What is escrow in real estate?
want to know about escrow.
Contents
What is Escrow in Real Estate?
Escrow Process Timeline
Cost of Escrow
Step 1: Open Escrow
Step 2: Initial Deposit
Step 3: Disclosure Signing
Step 4: Buyer Performs Inspection
Step 5: Obtain the Appraisal
Step 6: Close Deal
Step 7: Receive E&O Policy
What is Escrow in Real Estate?
We go over every part of the escrow process in-depth so you can feel safe during the biggest transaction of your life.
Let’s start with the basics.
Definition of Escrow
You’re going to appreciate having escrow in place.
Escrow When Buying a House:
When Do I Acquire Escrow?
Lucky for our generation, homebuyers of the 21st century can enjoy the luxury of online escrow, meaning documents can be e-signed and virtually stored.
What Happens During the Escrow Process?
The seller must go through a series of hoops before selling his/her home to make sure all of the appropriate documentation is in place before transferring funds.
If you’re like most people, you’re probably not a fan of chasing papers (not that kind of paper). Real estate agents are well aware of this, so they partner with escrow companies to make the document process fast and easy.
But let’s put all of this paperwork, whether it’s digitized or démodé, into perspective.
Imagine you are the buyer of a home. Wouldn’t you want to know if your future home was free of termites, or that the home being sold to you rightfully belongs to the seller presenting it?
Imagine now that you are the seller. Wouldn’t you want to know that your buyer actually has the funds to purchase your home, or that they are legally allowed to purchase a home in the country?
This is why it is imperative to have all of the official documents in one place before closing on a home.
But what exactly are all of these documents necessary for closing on a home?
Documents Needed During
the Home Selling Process
Some of the most common documents required in a real estate escrow transaction include:
– Copy of the Offer
– Sellers Disclosure Packet
– Termite Certificate
– HOA Documents and Transfer Fees
– Contingency Removal Form
– FIRPTA Affidavit
– Prequalification Letter
– Proof of Funds
– Commission Instructions
– Wire Transfer Instructions
-Documents for Deed Transfer
Having all of your documented ducks in a row is one of the biggest parts of a successful escrow transaction. The documentation you’ll need to produce for your escrow agent will depend on whether you are the buyer or the seller. It’s always a good idea to confirm any and all paperwork that needs to be gathered with your real estate agent. Questions about documents or opening escrow? CLICK HERE to contact us!
Disclosures and Home Inspections in Escrow
The buyer can then have inspections conducted on the property, followed up by requests for repair or other supplemental measures in the case of unsatisfactory findings during the inspection.
If you have any doubts about repair requests or appropriate contingencies (which are conditions of the agreement of sale), ask your real estate agent to guide you through the process. They’ve been through it many times before and can give you the best advice for your specific scenario.
What Happens After a Home Inspection?
If the seller and buyer are able to come to agreeance on changes and both parties want to proceed with the closing process, there is the option for a final walk-through of the property.
Closing the Real Estate Escrow Account
Closing is the final phase of mortgage loan processing where the property title passes from the seller to the buyer. Your escrow agent will help make this process painless for you! CLICK HERE to speak with one of our escrow professionals who can answer any questions you might have.
Real Estate Escrow Process Timeline Explained
Escrow Process Timeline
You can generally expect the escrow process to be an average of 30 to 60 days.
You should establish an agreed-upon timeline with the buyer at the time of contract. Be sure to factor in potential fluctuation for your unique home closing journey.
How Long From Opening an Escrow Account to Handing Over the Keys to a Buyer?
What Should You Expect From
a 30 Day Escrow Experience?
What if My Escrow Closing Process
Takes More Than 30 Days?
To know how long your home closing process will be, make sure to consult your real estate agent about the specifics or your home purchasing contract, contingencies, and relevant timeline.
They are they to take support your best interests through this process!
Just like that you’ve closed on your home! Okay, so maybe it isn’t that simple…
How Much Does Real Estate Escrow Cost?
Let’s start with the basics.
