CA Exam Prep: Transfer of Property

STUDY SHEET

Top Takeaways
You can expect 8% of your licensing exam, which is 12 questions, to be related to transfer of property.

Title Insurance
Title insurance protects buyers and lenders (through separate policies) against financial loss that might be incurred because of
title defects discovered after closing.
The lender's policy offers protection for an amount equal to the mortgage loan balance.
The title policy will include a legal description, a list of items covered, and a schedule of exceptions (or exclusions). The
schedule of exceptions describes items the policy doesn't cover, such as:
Any liens recorded after the effective date of the title policy, including mechanic's liens, taxes, and special assessments
Any claims not shown in public records
Claims against a title by anyone who lives or lived on the property unless there's a recorded record of tenancy
If more than the standard title insurance is required, an extended coverage policy can be purchased.
The standard policy protects against defects that may exist but haven't been discovered, such as errors in the legal
description, forgery, or improperly recorded deeds.
An extended policy covers everything in the standard policy as well as additional possible defects, such as unrecorded
liens, an incorrect survey, or boundary encroachments.
Extended policies are usually for the lender.
In the event of a claim, the title company will either pay the debt or take the claimant to court. If the title company pays the
claim, it may seek reimbursement from the at-fault party.
The title insurance company performs a search of public records in an attempt to discover any potential claims against the
property and issues a preliminary report (also called a title commitment) that's a promise to insure the property as long as
certain conditions are met.
The preliminary title report simply describes the property and provides current ownership information, as well as
anything that might be an exception to the coverage. It also provides data about outstanding taxes or assessments, any
encumbrances, and any conditions or restrictions on the property.
The chain of titleestablishes the path of property ownership from its first owner to the current owner. The chain begins
with the current owner and works backwards.
The grantor-grantee index establishes chain of title. When the last grantee is not the next grantor, a gap exists in the
chain. Gaps must be resolved, sometimes by branching out from public records, in order for clear title to be given.
A marketable titlehas no defects or clouds to which a reasonable buyer would object. It's not necessarily a perfect title.
Sellers can convey marketable title if the title search reveals no doubt about property ownership and there aren't any liens or
encumbrances that won't be cleared at closing.
A cloud on title( title defect) is any encumbrance, such as a lien or inheritance claim, that prevents the seller from providing
clear, marketable title.
The most common title defect in a real estate transaction is the seller's existing mortgage lien.
Issues with an existing mortgage lien are usually resolved at closing when the seller's proceeds are used to pay off the
loan.
California law requires the buyer to receive notice if title insurance won't be provided. This notice has specific language that
must be used, and the notice must be acknowledged by the buyer.
California has a trade association of title companies called the California Land Title Association, or CLTA, which provides a
standard form for title insurance. The CLTA is the homeowner's standard policy. The lender's extended policy uses forms
from the American Land Title Association, so it's called the ALTA policy.

Deeds
A deed is a written and signed legal instrument that transfers (conveys) title to real property from the owner (grantor) to the
new owner (grantee).
The deed is the document that establishes proof of property ownership.
California uses the grant deed to convey property in most transactions. A grant deed carries with it implied warranties that the
grantor has not encumbered the property.
A gift deed is the same as the grant deed, but specifies the title is transferred with no consideration, or with
consideration of "love and affection."
A general warranty deed (also called a full covenant and warranty deed) offers the greatest warranty to buyers. However, this
deed is rarely used in California.
 The general warranty deed provides six covenants (promises). By statute, some states have combined the covenant of seisin
and the covenant of the right to convey; in those states, only five covenants exist).
Three covenants provide present warranties:
Covenant of seisin: The grantor holds title to and possession of the property.
Covenant of right to convey: The grantor has the right to convey both title to and possession of the property.
Covenant against encumbrances: The grantor assures the grantee that there are no encumbrances against the title
other than those identified in public records or the deed itself.
Three covenants provide future warranties:
Covenant of quiet enjoyment: The grantor assures that the grantee will not be disturbed in the use and enjoyment of
the property because a title defect is passed on by the grantor.
Covenant of further assurances: The grantor promises to take whatever actions necessary (within the grantor's
power) to correct any title defects.
Covenant of warranty or warranty forever: In this most important covenant, the grantor promises to protect and
defend the title against lawful claims made by others.
A deed of trust(aka deed in trust) is a security instrument that allows a trustee to hold title to real estate for the beneficiary
named in the trust agreement. The trustee holds the deed of trust until the mortgage loan is paid in full, OR until the borrower
defaults and the lender (through the trustee) must foreclose.
A trustee's deed upon saleis used to transfer property from the trustee to the winning bidder at a California
foreclosure sale. It conveys full ownership but doesn't include any guarantee that the title is clean.
A quitclaim deedcarries with it no warranties to the grantee. It only releases any of the grantor's property rights to the grantee.
The quitclaim deed is typically used to clear up a simple cloud on a title.
Other types of deeds include court-ordered deeds, such as the executor's deed (to convey property from a decedent's estate),
and a sheriff's or referee's deed (used to convey property from a judicial foreclosure).
Deeds in California must be in writing and must include the following elements:
A specifically named and identified legally competent grantor (possesses mental capacity and is of legal age); the
grantor's name must be exactly the same throughout the deed
A specifically named grantee who can be identified based on the name in the deed, and who is capable of accepting the
grant
Act of conveyance (the granting clause such as "... does hereby bargain, grant, deed, and convey ...") signifying the
grantor(s) intend to convey the property
Legal description of the property
Grantor's signature
The signed deed is delivered to and accepted by the grantee.
Deeds are acknowledged in order to be suitable for recording. Acknowledgement means that the parties signing (in the case of
a deed, the grantors) have gone before a competent party (typically a notary) and indicated that the signatures are their own
and that they signed voluntarily.
Title transfers when the grantor delivers and the grantee accepts the deed. Delivery may be made directly to the grantee or to
an agent of the grantee, such as an attorney, real estate broker, or the title company issuing the title. Once delivery is made,
acceptance is presumed.
The deed is recorded in the land records of the jurisdiction in which the property is located. Recordation ensures that the
buyer's ownership (title) is protected. It provides constructive notice of the sale/purchase, which means that the record is
publicly available to anyone who performs a records search. This is in contrast to actual notice, which means that the parties
have personal knowledge of a particular event.

