The Escrow Process
The Escrow Process—10 Easy Steps to Understanding Escrow
The escrow process does not need to be mysterious or overly complex. Below is a simplified 10-step walk-through of the process. As always, we are here to help walk you through every step of the way. Call us with any questions that you may have. We look forward to serving you.
Step 1: Open Escrow
Once a buyer and a seller have agreed on terms, the first step in the escrow process is opening the escrow. Opening an escrow will start with delivering the mutually signed purchase agreement and an earnest money deposit check to your escrow company. Once an escrow has been opened, you should expect to receive a call from the escrow manager that will be handling your transaction. The escrow manager will guide you through the entire process and be a resource for you to call at any time, for any reason.
If your transaction involves real estate agents, it is customary for the agents to be the primary liaisons to the escrow company. This does not preclude any of the principals in the transaction to talk directly to their escrow manager.
We are here to serve all parties and you should not hesitate to contact us for any reason.
Step 2: Secure Financing
Once you select a bank for your loan, they will prepare a good faith estimate detailing your loan amount, interest rate, monthly payment and any other costs related to obtaining your financing. Once you have a written loan commitment from your bank and have approved the terms, the buyer should remove the financing contingency for your transaction.
TIP: It is highly recommended that buyers work with their bank in advance of finalizing an agreement to purchase a property. The bank can help you understand the amount for which you can qualify, the terms of the loan and the amount of the payments.
Step 3: Loan Approval
If there is a loan involved in your transaction, the lending bank will want to do an appraisal on the property to determine the value of the property. This appraisal will be used to determine how much money the bank is willing to loan on the property.
TIP: We recommend sellers obtain a fair market value study for their property prior to offering it for sale. Knowing the fair market value for your property will avoid any surprises and/or disappointments in the loan approval process.
Step 4: Seller Disclosures
California requires sellers to fill out a real estate Transfer Disclosure Statement (TDS). This document provides written notification of any known problems with the property. The seller has a legal obligation to disclose any known issues or problems in this document however they are under no obligation to correct them.
It is important that the buyer read, understand and accept what the seller has disclosed in this document.
Natural Hazard Disclosure
California law requires sellers to make certain disclosures regard any natural hazards that exist relating to the property. A natural hazard disclosure report can be purchased that outlines these disclosures and should be part of your transaction.
The buyer will need to review and approve the natural hazard disclosure.
Step 5: Inspections
Inspections are not a requirement in a real estate transaction, but in most cases they are a very good idea to do. The cost of inspections will vary greatly by type, but here are a few examples of common inspections that you may want to consider.
For a few hundred dollars, a professional home inspector can give you a cursory view of any dangerous or costly defects in the property. In some cases, the home inspection may uncover issues that may require deeper analysis from a specialist (i.e. soils, foundation, heating & air conditioning).
Lenders will often require a termite inspection. Even when not required, they are beneficial to get. If there are any pest problems, they will need to be rectified before the sale can close.
Environmental inspections check for toxins such as mold and/or asbestos. These inspections can also cover contamination exposure from the surrounding area.
If you are satisfied with your inspection(s), you will then need to remove the inspection contingency in writing. Who pays for any remediation here will depend on the contract between buyer and seller.
Step 6: Homeowners Insurance
If a loan is involved in the transaction, a homeowners insurance policy and any extra coverage required in your geographic area (such as flood insurance), will be required. Even when not required, it’s beneficial to have a homeowners policy to protect your investment.
Step 7: Title Insurance
Here again, title insurance is required if a loan is involved and still a good idea even when they are not. The title insurance process starts with receiving a title report for the property to verify there are no liens or other claims against the property.
Once you review and approve the title report, your title insurance protects you (and your bank) from any legal challenges that may come up later for anything that may have been missed on the title report.
Step 8: Final Walk-through
The final walk-through happens just prior to closing the escrow to verify everything is in order with the property, including any agreed upon repairs, as well as confirms the overall condition of the property is consistent from when you agreed to the purchase.
Step 9: Review Closing Statement
At least one day before closing, you will receive a final closing statement. Compare this document to the good faith estimate you received early in the process to confirm the details are correct. The two documents should be very similar. Look for unnecessary, unexpected or excessive fees as well as outright mistakes.
Step 10: Close Escrow
Each party will be required to sign all the necessary paperwork to finalize the transaction. Some of these will be required to be notarized (signed in front of a designated official called a Notary Public). Take your time in this process, ask questions and make sure you understand everything you sign. If you don’t understand it, don’t sign it!
After all the papers are signed, the escrow officer will prepare for closing which includes handling money distribution, creating a new deed naming you as the property's owner and sending everything to the proper place for recording.
You will receive a closing statement that outlines the final transaction. Keep this document as you will need it to prepare your tax filing at the end of the year.
Voila! Ten easy steps to closing an escrow!
While these outline the basic steps, closing an escrow requires the alignment of many moving parts which is why it is important to have a trusted adviser along the way. We’re here to help in anyway that we can. Please don’t hesitate to call or email if you have any questions about the process or anything else that we can help with.