(450,000/1,000)= 450
(450 x $1.60) + $300 = $1,020
For a home sold at $450,000, the escrow fee for the seller would be $1,020
Make sure to watch out for additional fees that might get added onto the estimate, including wire fees, overnight shipping fees, storage fees, or courier fees.
Curious what other fees sellers need to think about when buying a home? Check out a full breakdown of the costs associated with selling a home in California. We know this can be tricky, so CLICK HERE to speak with someone who can help you with your escrow fees questions.
Buyers & Sellers Beware:
Potential Problems in Escrow Post-Close
Get your documents and e-pens ready, it’s time to dive in!
STEP 1: Open Escrow
What Does It Mean to “Open Escrow?”
You can contact an escrow company directly by giving them a call or via your real estate agent. The account will usually be opened within three days of your contract’s completion.
Who Sets Up Escrow Accounts?
Normally the real estate agent sets up escrow, but it could also be the buyer or the seller – essentially anyone involved in the sale of the home can open escrow.
Most prospective home buyers contract real estate agents to represent them, so they usually won’t have to open their own escrow accounts. This is because most real estate agents already work with specific title companies (companies that insure the legality of property titles and issue title insurance), who in turn work with specific escrow companies.
If you are selling your home FSBO (For Sale By Owner), a.k.a. selling your home without a real estate agent, you will choose with whom you would like to open escrow.
Even if you are working with a real estate agent, you can request to work with a specific escrow company that offers the perks and services you desire. But that begs the question… “what should I be looking for in an escrow company?”
What Should I Look for in an Escrow Company?
– Excellent customer service that is willing to walk you through the entire process
– An Errors & Omissions Policy to protect you after the sale
– Tech capabilities to help you e-sign documents & store them in the cloud
What is Needed to Open a
Real Estate Escrow Account?
At this point, the escrow company will assign the homebuyer an escrow number and an agent will lead him/her through the process to ensure everything is carried out correctly.
STEP 2: Initial Deposit Made
What is Good Faith Money?
What is Needed to Open
a Real Estate Escrow Account?
What Happens When the
Initial Deposit is Made?
Is Good Faith Money Refundable?
When Can a Home Buyer Back Out of a Purchase Agreement?
Homeowners have numerous opportunities to back out of purchase agreements. The deadlines that we outlined in the escrow process timeline can be negotiated by both the buyer and seller, and at almost every deadline, there is an opportunity that the potential home buyer can back out of their purchase agreement and still receive their earnest money.
Commonly disputed dates include the inspection contingency deadlines, title review deadlines, and loan contingency deadlines.
If you are unsure about your contingency deadlines, call your agent and ask them to walk you through the home closing timeline.
Home Inspection Contingency Deadline for Earnest Money
For inspection contingency, this is the date by which all of the home inspections must have been completed. If the buyer discovers something unsatisfactory about the property during this time that is a non-negotiable for them, they can drop out and receive their earnest money, and the house goes back on the market.
However, if the buyer discovers something he/she didn’t like after the agreed upon deadline, the seller often has the choice to refund the earnest money or not.
Title Review Deadline for Earnest Money
On the other hand, if the title review deadline draws near and the home is not proven to legally belong to the self-proclaimed owner, the buyer can reclaim their good faith money.
Loan Contingency Deadline for Earnest Money
This is often the last deadline set up by the buyer and seller because it usually takes the longest to secure a loan. It also happens to be where earnest money becomes non-refundable, because the seller has been relying on your “good faith” up until the loan approval. This is often where the legal line is drawn and sellers can decide to legally withhold the money.
What Happens if the Buyer and Seller Get Into a Dispute Over Earnest Money?
If there is a case where the good faith money enters into dispute, most likely if the seller doesn’t indicate to the buyer in a timely manner their intent to not follow through with the sale, the escrow company will safely hold on to the disputed money until the parties have reached a resolution. This is to protect the parties from any liability.
If the parties can’t play nice, they might end up in small claims court or general jurisdiction, depending on the size of the good faith money deposit and the laws of the state they reside.
For an Easy Escrow Experience, Do This!
One tip that will help you breeze through the escrow process is to introduce the lender and the escrow company right away.
