SALE & PURCHASE ESCROW
Residential Sales, Commercial Sales, Probate Sales, For Sale By Owner, Seller Carry Back, 1031 Exchanges
What is Escrow?
Escrow is a neutral third party that securely holds the important items in a real estate transaction and make sure everything in the transaction proceeds smoothly, including the transfers of money and documents, and to hold assets safely in an escrow account until disbursement. Escrow is the center of the settlement process and protects all of the relevant parties in the transaction, including the seller, the home buyer, and the lender, by ensuring all of the conditions in the agreement have been met, the deal is closed and the house officially changes hands. Along the way, proper documentation is filed with the escrow officer as each step toward closing is completed.
Some transactions are clean and go through smoothly; others may have problems that make the closing more difficult to achieve. Having a knowledgeable Escrow Officer will make a huge difference.
Why do we need to go through escrow?
1) Document Preparation
The general public would not know which documents are needed for different scenarios and how each are completed properly. Incomplete or incorrectly prepared documents can have drastic unintended consequences.
2) Local, State, and Federal Regulations
Different cities and counties have different types of laws and government regulations, some of which may change from year to year. A reliable Escrow Officer will always be up-to-date on all the laws and changes at all times.
For example, some cities require a residential property report before the property can be sold. If the Seller is a foreigner, Internal Revenue Service has their complicated requirements under the FIRPTA laws and Seller will be subject to withholding. Does the Seller live on the property? If not, the Franchise Tax Board has requirements for upfront tax payment.
3) Cloud on Title
Sometimes the ownership is not clear and the Seller may not be able to convey the title free of potential issues. The circumstances that lead to a “cloud on title” can be many and varied.
The most common problems will be liens and judgments filed against the owners and being attached to the properties they own. If the liens and judgments are not discovered and satisfied prior to the transfer of ownership, the responsibilities will then pass onto the home buyer. Some owners might transfer the property back and forth to others, making the ownership rather complicated and that others may have an interest due to the sale of the property. There are also owners who passed away but the proper documents have never been filed or an old document was prepared incorrectly, thereby leading to questionable ownership. Having a knowledgeable and experienced Escrow Officer can protect both seller and home buyer throughout the real estate transaction, resolve the cloud on title, and most importantly, transfer the property free and clean to the new owner.
4) The earnest money deposit
Earnest money—also known as an escrow deposit—is the initial deposit buyers put into an escrow account after the seller accepts their offer. The escrow company holds the money in an escrow account for the duration of the real estate transaction. Another way to think of it is as a “good-faith” deposit into an escrow account, which will compensate the seller if the buyer breaches the contract and fails to close.
How escrow protects you during the real estate selling and buying process?
By holding the earnest money deposit and important documents in a real estate transaction, escrow holder is keeping everyone safe as they move toward the closing and property eventually changes hands. For example, the buyer had a home inspection contingency and discovered that some areas needed repairs. The seller agrees to fix those areas prior to the close of escrow, however, during the buyer’s final walk-through, he/she finds that the areas have not been repaired as expected. In this case, buyer inform escrow holder not to close the transaction until the necessary repairs have been done and satisfied.
Escrow also protects the seller during the real estate process. What if the buyer gets cold feet at the last minute and bail on the transaction. This may be disappointing to the seller, but at the very least, buyer put in their earnest money deposit and this money has been held in escrow. When buyer back out with no legitimate reason, they forfeit that money to the seller—a decent consolation for the sale’s failure and the expense of making mortgage payments and other expenses while the home was off the market.
How much does escrow cost?
That varies, as well as who pays for the escrow cost. Typically the cost will be totaling about 1% to 2% of the purchase price and split between the Seller and the Buyer. In some cases, Seller or Buyer will cover all the escrow cost based on the terms in the purchase agreement.