Escrow
Escrow involves three components: a neutral third party (the escrow agent), the parties in the transaction (the principals), and
the instructions for completing or closing the escrow (the escrow instructions).
Escrow instructions must be clear and unambiguous and may be given unilaterally or bilaterally, but must be signed by
all principals to be valid.
In a face-to-face closing, all parties are present for the signing. California typically uses escrow closings where the buyer and
seller don't meet. The escrow agent holds the documents and funds, coordinates activities, and ultimately delivers those items
to their owners at the close of escrow.
The escrow agent (aka a closing agent) may be a broker, title representative, escrow officer, or an attorney. A title company
representative is the most common, particularly in northern California.
In California, escrow agents must be licensed under the California Department of Business Oversight.
Exemptions to escrow licensing include banks, savings and loan associations, title insurance companies, attorneys, and
real estate brokers. Attorneys and brokers qualify for this exemption only when they're representing a principal in the
transaction.
Escrow agents are limited agents acting on instructions from the parties to the transaction. As limited agents, they don't
represent either party but are performing a fiduciary duty of holding escrow money and conducting the closing.
General escrow principles require escrow agents to:
Maintain their impartiality as limited agents to the parties in the transaction.
Maintain confidentiality as appropriate while also making any material facts known to the principals.
The escrow agent has many responsibilities, including:
 Orders the preliminary report from the title company and delivers to the buyer or buyer's agent for review.
Requests loan demand for payoff for any existing loan that will be paid through escrow.
Accepts all reports, inspections, policies, loan instructions, instruments, and other related documents needed to
complete and close the escrow and delivers them to the appropriate principal for approval as needed.
Requests closing funds from the lender. These funds may not be disbursed until the checks or drafts have cleared and
become available for withdrawal.
Makes any prorations and audits the accounts and records using a cash reconciliation statement to account for all
funds, and determines if the principals have complied with all instructions.
Orders and confirms the recording of all documents after the title or title insurance company runs a date down (a title
check to the current date) of the seller's title.
Closes the escrow by preparing a settlement statement for the buyer and seller, disbursing all funds according to the
escrow instructions, and delivering the instruments of the escrow to the principals.
Shared expenses that either party owes at closing are prorated (divided proportionally between) the parties depending on when
closing occurs. Typical prorations include:
Property taxes and HOA dues
Fuel (propane or oil tank)
Water and sewer charges
A debit is a charge that a party must pay.
A credit is a charge that a party has already paid, an amount that will be reimbursed, or an amount that is promised.
Prorated items will be either accrued or prepaid.
Accrued expenses are items the seller owes on closing day but that will eventually be paid by the buyer (unpaid
current property taxes, for example). These expenses will appear in the seller's debit column and the buyer's credit
column.
Prepaid expenses are those already paid by the seller but that the buyer should pay a portion of (such as prepaid real
estate taxes, utilities paid in advance). These items are credited to the seller and debited to the buyer.
Proration calculations may use either a 360-day statutory year (30 days per month), or a 365-day calendar year. The exact
number of days in the closing month are always used.
The Real Estate Settlement Procedures Act( RESPA) ensures that buyers receive an estimate of closing costs (on the Loan
Estimate,aka LE,form) from the lender within three days of loan application, and a final disclosure of closing costs on the
Closing Disclosure( CD) at least three business days before closing. This gives the buyer the opportunity to compare the LE
with the CD and determine what, if any, changes may have occurred.
Together, the LE and CD form what's referred to as TRID: TILA/RESPA Integrated Disclosures. The Dodd-Frank Wall Street
Reform and Consumer Protection Act implemented use of these forms for all federally related mortgage transactions. These
forms aren't required for home equity lines of credit (HELOCs), seller financing, or reverse mortgages.