After the TRID laws (a.k.a. The Know Before You Owe Act), which were originally enacted to protect borrowers from rip-off lenders, were updated in 2017, they introduced a new series of timelines and guidelines on fee disclosure.
Simply put: The lender and escrow agents now rely heavily on each other for the safe, accurate, and timely disclosure of all fees.
The sooner you introduce the two parties representing you, the quicker your escrow process will move along! Questions? Call us and let us help!
STEP 3: Disclosure Signing
What is the Real Estate Disclosure Process?
Naturally, it behooves the seller to be as honest as possible during this process, making sure to mention any major renovations that would have taken place on the property or any note-worthy damage incurred by him/herself or by past owners. In some cases, documented communication between the seller and past owners/neighbors is required.
What are the Most Common
Disclosures in Real Estate?
– Natural Hazards Disclosure Statements
– Market Condition Advisories
– State Transfer Disclosures
– Local Transfer Disclosures
– Megan’s Law Disclosures (sex offenders in area)
What Happens During Disclosure Signing?
Signing disclosures protects the seller by having the buyer acknowledge any known issues with the property that might otherwise be considered a material fact. Acknowledging receipt of these disclosures allows both parties to move forward in the closing process.
Buyer Beware: 5 Common Scenarios That Arise from Disclosure Docs
Don’t let the sheer number of documents tempt you to skim. Be sure that you read all of the fine print or have your escrow/real estate agent explain to you what you are accepting. You should fully understand the implications of all the documents involved before agreeing to move forward.
Remember: Honest clerical errors can happen. We address a whole range of escrow “what-ifs” below.
1. What if the house I want to buy has termites?
Termites aren’t an automatic disqualifying factor when it comes to the purchase of a property.. When the termite damage or infestation is uncovered during inspection, the seller will need to schedule the necessary treatments and repairs.
However, if the seller refuses to have the problem resolved, then the seller has every right to walk away from the deal. Escrow will be there to prevent the seller from losing out on the money already invested.
It’s also important to note that uncovering issues such as termites opens the floor to negotiation. This will also give the buyer a chance to come back with a counter offer.
2. The seller didn’t disclose water damage. Now What?
This may come as a surprise, but water entering the foundation of homes is very common. According to Water Damage Defense, 14,000 Americans experience water damage each day.
While some sellers may not have been aware of the water damage and thus enable to disclose it in the first place, there are other sellers who try to sweep water damage under the rug. A fresh coat of paint and a strategically placed couch may keep their secret for a little while.
But now that you’ve uncovered this evasion, what are you next steps as a buyer? If the discovery happens before the sale is completed, then you have a few options.
The first option, Sellers can complete repairs, to the satisfaction of the Buyer by the close of escrow.
Second option, money or credit from Seller to Buyer, in lieu of water repairs, through Escrow.
3. Somebody died in the house I want to buy. Isn’t it illegal for the buyer not to tell me?
Every state is different when it comes to a home that has been stigmatized by a death. Many states don’t require that buyers disclose that there has been a death on the property. California, however, is not one of those states.
In California, expect to have any deaths, no matter the circumstance, disclosed to you as the seller. This is only required for deaths having occurred in the three years prior to the offer date. The only exception to this law is in the case of a death caused by AIDS (as this is classified as a disability and disclosure of this death could be deemed discriminatory).
If you find out that the seller has failed to inform you of a death that occurred in the three years prior to the date from which you made an offer on the home, you have slightly different options depending upon your place in the process.
If you have yet to finalize the sale, then according to California civil code 1710.2, you should be able to walk away from the deal unscathed due to a failure to disclosure said information.
However is you’ve already settled in when you uncover the news, you are within your rights to file a lawsuit against the Seller.
4. The seller didn’t disclose unpermitted work. What can I do?
You find out that your 3 bed/2 bath is actually a 2 bed/2 bath. At least that’s what the lack of permits would lead you to believe. Unfortunately, now your ‘bonus’ room comes with a bonus headache.
Now that you’re stuck with an addition made without a permit, you need to decide on your best move.
As a buyer, you can accept the deal and buy the home, risks and all. You can obtain permits and pay the necessary fees down the road.
