HUD-1 or HUD-1A Settlement Statement +10California · Real Estate · English

The third RESPA-required disclosure in a federally related loan transaction is either the HUD-1 or HUD-1A. The HUD-1 is used when the security property is being purchased and sold (involving both a borrower/buyer and a seller). The HUD-1A is used when the loan purpose is to refinance or further encumber the intended security property in one-party transactions not involving transfers of title.

• ✓HUD-1 is required in every settlement involving a federally related mortgage loan with both a borrower and a seller
• ✓HUD-1A is used for refinances or further encumbrances with no seller and no transfer of title
• ✓A single HUD-1 may be distributed to multiple borrowers in the same transaction
• ✓Creditors/lenders are not required to use either form for open-end HELOCs if Regulation Z provisions are followed

The federal definition of settlement agent includes the creditor/lender if no neutral party is designated. In California, functioning as a settlement agent/escrow holder requires licensing under the Public Escrow Law or an exemption. Exempt entities include title insurance companies, underwritten title companies, banks, savings and loans, trust companies, licensed attorneys, and real estate brokers who are agents or parties to the transaction.

• ✓California requires Public Escrow Law licensing or an exemption to act as settlement agent/escrow holder (Financial Code Sections 17003, 17004, 17006)
• ✓Title/underwritten title companies must make an offer to issue a title policy as a predicate to conducting escrow under exemption
• ✓Attorneys are exempt if in a bona fide relationship with a principal and not actively engaged in escrow business
• ✓Real estate brokers are exempt when acting as an agent or party to the transaction performing an act requiring a real estate license

The settlement agent or escrow holder must use the HUD-1 or HUD-1A in every federally related mortgage loan settlement. Tolerance caps and changes in circumstances place a burden on creditors/lenders and mortgage brokers to ensure the HUD-1 is consistent with settlement charges and prepaid expenses disclosed in the GFE, as well as the material loan terms disclosed under Regulation Z of TILA.

• ✓The HUD-1 must be consistent with settlement charges and prepaid expenses disclosed in the GFE
• ✓Historically the creditor/lender did not have direct statutory responsibility for HUD-1 accuracy when a separate settlement agent was involved
• ✓Tolerance caps require ensuring consistency between the GFE and HUD-1 to protect the consumer/borrower

Unlike most settlement agents/escrow holders, brokers acting as escrow holders in a real property or real property secured transaction are NOT functioning as neutral escrow agents. Mortgage bankers under the RMLA or finance lenders under the CFL may not act as settlement agents or escrow holders in California.

• ✓Brokers acting as escrow holders are not neutral escrow agents (B&P Code 10145, Financial Code 17006)
• ✓Mortgage bankers under RMLA may not act as settlement agents or escrow holders in California
• ✓Finance lenders under the CFL may not act as settlement agents or escrow holders in California

When the settlement agent is other than the creditor/lender, the creditor/lender should obtain a copy of the HUD-1/HUD-1A to ensure compliance with instructions, tolerances, and unchanged material loan terms. Mortgage brokers have added burdens: ensuring conformed copies of deeds of trust/mortgages are delivered and confirming the borrower received a copy of the final HUD-1/HUD-1A.

• ✓Creditor/lender must obtain a copy of the HUD-1 to confirm fees are within GFE tolerances
• ✓MLBs/MLOs must ensure conformed copies of deeds of trust/mortgages are delivered (B&P Code 10234.5)
• ✓MLBs/MLOs must confirm the borrower received a copy of the final HUD-1/HUD-1A Settlement Statement

One business day in advance of settlement, the settlement agent/escrow holder must permit the borrower to inspect the proposed HUD-1/HUD-1A. The borrower may waive this right in a written waiver. No fee or charge may be imposed to prepare and deliver the HUD-1/HUD-1A or any RESPA/TILA disclosures.

• ✓Borrower has the right to inspect the proposed HUD-1 during the business day immediately before settlement
• ✓The advance review right may be waived only in writing executed by the borrower
• ✓No fee or charge may be imposed to prepare and deliver the HUD-1/HUD-1A or RESPA/TILA disclosures
• ✓Mailed HUD-1 is sent to the address in the loan application unless a different address is authorized in writing

A sale-leaseback (also termed purchase-lease, sale-lease, lease-purchase, or leaseback) is popular for companies with excellent credit. The seller sells the property and immediately leases it back, freeing capital while retaining use of the property.

• ✓Working capital is not tied up in fixed assets, and often more capital can be raised than by borrowing
• ✓Since leases are not considered long-term liability, rent may be tax deductible and the balance sheet looks better, enhancing credit
• ✓Tax deduction of lease payments is frequently better than depreciation since land cannot be depreciated
• ✓For government cost-plus-fixed-fee contracts, rent is an allowable expense but mortgage interest is not (reason many defense plants are leased)

There are various ways to acquire real estate interests without using mortgage financing. With the exception of the real property sales contract, these methods are generally available only to large financiers, very strong tenants, or substantial institutions. An all-cash purchase is an obvious alternative, but individuals often find it difficult to raise substantial sums and protect against unlimited liability.

• ✓Most non-mortgage alternatives are available only to large financiers, very strong tenants, or substantial institutions
• ✓The real property sales contract is the exception, being available more broadly
• ✓An all-cash purchase is the most obvious alternative to mortgage financing

Syndicates afford small investors opportunities to invest in high-yield real estate. A syndicate offers knowledge of values and the ability to find, organize, and manage a successful venture, pooling resources of multiple investors.

• ✓Syndicates allow small investors to participate in high-yield real estate
• ✓A syndicate provides expertise in finding, organizing, and managing ventures

A straight bank (commercial) loan can be used to purchase real property. The borrower obtains the loan based on good credit or on collateral (stocks, bonds, personal property) other than the real property itself. Large, well-rated corporations can also sell stocks or general obligation bonds to purchase real property without using a mortgage.

• ✓A commercial loan is secured by credit or collateral other than the real property
• ✓Large well-rated corporations may sell stocks or general obligation bonds to purchase property without a mortgage

A long-term lease is a good approach if the property is usable as is. If the lessee leases only land and must pay for construction of improvements, the overall cash investment will probably be larger than buying improved property with a mortgage. It offers tenant advantages but poses landlord risks.

• ✓Rent may be deductible as an expense; if owned, only improvements would be depreciable (land cannot be depreciated)
• ✓Money freed for other uses can be used more advantageously and the tenant's total debt load is not increased
• ✓Landlord risks include tenant credit going sour, special-purpose improvements followed by bankruptcy, and mechanic lien claims from incomplete construction

The buyer/lessor obtains a long-term, carefree investment with potential appreciation. Lease payments may exceed what mortgage payments would be, helping the lessor while retaining title to the property.

• ✓Lease payments may be higher than mortgage payments and help pay off any mortgage while lessor keeps title
• ✓The investment will not be paid off prematurely as mortgages often are through refinancing
• ✓Lease terms often give the lessor a claim against other assets of the lessee in the event of default

A trade or exchange of properties can be an alternative to mortgage financing if the difference in valuation between the properties can be reconciled and the trade made without financing difficulties.

• ✓An exchange works if valuation differences between properties can be reconciled
• ✓The trade must be made without financing difficulties to serve as a mortgage alternative

Real estate syndication is a descriptive term (with no precise legal significance) for an organization or combination of investors pooling capital for investment in real estate. It channels private savings into real estate investments for which other financing is not available and has been popular for financing properties in higher price ranges. The responsibility, obligation, and relationship of the syndicator to the group and among investors are determined principally by the form of organization.

• ✓The term 'syndication' has no precise legal significance
• ✓Syndication pools capital from multiple investors for real estate investment
• ✓Relationships and obligations are determined by the form of organization chosen

Selecting the form of organization involves practical, legal, and tax considerations. The corporate form insures centralized management and limited liability but is seldom used in modern syndicates due to negative tax features (double taxation). The general partnership (joint venture) avoids double taxation but has unlimited liability and lacks centralized management. The limited partnership combines advantages of both: limited liability, centralized management, and partnership tax treatment.

• ✓Corporate form: centralized management and limited liability but negative tax features (double taxation)
• ✓General partnership (joint venture): avoids double taxation but has unlimited liability and no centralized management
• ✓Limited partnership: combines limited liability, centralized management, and partnership tax advantages

An LLC is a hybrid business entity combining aspects of a corporation with a partnership. It permits active participation in management and control by the members along with limited liability similar (with certain exceptions) to corporate shareholders. Properly created and operated, an LLC may be taxed like a partnership and avoid some corporate taxation problems. Importantly, an LLC as an entity cannot hold a real estate license.

• ✓LLC is a hybrid entity combining corporation and partnership features
• ✓LLC provides limited liability while allowing member management and partnership taxation
• ✓An LLC as an entity cannot hold a real estate license

Under the California Revised Limited Partnership Act, a limited partner is not liable as a general partner unless the limited partner is also named as a general partner in the certificate of limited partnership or the limited partner participates in control of the business (Corporations Code Section 15632). If the limited partnership agreement satisfies certain tax requirements, it is taxed as a partnership rather than as an association taxable as a corporation.

• ✓A limited partner is generally not liable as a general partner (Corporations Code Section 15632)
• ✓Liability arises if the limited partner is named as a general partner or participates in control of the business
• ✓A qualifying limited partnership is taxed as a partnership, not as a corporation

A typical real estate syndication combines the money of individual investors with the management of a sponsor and follows a three-phase cycle. Origination involves planning, acquiring property, satisfying registration and disclosure rules, and marketing. Operation is when the sponsor usually manages both the syndicate and the real property. Liquidation or completion is the resale of the property.

• ✓Origination: planning, acquiring, registration/disclosure, marketing
• ✓Operation: sponsor manages the syndicate and the property
• ✓Liquidation/completion: resale of the property

Syndication allows a small-scale investor to pool limited resources with others to participate in ownership and operation of property too expensive to handle alone or in a small joint venture. It also offers professional management, which might not otherwise be economically feasible for the small investor. Professional management is the basic commodity the syndicator offers and is crucial to successful syndication.

• ✓Pooling allows small investors to access larger, more expensive properties
• ✓Professional management is the syndicator's basic commodity and crucial to success
• ✓Enables licensees to convert unmanageable deals into profitable transactions

An appraisal is the act or process of developing an opinion of value. Value is the present worth of all rights to future benefits arising out of property ownership. An appraisal report is usually a written statement of the appraiser's opinion of value of an adequately described property as of a specified date, resulting from research and analysis of factual and relevant data.

• ✓To appraise means the act or process of developing an opinion of value (USPAP)
• ✓An appraisal report is usually written but may be transmitted orally
• ✓Value equals the present worth of all rights to future benefits
• ✓All licensed and certified appraisers in California must comply with USPAP

Market Value is the most probable price the property would bring if freely offered on the open market with both a willing buyer and a willing seller. It is the object of most appraisal assignments.

• ✓Market Value = most probable price with willing buyer and willing seller on open market
• ✓Market value is the object of most appraisal assignments
• ✓Appraiser must distinguish between personal and real property

There are three approaches to property valuation: Sales Comparison (Market Data) Approach, Cost Approach, and Income Approach. Each gives a separate indication of value, all are interrelated, and all use market comparison techniques. All three are considered but not always employed.

• ✓The three approaches are: Sales Comparison, Cost, and Income
• ✓All three approaches are considered in each complete assignment
• ✓All three are not always employed depending on property type and client agreement

Property rights in real estate are called the 'Bundle of Rights,' which include the right to occupy and use, sell in whole or in part, bequeath, and lease. It also implies the right NOT to take any of these actions. These rights are limited by government powers.

• ✓Bundle of Rights includes: right to occupy/use, sell, bequeath, and lease
• ✓Rights are limited by taxation, eminent domain, police power, and escheat
• ✓Property rights are normally appraised at Market Value
• ✓Appraisers mainly appraise fee simple estate as opposed to partial interest value

The licensed or certified appraiser furnishes clients with an objective third-party opinion of value, arrived at without pressures or prejudices. Appraisers must not allow neighborhood ethnic, religious, or minority composition to detract from an objective evaluation. USPAP was adopted in 1989 and OREA enforces continuing education requirements.

• ✓Appraiser provides objective third-party opinion of value
• ✓Appraiser cannot allow ethnic/religious/minority composition to affect the valuation
• ✓OREA (Office of Real Estate Appraisers) enforces California appraiser continuing education
• ✓USPAP promulgated by the Appraisal Foundation, adopted 1989

In June 1978, California voters approved Proposition 13, amending the State Constitution to limit the maximum annual property tax to one percent of 'full cash value' (market value) as of date acquired or completed construction, plus a maximum 2% annual inflation adjustment based on the CPI.

• ✓Maximum annual property tax is 1% of full cash value (market value)
• ✓Annual inflation increase capped at 2% based on Consumer Price Index (CPI)
• ✓Property taxed according to value (ad valorem) as of date acquired or date of completion of new construction
• ✓Additional indebtedness requires a two-thirds vote of affected residents

Property taxes become liens on January 1 of the year preceding the fiscal year (July 1 - June 30). Taxes are paid in two installments with specific due and delinquency dates, and delinquency triggers penalties.

• ✓Taxes become liens on January 1 preceding the fiscal year (July 1-June 30)
• ✓First installment due November 1, delinquent after December 10 (5 p.m.)
• ✓Second installment due February 1, delinquent after April 10 (5 p.m.)
• ✓10% penalty applies to a delinquent installment
• ✓If delinquency date falls on weekend/holiday, extended to next business day

The passage of Proposition 39 in 2000 authorizes bonds for repair, construction, or replacement of school facilities and classrooms if approved by a 55% local vote for projects evaluated by schools, community college districts, and county education offices for safety, class size, and information technology needs.

• ✓Proposition 39 (2000) requires only 55% local vote for school facility bonds
• ✓Applies to repair, construction, or replacement of school facilities/classrooms

The Morgan Property Taxpayers' Bill of Rights (Section 5900 et seq.) and amendment to subdivision (e) of Section 408 require the assessor to allow, upon request of an assessee or representative, inspection and copying of documents including auditor's work papers relating to appraisal and assessment.

• ✓Assessor must allow inspection/copying of assessment documents on request
• ✓Taxpayer rights information available from State Board of Equalization, Taxpayers' Rights Advocate's Office

California regulates subdivisions through two primary laws: the Subdivision Map Act and the Subdivided Lands Law. Each serves distinct purposes and is administered by different authorities.

• ✓Subdivision Map Act is found in Government Code Sections 66410, et seq.
• ✓Subdivided Lands Law is found in Business and Professions Code Sections 11000-11200
• ✓The Subdivision Map Act governs physical design and local government control
• ✓The Subdivided Lands Law protects purchasers from fraud in initial sales

The Subdivision Map Act sets conditions for approval of subdivision maps and requires local subdivision ordinances giving local governments direct control over subdivision projects and required improvements.

• ✓Objective 1: Coordinate subdivision design (lots, streets, drainage, sewers) with the community plan
• ✓Objective 2: Ensure the subdivider properly completes areas dedicated for public purposes so they don't burden taxpayers
• ✓Requires enactment of subdivision ordinances by local governments

The Real Estate Commissioner administers the Subdivided Lands Law to protect purchasers from fraud, misrepresentation, or deceit in the initial sale of subdivided property through the public report requirement.

• ✓No subdivision can be offered for sale in California until the Commissioner issues a subdivision public report (with few exceptions)
• ✓The Commissioner does not issue the final public report until the subdivider meets all statutory requirements
• ✓Requirements include financial arrangements to assure completion of improvements and a showing lots can be used for their intended purpose
• ✓A public report includes important information and disclosures about the offering

Real estate brokerage involves agency directed, for compensation, primarily toward the sale, exchange, lease, rental, financing, or managing of real property or a business opportunity. The overall real estate business consists of the production, marketing, and financing of real property.

• ✓Brokerage requires an agency relationship performed for compensation
• ✓Brokerage activities include sale, exchange, lease, rental, financing, or managing of real property or a business opportunity

Brokers regularly deal with other specialists including appraisers, surveyors, engineers, financial institutions, title companies, escrow agents, architects, contractors, pest control inspectors, credit reporting agencies, attorneys, and accountants. A broker should establish and maintain good working relationships with these professionals.

• ✓Brokers coordinate with appraisers, surveyors, title companies, escrow agents, and attorneys
• ✓Maintaining good working relationships with fellow professionals is essential to brokerage operations

Trust funds are money or other things of value received by a broker or salesperson on behalf of a principal or any other person, held for the benefit of others in the performance of acts requiring a real estate license. They create a fiduciary responsibility to the funds' owners.

• ✓Trust funds may be cash or non-cash items (checks, personal notes, an automobile pink slip given as deposit)
• ✓A purchase deposit check is a trust fund whether payable to the broker or to an escrow/title company
• ✓Improper handling of trust funds is cause for license revocation or suspension

Licensees must distinguish trust funds from non-trust funds because trust funds require special handling. Non-trust funds include real estate commissions, general operating funds, and rents/deposits from broker-owned real estate.

• ✓Non-trust funds are not subject to Real Estate Law and Commissioner's Regulations as long as not commingled with trust funds
• ✓The DRE may still investigate transactions involving non-trust funds under certain circumstances

Some developers specialize in converting raw land to finished lots for builders to buy; the land developer often installs principal off-site improvements and infrastructure (roads and utilities). Other developer-builders plan and complete the entire subdivision from raw land through construction and sale. Developers can be national, regional, or local. Importantly, there are NO state licensing requirements for developers or subdividers.

• ✓Land developers may convert raw land to finished lots and install off-site improvements (roads, utilities)
• ✓Developer-builders handle the entire process from raw land to home sale
• ✓There are no state licensing requirements for developers or subdividers

Developers 'manufacture' residential, commercial, or industrial sites as either vacant lot subdivisions or improved/partially improved subdivisions. Their goal is to supply the type and price range of product that satisfies the market.

• ✓Developers produce residential, commercial, or industrial sites
• ✓Products may be vacant lot subdivisions or improved/partially improved subdivisions
• ✓The developer's goal is to match product type and price range to market demand

In business, a developer often carries inventory of raw land and semi-finished/finished products for lengthy periods across multiple separated projects, both 'spec' (for sale) and custom (pre-sold). Developers use personal funds or negotiate loans from land sellers, joint venture partners, or financial institutions, and assume large risks from land planning uncertainties and market misjudgment resulting in delays and losses from interest, carrying charges, and overhead.

• ✓'Spec' properties are built for sale; custom properties are pre-sold
• ✓Developers finance via personal funds, land sellers, joint venture partners, or financial institutions
• ✓Developers assume large risks from planning uncertainties and market misjudgment causing delays, interest, and carrying costs

Real estate development provides part of the inventory a broker uses in business. Just as retailers stock products, brokers stock listings of real property, constantly replacing sold or expired listings with new ones, some coming from developers as 'new homes or lots.' Developers function in a larger business arena than brokers.

• ✓Brokers stock listings as inventory, similar to retailers stocking products
• ✓Developers supply new homes and lots that become broker inventory
• ✓Developers operate in a larger business arena than brokers

The statutory merger of the real estate and business opportunity licenses occurred in 1966. Since then, a real estate license is required to engage as an agent in the sale or lease of business opportunities. The Real Estate Law defines a business opportunity as the sale or lease of the business and goodwill of an existing business enterprise or opportunity.

• ✓A real estate license is required to sell or lease business opportunities since the 1966 merger
• ✓A business opportunity is defined as the sale or lease of the business and goodwill of an existing business enterprise
• ✓The sale may involve only personal property and typically includes inventory, fixtures, non-competition agreement, lease assignment, and goodwill

In most business opportunity transactions, the real estate licensee acts as a dual agent with the informed consent of both principals, creating a fiduciary relationship with both buyer and seller. The broker must obtain written authorization of the business property owner before obtaining a prospective buyer's signature on a procuring cause agreement.

• ✓Licensee typically acts as dual agent with informed consent of both principals
• ✓Fiduciary duties are owed to both buyer and seller
• ✓Broker must obtain written authorization from the owner before securing a buyer's signature on a procuring cause agreement
• ✓Failure to obtain written authorization is grounds for revocation or suspension under B&P Code Section 10176(j)

If real property is involved in a business opportunity sale, the agent usually treats the sale of the business and the sale of the land/building as two separate and concurrent transactions with two concurrent and contingent escrows.

• ✓Real property in a business sale is handled as a separate transaction from the business sale
• ✓Two concurrent and contingent escrows are used when real property is included

Simple interest is calculated by multiplying the principal (amount of note) by the interest rate to get the interest for one year. The interest rate is expressed as a decimal with two points marked off from the right (e.g., .06 = 6%, .09 = 9%).

• ✓Interest = Principal × Rate × Time
• ✓Interest rate is a decimal with two points marked off from the right (.06 = 6%)
• ✓Multiplying principal by rate gives interest for one full year

While a year has 12 months or 365 days, the 365-day figure makes an awkward denominator. Standard business practice assumes 12 months of 30 days each, totaling 360 days per year, to simplify calculations.

• ✓Assume 12 months of 30 days each
• ✓Use 360 days to a year for interest calculation
• ✓This convention avoids cumbersome fractions

For periods less than one year, use a proper fraction (days/360). For periods more than one year, use an improper fraction. Example: interest on $4,650 for 75 days at 10% = 4650 × .10 × 75/360 = $96.88.

• ✓Use proper fraction for periods less than one year
• ✓Use improper fraction for periods more than one year
• ✓Convert months to days: 30 days per month over 360-day year

Interest tables show a base of $1, $100, or $1,000 for various interest rates and time periods. Determine the factor from the table and multiply by the number of base units (e.g., thousands). Example: $4,650 = $4.65 per $1,000; multiply factor by 4.65.

• ✓Tables use base of $1, $100, or $1,000
• ✓Add day factors to reach desired total days
• ✓Multiply the total factor by the number of base units