Tax Aspects
Licensees should disclose the property tax obligations for properties to buyers.
The tax aspects of transferring real property include:
The calculation of property tax owed by both the buyer and seller at closing
The possibility that a transfer will trigger reassessment of the property and increase taxes
Review of the title commitment to ensure that there are no tax liens against the property
The buyer's potential income tax deduction for property taxes and mortgage interest paid
The seller's potential capital gains tax paid on the financial gain resulting from the property sale
Counties and some cities charge a documentary transfer taxthat's collected at closing and payable when the deed is
recorded. The county rate is 55 cents per $500 of sales price. City transfer taxes, if used, vary.
The purchase, ownership, and sale of real property has tax implications for buyers and sellers.
Licensees should be sure not to overstep the bounds of their license by giving any kind of tax advice to clients. Instead,
refer them to a financial expert.
There are potential tax implications for real property owners at each stage of the property ownership lifecycle:
acquisition, ownership, and sale (reversion).
Income tax implications for homeowners include:
Potential deduction of points paid and prepaid interest at acquisition
Potential deduction of property taxes, mortgage interest, and depreciation during the ownership phase
Exclusion of some or all of the gain on the sale of a personal residence, depending on circumstances

Special Processes
Property can be acquired through various special processes. These include accession, occupancy, non-judicial foreclosure, and
public grant.
Property acquisition through accession means the property has been extended due to natural or man-made causes.
Land can be gained through natural causes by:
Alluvion, which is newly formed land created by deposits from water action, called accretion
Reliction, which is addition of dry land when water recedes permanently
Land can also be lost through avulsion, which is a change in water course or the action of water washing land away.
 Real property may be acquired through adverse possession, which occurs when a party or parties who do not own the property
openly use it, reasonably believe they have the right to use it, and use it for a continuous and uninterrupted statutory period of
time.
Non-judicial foreclosure is a form of involuntary alienation. It allows a property transfer without court supervision, although
state law requires a specific procedure. The power-of-sale clause in the security document protects a lender's right to foreclose.
Transfer of property for public use between a private party and a governmental entity occurs through public grant (when the
government transfers interest to a private individual) or dedication by deed, such as when a developer transfers title to a
portion of property to the municipality where a development is being built (for instance, for a public park or pathway).

Transfer Through Court Supervision

Partition is one way of terminating co-ownership of property by tenants in common. The property can be divided
proportionally by the court among the co-owners. If the property can't be divided and still remain viable lots, the court may
order the sale of the property and split the proceeds according to the share of ownership.
Probate is a legal process used when a person died with or without a will. The purpose of probate is to determine the validity
of a will, where one exists, and supervise the distribution of an estate, whether a will exists or not.
Dying testate means with a will; intestate is without a will.
Intestate succession is an inheritance following the laws of succession in the state.
Operation of law always takes precedence over the terms of a will. For example, property held as joint tenancy will be
automatically transferred to the surviving joint tenant(s) regardless of what the will may say.
Because California is a community property state, in the absence of a will, the surviving spouse becomes the sole
owner of all community property.
An executor is used when a person dies with a will. The decedent names the executor in the will.
A gift of real property through a will is called a devise. The decedent is the devisor, and the recipient is the devisee.
Gifts of personal property through a will are called bequests.
An administrator is used when a person dies without a will. If a person dies without a will, the estate passes to the deceased
person's heirs by order of descent.
Escheat is the state's power to claim the property of someone who died intestate with no heirs or creditors.
Some title defects may require the owner to initiate a quiet title actionto remove the cloud. This is a court action that allows
the court to determine the validity of any claims on title and officially cure the defects with a court order filed in the county
records.
Declaratory reliefis another way the court can make a determination to settle questions about real estate ownership and
property rights.
Judicial foreclosure in California is rarely used. The lienholder asks the court for permission to foreclose. If the request is
granted, the sheriff holds an execution sale, and title is transferred to the winning bidder using a sheriff's deed. The sheriff's
deed transfers title but contains no warranties.
State law gives the winning bidder the right of redemption for one year after the execution sale.