Another option is to walk. You can then search out a different home without the headache of an illegal addition.
Finally, you can ask the seller to fix the issue before you close escrow. This may work in your favor, but if the seller is selling as-is they may not want to sink any money into correcting the non permitted work.
Each situation is a bit different. It’s best to consult with your real estate agent before moving forward.
5. I found mold in the house I want to buy and the owner tried to mask it with candles.
Mold is no small thing. In California, for example, sellers must give written disclosure of all material facts that may sway the decision or willingness of a buyer to purchase the home at a specific rate. To skirt around this requirement could result in serious legal repercussions.
Since you haven’t bought the house quite yet, you should be safe from during it out in the courtroom. If you are still certain you want to buy the home, then at the point of finding the mold you can present the problem to the seller with the understanding that it will be solved before closing continues. Need more info about disclosures? CLICK HERE and let us help.
What Happens if the Buyer and Seller Get Into a Dispute Over Earnest Money?
Consult the purchase contract immediately if a dispute breaks out, which will almost always point the parties to arbitration or mediation. The escrow company will then be contacted to give their counsel, as they are the experts in the specific state laws in which they operate.
If the parties can’t play nice, they might end up in small claims court or general jurisdiction, depending on the size of the good faith money deposit and the laws of the state they reside.
I’m Pressed for Time: How Can I Read All My Disclosure Documents in Advance?
For the Procrastinators: Keep Document Deadlines in Mind
The home buying process is busy and there are plenty of dates and tasks to keep tabs on.
When you employ a mobile escrow app, such as VentureTrac, you will be able to track important deadlines from your mobile phone during every step of the escrow process. It comes with the added benefit of digital documents that can be signed anytime, anywhere.
Whether you need to push off disclosure signing until the last minute or want to have time to review the documents in detail, having everything at your fingertips and available for e-signing is an invaluable convenience for both the buyer and seller.
STEP 4: Buyer Performs Inspection
This might either cause the buyer to walk or cause the seller monetary strain to meet the requirements set by the buyer.
Is a Home Disclosure the
Same as an Inspection?
Disclosure is something that the seller him/herself documents for the buyer concerning their knowledge about the property for sale. An inspection, on the other hand, is conducted by an independent third party. Inspections may reveal defects in the home that even the seller wasn’t aware of.
For this reason, the buyer should never rely solely on the disclosures of the seller. A full property inspection should always be carried out before moving forward with the home purchase.
Sometimes, sellers might even hire a property inspector before trying to put their home on the market to advance the escrow process. If you’re working with a realtor, ask your agent for a personal referral of a home inspector near you.
What Kinds of Inspections
Happen During Escrow?
Home Inspections:
What Do Home Inspectors Check?
– Heating
– Interior Plumbing
– Electrical Systems
– Visible Insulation
– Roof
– Attic
– Foundation
– Structural components
To be extra cautious, you can request a septic tank inspection be conducted, since these are often excluded from normal home inspections.
Print off our home inspection checklist to make sure you cover all of your bases.
What Happens During the Inspection Process?
Sellers then have three options:
1. Agree to all of the buyers’ requests
2. Offer a modified solution back to the buyer
3. Decline to make any amends
In response, the buyer can continue to negotiate, accept the seller’s position, or in some cases, end the transaction and recoup their earnest money.
Let’s Talk Bad Inspection Results...
Imagine a hopeful home buyer discovers termites in their dream home. What does this mean?
While it depends on the severity of the situation, termites could be grounds for terminating a home deal.
If the buyer is lucky, the seller will set up the necessary treatments and clear the property of termites so the buyer doesn’t have to resort back to house shopping.
Because of the seller’s willingness to cooperate, home buyers can continue on to the next stop in the home closing process– obtaining the appraisal. Keep in mind, if things do not play out and the seller is not cooperative,, then the home buyer would have been able to walk away from the deal and recuperate their money. Need more info on home inspections? CLICK HERE for help.
STEP 5: Obtain the Appraisal
If the appraisal comes in low, the home buyer would get a chance to haggle, but the chances of that happening are incredibly low. We’re talking below 10%.
