange for an expedited closing. The earliest possible date for closing was bad for me, so my real estate lady suggested she represent me at closing. I signed power of attorney type stuff for this.
The day of the closing, I stopped at the real-estate office to pick up my check. The receptionist couldn’t find anything left for me. She looked everywhere, then got the boss. He called my agent, (who was out of the office-nobody knew where) but the call went to voicemail.
I explained to the boss guy about the power of attorney issue and he grew visibly uneasy. That made me more anxious. Repeated calls to the agent went to voicemail as did calls to her home phone. Other agents were whispering to each other. By this point I assumed she cashed the check and was “on the run”. I flat out asked the boss guy if his business carried insurance for situations like this.
Then, my agent walked in the door. Turns out my check had “slipped her mind”. She had shoved it into her briefcase and was out showing a home. Her phone’s battery had died. The end.
In some states, the closing is a meeting with everyone sitting around a table. Cashiers check(s) are handed over direct, and title is transferred. I much prefer this approach. There’s negligible risk: if the check is forged, it’s not as though the buyer can abscond with the house.
In some states, a “title company” clears the transaction. Funds from buyer & mortgage company go to the title company; the title company deals with title transfer then disburses funds. Few people seem to pay much attention to the credit risk involved. Title companies have no capital, and there’s a significant risk that somebody might abscond with the funds. When I raised this issue on a recent purchase (in New Mexico), the title company provided a “Closing Protection Letter” issued by the title insurer (a major insurance company), indemnifying me against this risk. Obviously, I called the insurance company to verify. There was no cost to me, and I strongly recommend requesting this.
Concur, that’s what we pay the lawyers for. We also have to declare to our lawyers where all our money has come from, to prove there’s no money laundering going on.
I had an interesting transaction on a house I bought in Italy. The lion share of the cash was transferred to the estate agent (who also has legal powers in Italy). He then dispersed the money to the seller. However, the seller and, get this, the notary, who oversees the deal (a kind of lawyer/magistrate) both wanted a portion to be paid in cash.
I had to wire transfer this cash to my bank in Italy, withdraw 10,000 euros, and hand over the cash to the owner and notary when we all met in person for a signing of the deeds. It’s an open tax dodge, which even the legal authorities in Italy collude in.
That’s a rarely used method nowadays in my state. Title companies handle the entire transaction electronically, even signatures on documents where and when possible. Often buyers and sellers sign in advance of the closing date, then closing is just a “virtual” event with no one physically present.
Earnest money is transferred from the broker’s trust account to the title company electronically, likewise other funds and payments to inspectors and for work done, filing fees, etc. The title company takes care of everything, and cuts physical checks only when necessary.
There is a scam making its rounds, where the scammer calls up the title company and/or broker, pretends to be a banker, and asks for the routing data to transfer funds. Once they are gone, there’s no getting them back, as such transactions are not reversible. Title companies are learning to verify any call of this type with all parties first. I don’t know if insurance takes care of it, but I hope so.
…erm, which is what I described in the second part of my post that you cut off.
The procedure of transferring unsecured and irrevocable funds electronically to a title company may be convenient, but it’s dangerous for the buyer. I have no doubt that sooner or later after fraudulent losses many states will overhaul this system with new regulations. Title companies are basically uncapitalized shells, and it makes no sense for them to be clearing large transactions like this.
In the meantime, as I mentioned: if you are a buyer closing via a title company, insist on getting a “Closing Protection Letter” from the title insurer to indemnify you against fraud.
I’ve always done this through escrow … I write a check for the down payment and give it to the escrow officer, the bank sends the check for the balance and the seller sends the deed. The escrow officer does a title search making sure first the seller’s deed is legitimate, then looks for any liens against the property. It’s the escrow officer’s job to pay off the outstanding mortgage and any liens. Then what ever is left over goes to the seller, and the deed is transferred to the buyer/bank.
The principle is to have a neutral third party collect everything, and then distribute it as the agreement says to. One of the many requirements to be an escrow officer is to carry a performance bond. If the officer “takes the money and runs”, then the insurance company pays out for the losses.
Word of advice: Always use escrow when transacting real estate. Also, most of us will only buy a home once in our lives, so go ahead and have a lawyer look over the documents before you sign. For a million dollars, better to be safe than sorry … there’s ways to commit fraud in the real estate market and escrow is your best protection … and your check won’t “slip their minds” … a week’s interest at 5% is $1,000 …
Yes, the process of escrow per se makes perfect sense.
That’s what’s happening when title companies clear transactions - they have their own escrow officers. The problem is that title companies are pretty much shell companies, and you are heavily exposed to fraud while they are holding your money.
Escrow makes sense, but really there should be a requirement that you are a bank to conduct escrow.
Oh, for goodness sake. California’s been closing real estate escrows using title companies for at least 30 years (I bought my first house there in 1986 that way). If what you worry about were such a concern, one would think California would have done something about it. But the closing of my purchase just last month was essentially no different than the closing I did 30 years ago, except that this time, there were no physical checks involved (all done by wire transfers).
Do you have any evidence, Riemann, that title companies are a significant problem?
In my current home state (South Carolina), an attorney mediates the transaction. This is done under the theory that registering deeds in this state is a court function, and attorneys, as “officers of the court” are required to monitor the process. The attorney doesn’t represent either party; they’re not acting as counsel, but rather as extensions of the court.
My cynical side sees it as nothing more than a way to generate extra income for attorneys.
Sure, it’s a low probability event, but there’s a huge amount of money at stake. You have no recourse to recover a wire transfer, it’s essentially like handing over a suitcase of cash. I would never wire money to a title company without making sure that an insurance company or a bank is explicitly standing behind them guaranteeing them.
ETA, from that last article:
So 1 in 200 real estate closings involve escrow fraud. That’s not “extremely rare” in my book.
I work for a mortgage company. Thousands of closings every single month, and a good chunk in California. I’ve never once heard of an title company absconding with escrow funds. Of course, that’s why you deal with reputable companies, and not “Bob’s Escrow and Trucking.”
Someone saying something is extremely rare and then saying is half a percent, is someone who doesn’t understand percentages.
…and on top of that, every title company I’ve worked with has offered me insurance (at a cost) that protects me in the event someone absconds with the funds. Naturally we’ve never taken it because as you point out the risk of a title company absconding with escrow funds is laughably small.
It wouldn’t be, but you’ve extrapolated from “any type of fraud” to “escrow fraud” without any evidence. Also, its pretty clear from the follow up paragraphs that this includes “nickel-and-dime” style schemes where you sign away $10 or so that you weren’t expecting because you didn’t read the final document carefully. A reasonable person might have thought you were suggesting there is a 1 in 200 chance of an escrow company absconding with your wire transfer. That is not a view supported by the facts provided.
Anyway, here in Washington state I believe everything got funneled through the title company. There were various sources of funding (our down payment that we wired to them, the mortgage funding which I assumed was also wired from the bank). I assume there were various beneficiaries (the title company fees, the seller) that would have been wired money out of this pool.
In our case the title company forgot to check that property taxes were all paid up. They weren’t. As soon as I discovered it (six months after closing) and told the title company they fixed that immediately. I wonder about that … if they just had to eat that due to their own mistake or if they were able to get it back from the seller.
