It is finally happened – you have a mutually executed purchase and sale agreement. You are happy. Your agent will now open escrow. You think the sale is almost done, but that could not be further from reality. Before I knew what the escrow process was, it seemed like a confusing and mysterious place where lots of “stuff” (usually unexpected surprises) happened…After that, I understood that nothing is final until final closing, and I was better prepared for the situation.
I believe knowledge is empowering, and learning what to expect will reduce stress. I am all about reducing stress during an already hectic time of life that is selling a house and preparing a move. So, let’s dive right into the main aspects of the escrow process:
What is escrow? Also called the closing process, escrow is the process in which a neutral company manages the exchange of funds and documents during the transaction. They are responsible for keeping track of every deadline and requirements of the executed agreement, and to bring the deal to a final closing. You will also hear a lot of people say we are under contract.
Escrow instructions. You will have an escrow officer assigned to your transaction. The first task they usually complete is creating the escrow instructions. In this document, they will list all the documents each party will need to provide, all the deadlines each will need to meet, and the amount of earnest money needed to open escrow.
The escrow officer obtains all this information from the mutually executed purchase agreement. The reason they write escrow instructions is to provide all parties with an easy to read document that clearly lists all items needed for closing. This is a great service because purchase agreements are usually long documents full of legalese, and escrow-specific items can be hard to find and track.
Escrow timeline. When I am going through an escrow, I like to use an escrow timeline spreadsheet. I take the items from the escrow instructions and make columns and rows with each item and its deadline. I also note the related section number on the purchase agreement. It is a helpful tool to keep track of everything.
Contingencies. Every contract includes deadlines for completing different contingencies, some by the buyer and others by the seller. Contingencies are set in place to protect the buyer and seller. They describe circumstances under which either party is able to rescind the contract without penalty (or, if there are penalties, it states the amount). The biggest are: title, inspection, appraisal, and financing.
For example, with the title insurance contingency, you will have a certain number of days to complete your title review. Once you are done, it is best to let everyone know. Keep in mind that most contracts are written so that if you do not specifically alert the parties of an issue with a contingency, it will be assumed to be “removed.”
Removing contingencies is such a confusing term when going through this the first time. Let’s look at another contingency example, in this case the home inspection contingency. Say that the contract states you have seven days to complete your inspection. If you do not get your inspection done and you let the seven days pass, the contingency will be marked as done and therefore removed from the list of items that need attention for closing.
This means that if you do not pay attention to these contingency deadlines, you could be unpleasantly surprised. In the example above, if you don’t complete your inspection and you let the deadline pass without informing the other parties, then you will not be able to rescind the contract due to a problem found during the inspection.
GFE and HUD-1. When the buyer applies for financing and escrow opens, they will receive a Good Faith Estimate (GFE) from their lender. This will show their financed amount, down payment, interest rate, prorated taxes, fees, etc. As the seller, you will not be receiving this, but you will want to be aware of it. A day or two before closing, the escrow officer will send you and the buyer a Final HUD-1 statement. The HUD-1 form will have a column for each of the buyer’s and seller’s closing costs, including prorated taxes, agent commissions, title insurance, etc. It will also show the buyer’s final loan terms. You and the buyer will want to review this form line by line carefully and make sure everything looks as it should. If you have any questions about any of the amounts, ask. This is your last chance.
Closing documents. Typically on the last day of closing, you and the buyer (at different times) will go to the escrow office and sign loan documents. If you are out of town, they will arrange for a notary (usually mobile) to meet you and sign the paperwork. Read the paperwork carefully. I know it will be a lot of papers to sign, but there is a lot of money at stake.
Funds transfer. The buyer will need to arrange for a wire transfer to the escrow company, who will transfer the funds to the seller, after deducting all the fees and costs. At this point the escrow officer will also create the new deed in the buyer’s name. You are almost done…
Recording. The transaction is not officially completed until recording. Recording establishes the buyer as the new owner of the property. Now that I have been through many escrows, I do not count the deal as done until I get notification that the deed was recorded in the appropriate county. In the case of manufactured homes in California, this will be when the State Department of Housing & Community Development completes the transfer of the mobile home.
You have now closed escrow and are able to move on to the next chapter in your life! If you enlisted an agent’s help, they will guide you through the entire escrow maze.
I truly hope this has been helpful. Please leave a comment, share, or contact me directly with any questions.