Home buyers start to worry when appraisals come in high. Why is that? Let us break it down for you.
What is a Home Appraisal?
Most real estate transaction requires an appraisal because every property is unique, and simple factors like where a home is located simply cannot determine the exact value of a home. It needs to be appraised.
The lender wants to know what the property is actually worth and what the buyer has agreed to pay for it. Afterall, if a buyer defaults on his loan, the property then becomes the property of the bank, so lenders must do their due diligence to insure their investment
What Happens During the Inspection Process?
Who is Responsible for Conducting the Home Appraisal?
The party responsible for holding your mortgage will be the ones ordering an appraisal. This could be either a bank or a lender.The appraiser themselves will be an unbiased third-party. They need to carry an active license or certification and be familiar with appraising similar properties in the surrounding geographic area.
What Is the Appraiser Looking For?
The appraiser’s job is to identify areas of the home and features that may interfere with or benefit the home’s value. Elements that are considered during appraisal include:
– Property Location
– Exterior & Interior Condition
– Upgrades & Renovation
– Additions that Add Value
(Such as a Swimming Pool)
Keep in mind that the appraiser isn’t judging the home’s value on the color of the bathroom or the type of grass in the yard. Appraisers conduct market research to evaluate the home using a comparable sales price.
When Does the Appraisal Need To Take Place?
There’s an expiration date on your home’s appraisal. In most cases, that date is 120 days out from when it was initially conducted. The lender wants the appraisal and purchase date to happen as close together as possible to be sure they are extending no more in money than the worth of the home being bought.But not to worry! If the process begins to draw out, you can possibly extend your home’s appraisal to 240 days with an addendum from the lender.
Why Is Home Appraisal Necessary?
Lenders and banks request appraisals as a way to protect themselves. If the home were foreclosed, they need to make up for their losses from the mortgage. By ensuring that the home is worth the price they are lending you, they can be sure they can make back that money if needed.And if you were wondering, the answer is yes – in pretty much all cases a home appraisal will be required by your lender. Remember, they need to protect themselves too.
What is a Home Appraisal?
That’s right – in most cases, the buyer will be responsible for the appraisal costs as they are the ones taking out the mortgage.
How much should you prepare to spend on home appraisal costs? In California, the average cost of a home appraisal is $400 – $500. Keep in mind that prices may fluctuate depending on the location and property type.
If you don’t know whose responsibility it is to pay for the appraisal costs, consult your real estate agent.
Help! My Home Appraised for Less Than the Purchase Price!
The bad news? The appraisal came in far lower than the purchase price.
The good news? You have options.
Whether the low appraisal is due to inflated rates, a declining market value, or the seller simply overpriced the home, you’re still left with the following options:
1. The seller can lower the price.
2. The buyer can pay for the difference.
3. A second appraisal can be requested.
4. You can collect a list of sale prices from recent local home sales that justify the agreed upon price (do this by contacting listing agents!).
STEP 6: Close Deal
Let’s take a look at what to expect on closing day.
Tying Up Loose Ends in the Closing Process
In order for escrow to close, all conditions must be met. This includes the loans being funded to the account and the property being legally handed over to the new owner.
You should be presented with a final closing statement at the close of escrow. This is a document that will be prepared by your real estate escrow agent. It is essentially an overview of the financials.
Time to Acquire Homeowners
& Title Insurance Policies
In the way of homeowners insurance, don’t be surprised if it is a prerequisite established by your lender in order to close on your home. Title insurance will protect you from situations such as unpaid property taxes (where the property’s history could come back to haunt you in financially devastating ways!)
To avoid potential tax liens and other common title problems, we suggest acquiring title insurance.
What You Should Expect During a Final Walk-Through
Go into the walk-through with a mental checklist of what to look out for. Common issues to watch for include:
– Previously requested repairs are completed
– All appliances are in working condition
– Lights are working
– Water is running and there are no leaks
– Inspect all doors, walls and floors for new damage
How Does the Final Signing Play Out?
Both buyer and seller are at the final signing, alongside their real estate agents, an attorney, title company representative, the mortgage lender and escrow agent.
