Basics to Understanding Escrow
In California, as well as many other states, when purchasing or selling a home, you have to deal with something called Escrow. This process can be very confusing and stressful in itself, so when a buyer or seller does not know what to expect when dealing with escrow, it can cause a lot of undue stress. We wanted to shed some light into the escrow process for you and what you can expect along the way.
Who or what is Escrow?
The most basic definition would be that Escrow is a neutral third party secured by two sides of a transaction, in order to facilitate the terms of the transaction. In California, when any two parties would like to enter into a contract, whether it be for the purchase or sale of real property, we use an Escrow Company to facilitate the exchange of monies and the completion of the terms of the contracts. All of this is under the assumption that both parties have executed a contract and are ready to move into escrow.
Opening an Escrow:
So then the natural question would be, who is responsible to open the escrow? Well that all depends on the type of contract you have just executed. If you are working with a Real Estate Brokerage to represent you, it will depend on what side of the transaction you are on. While it is not the law, it is common practice that most sellers dictate the direction of escrow unless otherwise specified in a contract. If you find yourself on the Listing side (selling your home) your agent will most likely direct you to a few of their preferred escrow vendors to let you choose the right fit for your needs. Upon execution of the contract your agent will then direct escrow to be opened.
If you find yourself on the buying side of the transaction, more often than not, escrow is chosen for you and thus opened by the Listing agent with the seller’s preferred choice. However, one thing must be noted, escrow must be a neutral 3rd party even if directed by one side. The responsibility falls on Escrow to remain neutral and fair to both sides throughout the transaction. If you feel you are not getting that service, talk to your agent.
Financing and Escrow:
But what if I have a loan? What do I need to know about escrow?
When you purchase a property and acquire the property with financing, the lender and escrow will be in direct contact throughout the escrow period. Initially contact will be made by your agent or your Loan representative/officer to escrow for an introduction and requesting of initial escrow documentation. Ideally, your lender and escrow work hand in hand to ensure not only that your loan goes smoothly but that the escrow period written in your contract is adhered to.
Money and Escrow:
Ok so what about this Money stuff?
So if you’re a buyer, there are a few key pieces, financially speaking you should be aware of; The Earnest Money deposit (EMD), Financing terms (discussed in previous section), Down Payment and your Closing costs.
The EMD is your initial deposit, indicated in your contract, which must be submitted to escrow typically within three days of both parties executing a contract. Sometimes this money is already given to your real estate broker to be held in a trust account once an offer is accepted, but more often than not, the buyer retains control of their funds and is instructed to wire or send a cashiers check to escrow.
We’ve already covered financing and escrow, so we will move onto the next piece of the process; the Down Payment and closing costs. By the time you have entered into contract you will have been fully apprised of what type of financing you are getting and therefore how much of a down payment you will be required to bring in. However, one variable that throws this number off is your final closing cost amount. Closing costs typically can be anything ranging from escrow and title fees, to inspection fees, to loan fees etc. These amounts are itemized on a settlement statement provided to you in the start of the transaction and towards the close. The final amount is tallied and added to your down payment amount and that will be what we call, “funds to close”. The funds to close are your Down Payment and your closing costs. One Key is to make sure the numbers on the initial statement you’ve received and your closing statement are similar. They should not vary by much if at all.
For Sellers, this part of the process is much more simplified. You will have three main concerns; your closing costs, your payoffs (if any) and your final amount due to you.
Sellers have a small advantage because before a seller even lists their home, they will have the ability to request an estimated net sheet from their broker. The broker will have the ability to give the seller a rough estimate as to how much they can expect to pay in costs as well as how much they will get at the end of the transaction. Of course when escrow is opened, they will get a much more accurate amount, and this should be provided within a week of opening escrow. And for the seller these numbers should not change. Once escrow is opened, the amounts that are on their closing estimate in the start of the transaction will most likely be the same towards the end unless there are unforeseen circumstances.
Escrow and closing:
The final element of the escrow process is the Closing. Closing an escrow is when the actual transaction is nearing completion. The buyer and the seller have both performed their respective responsibilities and escrow has facilitated the financial exchange. Escrow will at this point be responsible for a few items.
First escrow will handle the buyer’s financing and ensuring that the lender will wire their amounts to the appropriate parties; which in most cases will be the title company.
Next, escrow will coordinate with both parties to finalize all documents related to the transaction, most importantly the deeds.
Once everything is finalized, escrow will coordinate with title to ensure once funds are received that they send all recordable documents to the county recorder for closing.
The last piece is closing and disbursement. Once the recording is complete, escrow will have the final responsibility to disburse funds and coordinate closing packages for each party.
Congratulations! You've either successfully sold or purchased your home. We hope to have alleviated some of your concerns with the information we provided.