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Undestanding Escrow - Handling
the Property Transfer
As soon as possible after you and the seller have a ratified offer (that is, a signed contract), all funds, documents, and instructions pertaining to your transaction should be delivered to a neutral third party — the escrow holder designated in your purchase agreement. The act of giving these funds, documents and instructions to the escrow holder constitutes the escrow. Depending on your area, the escrow may be handled by a lawyer, an escrow firm or a title company. Buyers and sellers generally select an escrow holder based on recommendations from their agents. However, as with other companies you choose to do business with in your home-buying transaction, know that escrow fees and service quality vary.
Real estate deals are complicated and typically involve large sums of money. Both buyer and seller need someone each can trust to hold the stakes while all parties work through the resolved and unresolved details in the contract. The escrow holder (also known as the escrow officer) is your referee — a neutral third party who will not show any favoritism to either you or the seller.
Your Escrow Officer is Responsible For:
1. Preparing and reviewing papers related to the
transfer of title.
2. Getting them properly signed, delivered, and made
a matter of public search.
3. Giving an accounting to you and the seller for
your respective money.
4.Handling the paperwork details so that you can
concentrate on the deal.
When the escrow is opened, your contract will probably be filled with loopholes known as contingencies, or conditions of sale. For example, your contract should be written so that you can get out of the deal if you don't approve the property inspection reports, if the seller can't give you clear title to the property, or instructions. Do not instruct the escrow officer to give your money to the seller until you are fully satisfied that the seller has performed under the contract.
Ideally, your escrow will go smoothly from start to
close. If, however, the escrow officer ever gets conflicting instructions from you and the seller or lender, the escrow
will stop until the argument is resolved. What kind of conflicting instructions? Disputes about whether or not an item of personal property (that is, a refrigerator, light fixture, etc.), for example, is included in the purchase price. Disagreements about whether corrective work should be done prior to or after the close of escrow are also common.
To Avoid Unwanted Surprises, Pay Particular Attention to the Following Three Areas:
Closing Costs. Immediately after opening escrow, ask the escrow officer to prepare a statement of your estimated closing costs. Even though it may take several weeks to get actual costs for inspection fees, repair work credits, homeowners insurance premiums, and the like, at least you will have a preliminary figure that you can fine-tune as additional information becomes available. Having the knowledge in this preliminary statement is better than having to pay unexpected closing costs a couple of days before the close of escrow. Do not react to the situation — control it.
Preliminary Title Report. Shortly after escrow is opened, you should receive an extremely important document — the preliminary title report (or prelim) from your title company. This report shows who currently owns the property that you want to buy as well as any money claims (such as mortgage liens, income tax judgments and property tax assessments) that affect the property. Last, but not least, the preliminary title report shows third-party restrictions and interests such as condominium covenants, conditions, and restrictions (CC&Rs), and utility company or private easements that limit your use of the property. Your contract should be contingent upon your review and approval of the preliminary title report. Under the contract, you should have the right to reasonably disapprove of certain claims or restrictions that you do not want on the property and to ask the owner to clear them prior to the close of escrow. For example, asking the seller to pay off all debts secured by liens and judgments against the property is reasonable.
Final Closing Statement. You may believe that the most important piece of paper you get when escrow closes is the deed to your new home. From an accounting standpoint, however, the most important piece of paper is the final closing statement that you get from the escrow officer on the day that your escrow actually closes. If you think of the escrow as a checking account, the final closing statement is like your checkbook. The final closing statement records all the money related to your home purchase that went through the escrow as either a credit or a debit.
Credits. Any money that you put into escrow, such as your initial deposit and down payment, appears as a credit to your account. You may also receive credits from the seller for such things as corrective work repairs and property taxes. And, of course, your loan is a credit.
Debits. Funds paid out of escrow in your behalf are shown as debits. Your debits include modest and not-so-modest expenses, such as what you graciously paid the seller for your dream home, loan fees, homeowner’s insurance premiums and property inspection fees.
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