Types of Vesting
The form in which a buyer chooses to take title to property is called vesting.
Title to real property can be vested in the following ways:
Estate in severalty (sole ownership)
Tenancy in common
Joint tenancy
Tenancy by the entirety (not used in California)
Community property (used in California, but not in all states)
Business entities can hold title to real property.
Real property can be held in a trust, which can be formed in different ways for different purposes. All trusts include a trustor
(the person conveying title for the trustee to hold), the trustee (the person in charge of carrying out the terms of the trust), and
the beneficiary (the entity or individual who benefits from the trust).
A living trust is created during a person's lifetime and is established as a means to convey property.
A testamentary trust is created as part of a will and begins upon the death of the testator.
A land trust is formed specifically to hold real estate.

Estate in Severalty

Sole ownership is called ownership in severalty, aka estate in severalty. One person or entity (such as a corporation) owns
the property with no joint interest by any other person.
This type of ownership includes the right of inheritance. When the owner of an estate owned in severalty dies, the estate
passes either according to instructions in the owner's will or according to state law.

Tenancy in Common
 Tenancy in commonis a form of co-ownership in which each co-owner has an undivided interest in the whole property,
regardless of how many co-owners there are and the amount of each co-owner's fractional interest in the property's value.
Tenancy in common is generally considered the default arrangement if the deed doesn't specify another form of co-ownership.
Each tenant in common has the right to transfer personal interest in the property to another without requiring permission from
the other co-owners. However, transferring the entire property does require agreement from all co-owners.
Tenants in common have a right of inheritance, but not a right of survivorship. The fractional interest of a tenant in common
who dies will pass to that individual's heir as named in a will or according to the state's laws of descent. The heir(s) will
become tenants in common with the other co-owners.
Debt accrued by a tenancy in common owner can attach to that owner's interest.
Termination of a tenancy in common can occur by conversion to estate in severalty, by sale, or by partition.
If co-ownership is terminated by partition, the property is divided into portions, called partitions, and each tenant owns a
portion equivalent to the fractional value of the tenancy in common.

Joint Tenancy

Joint tenancycreates an equal, undivided interest between the co-owners. It can only be created if these conditions-called the
four unities-are present:
Possession: Each owner will enjoy undivided possession of the property.
Interest: Ownership is divided equally among the owners.
Time: Ownership interest is acquired at the same moment. New owners may NOT be added at a later time unless a
new joint tenancy is created.
Title: Each joint tenant acquires title to the property from the same source (i.e. a deed).
Just as with tenancy in common, any individual owner's debt can attach to the ownership interest of that owner.
Joint tenancy includes the right of survivorship, which means that the surviving co-owner(s) will own the property of a joint
tenant who dies.
If there are only two joint tenants, the death of one dissolves the joint tenancy. The remaining tenant becomes the owner of an
estate in severalty.
If there are more than two joint tenants, a deceased tenant's ownership transfers in equal parts to the remaining joint owners.
If a joint tenant sells that tenant's owned interest, the buyer doesn't become a joint tenant with the other owners; the buyer is a
tenant in common with the remaining joint owners. That's because the unities of time and possession don't apply.

Tenancy by the Entirety

California doesn't recognize tenancy by the entirety, but some states do use this form of ownership.
Tenancy by the entirety requires the four unities of joint tenancy, plus a fifth unity called unity of person. This refers to
married couples as one legal entity, so this form of ownership may only be used by married couples. Some states extend this
right to domestic partnerships and civil unions.
Co-owners have the right of survivorship. If one dies, the other becomes the sole owner of the property.
Since tenancy by the entirety is inherently based on the owners being married, in the event of a divorce, both parties
automatically become tenants in common. If the ex-spouses don't want to co-own the property, they're free to sell their
individual interests.
Tenants by the entirety are not allowed to convey a fractional interest in the property. Transferring the property requires both
parties' consent.

Community Property

California is a community property state. In general, property purchased during a couple's marriage or domestic partnership
becomes community property. Each spouse or partner has an equal ownership share in the property.
Property owned by either spouse/partner prior to the marriage is considered separate property unless it's converted to
community property by an agreement between the spouses/partners.
Property acquired during the marriage/partnership by one individual by inheritance or gift remains separate property.
Income generated by separate property remains separate property. Income generated by wages earned during the
marriage/partnership, or from community property, is community property.
The spouses/domestic partners may agree in writing to hold property as separate property rather than community
property.
When real estate is purchased in California by a married couple or domestic partners, the deed may specify that title is held as
"community property" or as "community property with right of survivorship."
If the right to survivorship isn't specified, a spouse or partners' half interest in community property can be willed away
from the surviving spouse/partner.
When the right to survivorship is specified, the property automatically becomes owned in severalty by the surviving
spouse/partner.
Both co-owners must consent to a transfer of the property.
A lien may be placed on the community property due to unpaid debt of an individual co-owner.