Thursday, September 4, 2008

The Escrow Process Explained

You're ready to buy a house.  You write up an offer with your Realtor.  What's next?

You're trying to sell your house.  Your Realtor brings you an offer from a buyer.  What's next?

The escrow process always raises questions from both buyers and sellers.  It can be confusing, and even overwhelming, because there are a lot of variables and moving parts.  On the other hand, every detail is spelled out line by line in the purchase contract, so there shouldn't be any surprises.

It's a good idea to read your purchase contract carefully (or even a blank, sample contract) and to discuss it with your Realtor before you have an offer in place.  But just in case you didn't get a chance to do that, I've listed some of the most common events and time frames below.

Loan Status Report (LSR).  The Buyer should have already met with a lender, and should be able to provide the Seller an LSR.  This will show the Seller that the Buyer is able to obtain financing to complete the purchase.

Earnest Deposit.  The Buyer should be prepared to write a check on the day she makes an offer.  The check is typically made payable to the title company, and is held in escrow until the conclusion of the contract.  If the contract closes successfully, the Earnest Deposit will be counted towards the Buyer's cash to close.  If the contract is canceled, the Earnest Deposit will be awarded to either the Buyer or Seller, depending on the timing and reasons for the cancellation, along with the rules spelled out in the Contract.

Day 0.  Your contract may be accepted as offered, or it may have several Counter Offers and Addendums included.  The Counter Offers and any Addendums add, define, clarify, subtract, or otherwise modify the terms of the original Offer, and are included as part of the Contract.  Once all parties have signed these documents, and the documents have been delivered to the other party (in writing), you have a valid Contract.  This date will be Day 0 for counting purposes.

Seller's Disclosures.  Typically the Seller has 5 days to provide the Buyer a copy of the Sellers Property Disclosure Statement (SPDS) and a copy of their Insurance Claims History.

Buyer Acknowledges SPDS.  The Buyer will need to sign the SPDS and return them to the Seller.  This is not to say she agrees with them; merely to say that she received a copy of them.

Buyer Inspection Period.  The Buyer has 10 days to inspect the home - any and ALL aspects of the home.  If the Buyer finds anything she doesn't like, she may either A) Cancel the contract and receive her earnest deposit back.  B) Give the Seller the opportunity to fix the items she disapproved of.  or C) proceed with the purchase.  If the Buyer chooses A or B, she MUST notify the Seller in writing before the end of the 10th day.  (and, of course, we have a pre-written form just for this purpose, called the Buyer's Inspection Notice and Seller's Response form - BINSR for short).  Failure to give any notice to the Seller is the same as option C.

Seller Response.  If the Buyer chose to give the Seller an opportunity to fix the items she disapproved of, the Seller will have 5 days to respond.  The Seller also has 3 choices to consider:  A) he may agree to fix everything the Buyer requested.  B) he may agree to fix some, but not all, of the items the Buyer requested.  C) he may not agree to fix anything.  Much like the Buyer during her inspection period, the Seller needs to respond in writing within the given time frame (5 days), especially if he chooses A or B.  Failure to respond is the same as choosing option C.

Timing - if the Buyer took all 10 days to inspect the home, and the Seller took all 5 days to respond, we're now at Day 15 of the transaction.

Buyer's Decision.  Once the Buyer receives a response from the Seller, she will have to make another decision.  This decision is much more simple, and there are only 2 choices.  A) she may agree to the Seller's response and proceed with the transaction, or B) she may decide to cancel the contract (and be entitled to receive her earnest deposit.)

Timing - if everybody took the maximum allowable amount of time (10 days, 5 days, 5 days), we would be at Day 20 of the transaction.  So it can take about 3 weeks to get through the inspection process.

Quiet Period.  Many times the inspection process is wrapped up weeks before the scheduled closing date.  This will cause a Quiet Period, especially compared with how much energy can be spent on the inspection process.  The Seller will be working to make any repairs he agreed to make, and the Buyer will be working with her lender to make sure the loan is in order.  Both parties will most likely be working on other logistical items, such as packing, movers, utilities, etc.  But don't get too complacent, because things will get hectic again!

Final Walk Through.  Sometime about a week before the closing date, the Buyer will do a Final Walk Through of the home.  She wants to make sure the home is still in "materially" the same condition as when she made the offer, and she wants to make sure the Seller did all the repairs he agreed to do.

Seller Signing.  The Seller will go to the title company's office to sign his portion of the papers, generally 2-3 days before the scheduled closing date.

Buyer Signing.  The contract calls for the Buyer's Loan Documents to be delivered to the title company 3 days prior to the scheduled closing date.  The Buyer should be prepared to sign his portion of the papers at the title company's office at this time.

Buyer's Funds.  The Buyer should be prepared to bring certified funds to title, or send a wire transfer, preferably on the day he signs.

Closing.  The title company will handle everything for the closing, and will make sure that any & all requirements are satisfied.  They will make sure they have all funds from the Buyer - Earnest Deposit, Certified Funds for the Down Payment + Transaction Costs, Loan Funds from the mortgage company.  They will make sure they have accurate payoff information for the Seller - 1st mortgage, 2nd mortgage, any other liens.  They will make sure they have everybody's signatures on the Deed and any other legal documents.  Once they have everything accounted for, they will record the Deed at the County Recorder's Office to show the change of ownership, and they will make the Seller's Proceeds available to him.

Delivery of Keys.  Once we have word from the title company that the deed has been recorded, we'll want to get the keys into the Buyer's hands as quickly as possible.

** Disclosure ** The numbers, dates, and terms used here represent a hypothetical transaction in Maricopa County, Arizona.  This article is intended to provide an overview into the general flow of a transaction, and should not be taken as gospel.  Your transaction may include terms and dates which are very different from the examples given here.  You are advised to read your contract carefully, and to consult with your professional representation.

And that's it - easy as pie.  A stressful process, but an easy-to-understand process.  An understanding of the process, couple with a good game plan and lots of open communication can go a long way toward relieving some of that stress!

Your ready to answer a
ny other questions you might have

Chris Butterworth