Understanding the Escrow Process in Real Estate Transactions

Understanding the Escrow Process in Real Estate Transactions

What is Escrow?

In real estate transactions, significant sums of money are exchanged and critical documents are signed by the buyer, the seller, and the lender. Escrow refers to the process wherein a neutral third party—commonly a Title Company—serves as a custodian and mediator for both the buyer and the seller. This entity follows the directives of both parties, managing the documentation, distribution of funds, title insurance, and the recording of the title deed. Consequently, being "in escrow" signifies that money or property has been handed over to this intermediary.

Escrow typically begins within one business day after the purchase agreement is accepted. At this point, the buyer's initial deposit, as outlined in the contract, is placed into the escrow account. The escrow period spans from the acceptance of the offer to the official recording of the property's change in ownership, generally lasting between 21 to 45 days. Transactions involving all-cash purchases may conclude more swiftly.

Escrow Checklist:

✔️Property Inspections

Property inspections are a crucial aspect of your due diligence when purchasing real estate, usually carried out between 7 to 15 days after your offer is accepted. It's important to carefully review the “Buyer’s Inspection Advisory.” Typically, you will be responsible for the inspection fees, however, any issues that are discovered during these inspections can often be negotiated with the seller, as detailed in the purchase contract. Attending all inspections is essential, as this allows you to personally observe any potential issues. Engage with the inspector, asking relevant questions to fully understand the property's condition and maintenance needs. Ensure you are thoroughly informed about the actual state of the property before proceeding with the purchase, as looks can be misleading.

✔️Structural Pest Control Inspection

A certified structural pest inspector will inspect the home for signs of termites, dry rot, earth-to-wood contact, water intrusion, and beetle infestations. Following the inspection, they will provide a written report and an estimate for any necessary repairs.

✔️Contractor Inspection

This inspection evaluates the overall state of the house, including major systems like plumbing, heating, and electrical, as well as structural components, the roof, safety features, and adherence to building codes.

✔️Contractor Inspection

Additional inspections by specialized professionals might be necessary depending on the particular property and the disclosures made by the seller. This can include evaluations by structural engineers or skilled contractors who focus on detailed assessments of roofs, fireplaces, sewer lines, electrical systems, plumbing, underground storage tanks, and environmental risks. It may also be advisable to have a professional examine the property’s permit history.

✔️Review Disclosures

By law, sellers of residential properties and their real estate agents must disclose all known significant details about the property's condition and situation. You will receive various legally mandated reports and disclosures for your thorough examination, including the real estate transfer disclosure statement, natural hazards disclosure, and information about lead-based paint, among others. However, sellers in probate and foreclosure situations are exempt from some of these disclosure requirements.

✔️Finalize Financing

Ideally, you should have obtained pre-approval from your chosen lender before submitting your offer to purchase. Throughout the escrow period, the lender will conduct an appraisal of the property and review the purchase contract, preliminary title report, and any other documents it considers essential before issuing a final loan commitment. This stage typically lasts between two to four weeks. Before disbursing the funds for the loan, the lender will usually verify that there have been no changes to your financial status.

✔️Home Warranty

Home warranties offer protection against unforeseen defects and malfunctions in specific systems and appliances within your new home, making them a valuable consideration. Your agent can supply details and recommendations, explaining the procedures, costs, and extent of coverage. The purchase of a home warranty can be made by either the buyer or the seller.

✔️Remove Contingencies

After completing all property inspections and reviewing the reports and disclosures to your satisfaction, and once your lender has finished the appraisal and underwriting process, you can take one of several actions. You may either lift the contingencies outlined in the purchase contract to move forward with the transaction, renegotiate the deal if new significant issues emerged during due diligence, or cancel the purchase if the findings changed your decision about buying the property. If you decide to proceed with the purchase, the amount of your deposit in escrow might increase depending on the terms of the accepted contract.

✔️Review and Sign Loan and Closing Documents

Your agent should be present when you visit the title company to sign the documents. Before heading to the title company for the escrow signing, ensure you complete the following tasks:

1. Secure hazard/fire insurance and provide your escrow officer with the contact details of your insurance agent. This policy must be active before your loan can be funded.
2. Decide on the manner in which you will hold the title to your new home, consulting with a lawyer, tax advisor, or another qualified professional to guide your decision.
3. Examine the estimated closing statement detailing costs and disbursements, as well as the loan documents, both prepared by your lender.
4. Bring a valid driver’s license or passport for identification at the signing appointment.
5. Transfer the remaining funds (down payment and closing costs) needed to finalize escrow to your title company via cashier’s check or wire transfer, at least two business days before closing.
6. Collect your closing documents from Compass and the title company.

Closing Escrow

Once the buyer and seller have fulfilled their respective contractual duties and signed the closing documents, your lender will transfer the loan funds into the escrow account. Subsequently, your title company will record the title deed and loan deed of trust with the Recorder’s Office. At this point, you officially become the owner of your new home, and the keys will be handed over to you personally. Sometimes, sellers may ask to rent back the property for a brief period after escrow closes. If you consent to such an arrangement, the terms should be established within the purchase contract.

What to Keep from Your Closing?

• The Real Estate Settlement Procedures Act (RESPA) statement, also known as the HUD 1 statement, details all the costs involved in the closing. This document is essential for income tax filing and future sale of the home.
• The loan documents and the Truth-in-Lending Statement.
• The title deed of the property.
• The home insurance policy.
• Copies of all relevant documents related to the home purchase, including the contract, addenda, reports, disclosures, and any other documents received during the process. These documents may prove valuable when you eventually decide to sell the home.

Congratulations – On Record!

Navigating the escrow process requires patience and trust in the system. You'll need to be ready to promptly respond to inquiries and submit necessary documents at a moment's notice. Fortunately, Charles Jacob will be on hand to guide you through each step of the process. With expert market knowledge and a commitment to exceptional service, he can help you find answers to all your questions. Get in touch with Charles Jacob today to step into the exciting San Francisco market.