Managing Money : Escrow Account Isn’t Required for Real Estate Transaction
QUESTION: Can we avoid escrow fees when we sell our house? If not, how do we reduce these costs?--H. L.
ANSWER: One of the best-kept secrets in the state is the absence of any California law requiring the opening of an escrow account in order to complete a real estate transaction. And for a simple, straightforward deal, an escrow account may not even be necessary. However, there are plenty of reasons why you--as either buyer or seller--might well want an escrow account for your real estate deal.
Basically, an escrow account provides a neutral, third-party clearing house for all the paper work and financial arrangements that must be completed before a real estate deal can close. Once escrow is “opened,” the escrow officer keeps track of the progress of the real estate sale, making sure that buyer and seller complete the terms of the deal before the sale is complete. Throughout the escrow, both sides are given copies of all papers filed in connection with the deal. By the “close” of escrow, both sides in the deal should have a complete paper trail of the transaction and a final financial accounting of all money passing through the escrow account.
Another well-kept secret is that you have the right to help select your escrow agent. Often real estate agents steer their clients to escrow companies they are familiar with. In some cases, real estate companies have their own escrow subsidiaries that they hand their business to. But you are under no obligation to select the company recommended by the real estate agents.
“The consumer has the right to shop around for the best deal and service,” says Marshall Wexler, president of Southern California Title Co. and host of a radio talk show on real estate. “And there’s no reason not to shop around.”
Selecting an escrow company, however, can be tricky. Prices and fees vary. Usually, companies charge a basic fee, typically $100 to $125, plus an additional amount per $1,000 of the transaction value. In Southern California, these charges are running from $2 to $2.50 per $1,000, says Michael Hiller, an Encino attorney specializing in real estate law and author of “How to Get the One Hour Real Estate Loan.” In addition, some companies will charge a fee for every document filed in the transaction. These charges are usually $25 per document, but Hiller says some companies charge as high as $75 to $80 per document.
Hiller advises his clients, particularly those buying properties for $1 million or more, to negotiate the escrow fees with a company. Hiller argues that it does not cost an escrow company that much more to service a $1-million deal than a $500,000 one. He says a savvy dealer should, at the very least, be able to negotiate the prorated charges down to $1 to $1.50 per $1,000.
In addition, Wexler advises clients to be wary of the so-called “garbage fees” that are often tacked on to the basic escrow charges. Such fees include charges for supplying a notary public, processing a lender’s statements, handling new loan papers and filing documents. He suggests that customers ask escrow companies what their basic fees are and if they charge any additional fees.
Still, Hiller notes that escrow companies should not be chosen on price alone. Service and integrity are important. Check references and consult with friends for recommendations.
Q: We just received a penalty notice from the state of California for $265. The reason is not that we failed to pay what we owed on April 15 but rather that we failed to prepay our 1987 obligation with a quarterly estimated payment. It is true that we owed the state a great deal on April 15--about $6,500--because we sold a piece of investment property during 1987. But we had no idea that we had to prepay our taxes on the proceeds from the sale. Is this true? Do we really owe the penalty?--S. P. L.
A: Unfortunately for you, the state is right; and yes, you probably do owe some sort of penalty.
“Individuals in California are required to pay taxes, as they go, throughout the year,” says state Franchise Tax Board spokesman James Reber. “You can’t wait until April 15 to make good on your obligations.”
The lesson is obvious: If you do receive a substantial amount of taxable income, such as from the sale of securities or real estate, and no taxes are withheld, you should make an estimated quarterly income tax payment to the state to cover your tax obligation on the transaction. A good rule of thumb is that you should file an estimated tax payment on extraordinary income if you suspect that your tax on it will be in excess of $100.
The appropriate forms, the 540-ES or Estimated Tax Vouchers for Individuals, are included in the state’s income tax booklet that you receive every year. The forms are also available from your local branch of the Franchise Tax Board.
By the way, the Internal Revenue Service operates on the same pay-as-you-go principal. The federal estimated tax form, the 1040-ES, is available from the IRS by calling (800) 424-FORM. An IRS spokesman says taxpayers are liable to be slapped with a penalty if they do not prepay at least 90% of their tax obligation.
Now about your state penalty: There is still a possibility that you may not have to pay all of it. According to Reber, the state allows several exemptions. For example, if the actual amount of tax you had withheld in the year in question is equal to or greater than your tax obligation of the prior year, the penalty will not be enforced. A portion of the penalty may be waived if you can prove that the extraordinary gain was received late in the tax year, thus showing the state that it was not denied its due for the entire year. The exemptions are fully explained in Form 5805, which is also available from the Franchise Tax Board.
Carla Lazzareschi cannot answer mail individually but will respond in this column to financial questions of general interest. Please do not telephone. Write to Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, Calif. 90053.
