Escrow & Transfer – California Real Estate Salesperson Exam
Comprehensive Study Guide
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Overview
Escrow and transfer is one of the most heavily tested topics on the California Real Estate Salesperson Exam. This guide covers the mechanics of escrow, how title is transferred and recorded, title insurance protections, and the financial calculations involved in closing. Mastering these concepts requires understanding both the legal framework and the practical customs that vary by region in California.
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1. Escrow Fundamentals
What Is Escrow?
Escrow is a neutral depository arrangement in which a third party — the escrow holder — holds funds, documents, and instructions from both parties until all conditions of the transaction are fulfilled.
Who Can Legally Conduct Escrow in California?
| Entity | Notes |
|---|---|
| Licensed escrow companies | Primary escrow providers; regulated by the DFPI |
| Banks & savings associations | May conduct escrow as part of lending services |
| Title insurance companies | Very common in California transactions |
| Attorneys | May conduct escrow for clients |
| Real estate brokers | Only when representing a principal in that transaction |
> ⚠️ Watch Out For: Real estate brokers may conduct escrow only when they are representing a party in the transaction. An independent escrow side business would require a separate escrow license.
Key Escrow Events & Definitions
Death of a Party During Escrow
Key Terms – Escrow Fundamentals
> ⚠️ Watch Out For: The DFPI regulates escrow companies but does not resolve individual fund disputes. Escrow companies seek resolution through the courts via interpleader.
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2. Title & Ownership Transfer
Types of Deeds
Understanding the differences between deed types is critical for the exam.
#### Grant Deed (Most Common in California)
1. The grantor has not previously conveyed the property to anyone else
2. The property is free from encumbrances made by the grantor (except those disclosed)
#### Quitclaim Deed
- Remove a cloud on title
- Transfers between family members
- Release a partial interest in a property
- Correct errors in a prior deed
#### Warranty Deed (Less Common in California)
Four Essential Elements of a Valid Deed
| Element | Description |
|---|---|
| 1. Competent grantor | Grantor must be of legal age and sound mind |
| 2. Identifiable grantee | Grantee must be identifiable — a living person or legal entity |
| 3. Adequate property description | Legal description sufficient to identify the property |
| 4. Grantor's signature | Grantor must sign; grantee signature is NOT required |
> ⚠️ Watch Out For: A deed is valid between the parties without recording, but delivery and acceptance are required for title to actually transfer. Recording is required for constructive notice and priority — not for validity.
When Does Title Transfer?
Recording & Constructive Notice
Recording a deed with the county recorder:
Constructive notice = The legal presumption that a person knows about a recorded document or the rights of a party in possession, whether or not they actually looked it up.
Actual notice = Direct, personal knowledge of a fact.
California's Race-Notice Recording Statute
To prevail in a dispute between two purchasers of the same property, the subsequent purchaser must satisfy all three conditions:
1. ✅ Paid valuable consideration
2. ✅ Had no actual or constructive notice of the prior conveyance
3. ✅ Recorded first
> ⚠️ Watch Out For: California is a race-notice state — both recording first AND lack of notice are required. A buyer who records first but had prior knowledge of the earlier sale does not prevail.
Key Terms – Title & Transfer
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3. Title Insurance & Title Search
Preliminary Title Report ("Prelim")
Types of Title Insurance Policies
| Feature | Standard Coverage | Extended (ALTA) Coverage |
|---|---|---|
| Recorded defects | ✅ Yes | ✅ Yes |
| Recorded liens & encumbrances | ✅ Yes | ✅ Yes |
| Unrecorded easements | ❌ No | ✅ Yes |
| Survey/boundary issues | ❌ No | ✅ Yes |
| Rights of parties in possession | ❌ No | ✅ Yes |
| Unrecorded mechanic's liens | ❌ No | ✅ Yes |
| Typically required by | Owners | Lenders |
> ⚠️ Watch Out For: Lenders almost always require ALTA/Extended Coverage to protect their loan. The buyer/owner may have only Standard Coverage. The exam frequently tests which policy covers which risks.
Who Pays for Title Insurance? (Regional Custom)
| Region | Who Pays for Owner's Policy |
|---|---|
| Southern California | Seller customarily pays |
| Northern California | Buyer customarily pays |
> ⚠️ Watch Out For: These are customs, not legal requirements — always negotiable. The exam may try to reverse these — memorize which region is which!
Cloud on Title
Key Terms – Title Insurance
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4. Prorations & Closing Costs
Understanding Debits and Credits
On a buyer's closing statement:
On a seller's closing statement:
Property Tax Prorations
- 30-day month / 360-day year (banker's year) — most common in escrow
- Actual days — if specified in escrow instructions
> ⚠️ Watch Out For: Because taxes are paid in arrears, the buyer will receive a credit at closing for the portion of the tax period the seller owned the property but taxes haven't been paid yet.
Documentary Transfer Tax
Example: $500,000 sale, no loans assumed → `$500,000 ÷ 1,000 × $1.10 = $550`
Federal & State Withholding Requirements
#### FIRPTA (Federal)
| Item | Detail |
|---|---|
| Applies when | Seller is a foreign person (non-U.S. citizen/resident) |
| Withholding rate | 15% of gross sales price (10% in certain lower-value transactions) |
| Who withholds | The buyer (or escrow on buyer's behalf) |
| Remit to | IRS |
| Purpose | Ensure U.S. tax obligations are met |
#### California 3.33% Withholding (State)
| Item | Detail |
|---|---|
| Applies when | Seller is a non-resident of California |
| Withholding rate | 3.33% of gross sales price (or seller's gain, if less) |
| Who withholds | The buyer (or escrow on buyer's behalf) |
| Remit to | FTB (Franchise Tax Board) |
| Key exemption | Primary residences under $100,000 |
> ⚠️ Watch Out For: Both FIRPTA and CA withholding are the buyer's responsibility to withhold, not the seller's. Failure to withhold can make the buyer liable for the tax.
RESPA
#### Closing Disclosure (CD)
> ⚠️ Watch Out For: The 3 business day rule for the Closing Disclosure is frequently tested. Missing this deadline can delay closing. "Business days" under RESPA excludes Sundays and federal public holidays.
Seller's Net Sheet
- Sales price
- Minus: commission, loan payoffs, transfer taxes, title insurance, escrow fees, prorations, repairs
Key Terms – Prorations & Closing Costs
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Common Exam Traps – Master List
> ⚠️ Watch Out For These Frequent Mistakes:
1. Brokers and escrow: A broker can conduct escrow only when representing a party — not as a standalone business without an escrow license
2. Grant Deed ≠ Warranty Deed: Grant Deeds only warrant against acts of the grantor — not prior owners
3. Quitclaim Deed conveys no warranties — even if the grantor actually owns the property, there is no guarantee
4. Recording ≠ Transfer: Title transfers on delivery and acceptance, not recording. Recording establishes priority and constructive notice
5. Race-notice requires BOTH conditions: first recording AND no prior notice
6. Prelim ≠ Title insurance policy: A preliminary report is only an offer to insure
7. Title insurance customs are regional: Seller pays in Southern CA; buyer pays in Northern CA
8. ALTA covers unrecorded risks; Standard does not
9. Property taxes are paid in arrears → buyer gets a credit at closing
10. Withholding is the buyer's duty under both FIRPTA and CA state law
11. Closing Disclosure = 3 business days before consummation — not signing, not funding
12. RESPA applies to 1–4 residential federally related loans only — not commercial
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Quick Review Checklist
Use this checklist to confirm you're ready for exam questions on this topic: