Sunday, April 13, 2008

We're In Escrow!....Now What? - A Guide To Understanding The Escrow Process

Its a big day and the seller has accepted an offer/counteroffer from the buyer who is now officially taking a huge step toward owning the subject home. Many have heard this term "escrow" thrown around quite a bit but most have no idea what it means let alone, what goes on there!

What Is Escrow?

Escrow is a simple enough concept to understand, it's the process by which the buyer investigates the property, works with the bank to obtain a loan, and coordinates documentation for changing ownership into his/her name. In other parts of the country, escrow closing is done through an attorney while in Southern California real estate, there is typically a seperate escrow company that acts as a neutral third parties to the transaction; ensuring that both sides abide by contractual obligations.

Esrow companies are paid by the sellers and buyers of the real estate and perform a multitude of duties during the escrow period (typically 30-60 days) to ensure a smooth closing and change of ownership. As one can imagine, the absense of a neutral third party will cause some less than ethical buyers/sellers to attempt to take advantage of the other party and can ultimately result in nasty lawsuits.

Explain The Escrow Process?

The process is actually quite complicated, but for convenience the best way to explain it is to simplify it according to these critical parts:

Opening - The buyers deposit check is sent to escrow along with copies of the purchase contract. Escrow rewrites the contract in their own language, but with the same terms, and sends it to both real estate agents to be reviewed and signed by the buyers and sellers.

Discovery/Contingency Period - Typically the first 17 days of the escrow period where the buyer can conduct investigations of the property, attempt to obtain a loan to buy the property, and ultimately decide whether or not they would like to continue on with the transaction. The buyer should have appraisal, inspection, and loan approval contingencies in the contract prior to entering escrow. This period is usually considered fairly risk free since the buyers deposit is not yet at stake, even if they decide to back out entirely.

Appraisal - In order to obtain financing, the bank will need to make sure not only that the property exists, but also that it is worth what the buyer has agreed to pay. Appraisals are done by licensed professionals who will look at the recent sold properties in the area, note general apperance of the home, and double check the square footage of the building. An appraisal is not to be confused with an inspection which will be explained next.

Inspection - Besides being valued correctly, the home buyer also needs to know the physical condition of the property. They will usually hire a professional home inspector to conduct a detailed investigation of the home, prepare and appropriate report, and possibly explain the findings to the buyer. If during the contingency period , the buyer finds the condition of the home to be less than acceptable, they can cancel the agreement or try to renogiate repairs or a price with the seller. The seller has the option to work with the buyers with regard to repairs/negotiations or they can also cancel the agreement.

Termite Report - Most residential purchase agreements are written such that the seller will pay for a termite inpection, report, and any active infestation damge (i.e. living termites, structure damage). The buyer will be responsible for treating, or not treating, the areas described as preventative maintenance, otherwise known as section 2 items.

Loan Approval - Most people will need to obtain some sort of loan to buy a home. The bank will need to verify all documentation needed for obtaining the loan and start the process of submitting the loan documents. This process is the most usual cause for delay that prevents a transactions from closing on time. Buyers need to get started on the loan as soon as the home enters escrow. As with appraisal and inspections, if the buyer is still within their discovery period and has not released the corresponding contingencies, they can cancel the transaction without any sort of penalty.

Contingency Release - There comes a time when the buyer of the real estate really needs to sit down with a clear head, weigh all the things they know about the property, and decide whether they want to continue on with the transaction. We call this the release of contingencies and it is the point at which the buyer places their deposit on the line if they can't close the transaction.

Closing - There comes a special day when escrow will call the home buyer up to the office, ask them to bring in all the money necessary to close the deal (sorry, no personal checks), and have the lender wire the remainder of the money over. Escrow will then be closed. At this point, the home is sold but it may take an extra day for the transaction to be recorded at the county. Shortly thereafter, the buyer will recieve the keys to their new home and the seller will recieve the proceeds from the sale!

Here's to closing another escrow!