What Documents Will Be Necessary for Closing Escrow?
If you didn’t already expect an impressive stack of documents, this is the point where we break the bad news to you. The final signing will consist of quite a few signatures.
The major players to watch for when it comes to documents are:
Initial Escrow Disclosure: This disclosure breaks down the distribution of money out of the escrow account itself. It shows in detail what all funds will be attributed to.
Deed of Trust: If you don’t pay for your home, your home goes away. That’s essentially what this document states. This contract allows the lender or bank to foreclose on your property if you don’t meet the agreed upon terms of the mortgage.
Promissory Note: This acknowledges your commitment to pay your loan for the home mortgage. It will provide in-depth details of interest rate and month payment requirements.
Other paperwork to watch out for can include but is not limited to:
– An occupancy statement
– Seller concessions
– Appraisal acknowledgement
– & Truth-in-lending disclosure.
If you have any questions about legal jargon or about the terms described above, do not hesitate to reach out to an agent at New Venture Escrow before diving into the home buying process. It’s also important to fully understand the costs of a slow escrow, so before we move on, CLICK HERE for more info on what choosing the wrong escrow company can cost you.
STEP 7: Receive E&O Policy
For this very scenario, sellers often secure Error & Omissions policies, otherwise known as E&O to save themselves from lawsuits and terrible monetary loss. But who all needs an E&O policy?
Who Needs E&O Insurance?
Real estate agents often offer E&O Insurance to their clients as a way to keep sellers safe during real estate transactions. However, the reality is that both sellers and real estate agents can benefit from E&O insurance.
If a dissatisfied buyer or client goes after either the seller or the agent with a lawsuit, the insurance will pay the settlement and judgment fees.
In the case of a lawsuit because of mold, as mentioned above, E&O would be there to help. Other situations sellers might find themselves in that E&O would cover include:
– Client claims you’ve lied
– Client claims you’ve withheld truth or acted criminally
– Client claims that you were not acting in their best interest
Although this shouldn’t come as a surprise, E&O policies will not cover fraudulent or malicious criminal actions.
When Should E&O Insurance Be Purchased?
However, you can still get a policy after you have sold the home as either a real estate agent or as a FSBO seller.
Either way, before or after, the important thing is that you carry a policy. It never hurts to be a little extra careful.
How Much Does E&O Insurance Cost?
On average, an E&O policy in California costs a little below $65 per month. This varies by insurance company and the details of the policy itself.
New Venture Escrow partners: We include E&O Policies to both agents and sellers upon every transaction, so you can sleep easy!
Keep an E&O policy and stringent records surrounding all business actions to keep your record clean and provide solid backup in the case of a lawsuit.
Who Chooses the Escrow Company?
Most homebuyers have no idea that they can choose their own escrow company (and many of them don’t even know what escrow is).
Because of that, listing and selling agents often choose the escrow provider for their clients. However, if you want to sell your house FSBO (without a real estate agent) or prefer to proactively choose an escrow company you trust, then you can get in contact with one directly.
Keep this in mind, homebuyers! If you ever want to refinance your home, having a trustworthy escrow company that already knows your situation and has your records on file will help greatly when it comes time to refinance your mortgage!
Do FSBO Sellers Have to Choose Their Own Escrow Companies?
Whatever the reason may be, FSBO sellers will still need to open an escrow account for a range of reasons: to have a third party hold earnest money, to clear title obligations, to order the mortgage payoff statements and more!
Choose New Venture For All
Your Escrow Needs in 2020
Wondering if New Venture is the escrow company for you? New Venture offers the most competitive escrow experience in California with completely paperless e-sign features with our VentureTrac app, a 6-month E&O Policy, and unbeatable customer service. Last but not least, New Venture Escrow places the safety and security of your transaction as priority number one. Real estate wire fraud has become a billion dollar problem in our time, and we are taking the proper measures to prevent and eliminate fraud for the benefit of our clients. CLICK HERE to learn more about how to prevent real estate wire fraud and stay safe!
And don’t just take our word for it – check out some escrow testimonials from our esteemed clients to hear it directly from the source.