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The Real Estate Escrow Process

Glossary Of Real Estate Terms

  Once the buyer and seller have agreed on price and terms for the sale of a piece of real estate, the escrow process begins.  I will try to explain the process of a typical escrow and title search in Southern California (there are procedural differences between Southern and Northern California).  Lets start with the definition of a real estate escrow.

• Escrow is the deposit of documents and funds with a neutral third party (the escrow company) with specific instructions as to how they should be disbursed. Escrow acts as the clearinghouse for the exchange and distribution of those documents and funds in connection with the transfer or financing of real estate. The services of a qualified escrow agent, assures all interested parties that the rules and regulations governing real property transfers will be strictly observed by a neutral third party with an objective interest in completing the transaction.

I think the easiest way to understand the process is to delineate the obligations of each party in the real estate transaction.

Obligations Of The Seller

·        The seller must provide the buyer with detailed disclosures that will reveal to the buyer any problems or adverse conditions that the seller is aware of. In addition, the seller must provide the buyer with a natural hazard disclosure report. This report is prepared by companies that check local records and maps to determine if the real estate is in an earthquake fault zone, a flood zone, an area of potential landslides, a high fire area, an area of potential liquefaction and other zones that might affect the desirability of the property. It is not uncommon for homes in the San Fernando Valley to be located in several zones.

·        Making the home available for the buyer’s physical inspection, geological inspection and lenders appraiser is also required.

·        The seller must have a licensed termite company inspect the property and the seller is generally responsible for insuring that any termites or wood destroying fungus or dry rot is taken care of prior to the close of escrow.

·        The escrow company will have a number of documents to be filled out and sent back to escrow.

·        The seller may be responsible for making repairs to items discovered in the buyer’s professional home inspection. The items to be repaired or replaced will be negotiated between the buyer and seller after the inspections are complete.

·        The seller is responsible for maintaining the property in the same condition it was in when the buyer made the offer on it.

Obligations of The Buyer

·        The buyer must deposit their good faith deposit with the escrow holder within three business days of acceptance of their offer. Typically, this is a check for the amount of three percent of the purchase price.

·        If the buyer is has not been pre-approved with a lender, the buyer must start the loan process by filling out all the loan application forms, and providing a check for the cost of the appraisal. In addition, the buyer can expect to provide the lender with tax returns, paycheck stubs, bank statements, and a source of funds for the down payment.

·        Within the first two weeks the buyer is strongly encouraged to have the property inspected by professionals to determine its physical condition and any geological problems.  Different soil types, mountainous terrain and the 1994 San Fernando Valley earthquake make this extra important. The seller must also disclose any problems with the house that they are aware of. This is done on a form called the Transfer Disclosure Statement.

·        The buyer must provide the seller with a list of items that come up in the inspection process and note which conditions they want the seller to remedy prior to the close of escrow. The buyer and seller generally go into a round of negotiating to determine what items the seller will fix if any.

·        Within five days of the close of escrow, the buyer should go back to the home to determine that the seller has taken care of all the items they agreed to do, and confirm the property is in the same general condition it was in when the offer was made.

·        Prior to the close of escrow, the buyer will go into the escrow office and sign all the loan documents that spell out the terms and conditions of the buyer’s new loan. The buyer generally brings in a cashiers check for the balance of their down payment at this time.

Obligations Of The Escrow Officer
 

·        Order a title report on the subject property and obtain all the necessary information to clear all title defects and satisfy existing liens and encumbrances against the property or the principals involved in the sale

·        Work with the buyer's lender to insure instructions from the seller, buyer and lender are coordinated

·        Prepare many of the documents necessary for the transaction and review all others to make certain they conform to the parties' demands

·        Figure tax and interest prorates and prepare closing instructions and statements for both buyer and seller

·        Arrange closing appointments for all parties to sign the necessary documents

·        After taking final signatures, the escrow agent has responsibility to complete the transaction by checking all documents for completeness, compliance and accuracy

·        Return copies of all loan documents to the lender for approval to record

·        Record all necessary documents in the county where the property is located. This is when the transaction is closed

·        Disburse all funds out of the escrow account according to the signed, written instructions. (These funds could include the seller's net proceeds, the Broker's real estate commission, and other payments required for loan approval or to satisfy other terms of the agreement.)

·      Prepare and distribute final closing statements to all interested parties

The Real Estate Agents Job

The job of any good real estate agent is to oversee everyone involved in this process and make sure they are doing their job within the time frames allowed in the contract. All too often an agent will assume the lender, title company or escrow officer is doing their job without asking critical questions. This can be a recipe for disaster! A good real estate agent will take a proactive position during the escrow process and identify small problems at their onset. This will help prevent small problems from becoming major obstacles later on. The escrow period is the most important phase of transferring real estate. One mistake by any party can sink a transaction. It is crucial that a buyer or seller have the expertise and advise of an experienced professional to look out for their best interests.