Don’t Be Afraid of the Escrow. It’s Not a Scarecrow!

Some FAQs About Escrows

Question: What is “escrow” and how does it work? Is there a scarecrow involved?!

Escrow refers to a neutral third party whose job it is to hold funds, prepare documents and disburse funds for a given amount of time until certain events and conditions occur. Typically, escrow is also the title company whose job is to provide title transfer, insurance and recording services to the buyer, seller, brokers, lenders with respect to each other and with the relevant city and county authorities. Usually, one person (the escrow/title officer) and their assistant are the main points of contact for agents and clients alike.

The escrow officer’s marching orders are based on the terms of Purchase Agreement as supplemented by party instructions, lending requirements and/or tax liens. The escrow officer can also disburse sale proceeds seller-incurred costs. The escrow company can never release monies unless and until both parties have agreed to do so mutually or if there’s a court order.

Question: Why does the Escrow Officer matter?

Because the escrow holder is the neutral third party who maintains and runs the process between when an offer contract is accepted to when the deed transfers provided all the agreed-upon conditions are satisfied mutually. They will also be the folks who issue various forms of insurance required for a transaction, handle financing issues and also take a role in telling people what is due and where to send whatever it is. The escrow/title company will also prepare all those documents needed to facilitate the title deed transfer, which is what everything is about in the end. A good officer will be proactive and responsive and will keep us on schedule. A bad one can lead to a host of issues that would make me don my lawyer hat and put our deal at risk. Let’s err on the side of having a good escrow company and personnel, shall we?

Question from Bill Lumbergh: “Yah, if you could just go ahead and tell me what it is that you do here, that’d be great.” (i.e., what does escrow actually do?) 

• Receives the purchase agreement
• Serves as the neutral agent and the liaison between all parties involved
• Prepare and conduct a Preliminary Title search to determine legal status of the property’s title and any claims or errors in title
• Handle the seller’s loan, i.e., payoff demands, dues, HOA fees owed, liens outstanding, etc.
• Confirm parties are complying with lender requirements
• Prepare Closing Disclosure (if there is a purchase loan involved) for buyers
• Prepare loan documents (if any) (like the deed of trust, note)
• Receive and handle purchase funds from the buyer (usually via EFT)
• Assist in the creating joint escrow instructions; implementation of the same
• Prepare title deed transfer and other documents related to the escrow
• Prorate and calculate  property taxes due, interest, insurance premiums due,(for income properties, transfer deposits accurately); collect/disburse the same
• If needed, prepare, underwrite and issue mortgage insurance policy
• Disburse funds as authorized by escrow instructions, including charges for the title insurance, recording fees, real estate commissions and loan payoffs
• Prepare final tax statements for all parties that account for the disposition of all funds held in the escrow account as needed for tax purposes; withhold FTB portion if needed
• Manage signing & recording of all title-related documents with County
• Fingerprint signers to confirm identity at signing (escrow officers are usually also a notary public)

And Who Pays for What Again?

Closing Costs or settlement costs are the accumulation of separate charges paid to different entities for the professional services associated with the buying and selling of real estate. While negotiable, local custom and practice dictates who pays for what for such items as transfer tax, escrow fees, recording fees and the such. In San Francisco County Sellers usually pay the transfer tax unless it’s negotiated differently (as is the case in many probate or estate sales) or if it’s new construction (sorry buyers, you pay it when you buy new construction and again when you sell). But in Oakland and Alameda County transfer taxes are usually split between the parties. So ask us for details if you have questions. Each side will prepare escrow instructions shortly before closing to advise the escrow company who is paying what.

Here are some of the most common closing costs:

• Title Insurance Premium. Fee paid by an individual to ensure he has a marketable title or (in case of a lender) to ensure its lien position. This may be tax deductible.
• Real Estate Commission. Fee paid to a real estate company for services rendered in listing, showing, selling and consummating the transfer of property.
• Transfer and Assumption charges. Fees charged by a lender to allow a new purchaser to assume an existing loan.
• Recording Fees. Fees assessed by a county recorder’s office for recording the documents of a real estate transaction.
• Loan Fees. Fees charged by a lender in connection with the processing of a new loan. These may include points, origination fee and credit report.
• Escrow Fees. Fees charged by a title and/or escrow company for services rendered in preparing documents necessary in the consummation of a real estate transaction.
• Additional Settlement Costs Taxes, insurance, impounds, interest proration, etc.

The Seller generally pays for:

• Real estate commission (split between agents)Documentation preparation fees for Deed Transfer tax (county), if city, then shared
• Notary fees
• Homeowner’s Association transfer fee
• Interest accrued on mortgage
• Their Own Mortgage fees
• Pre-Sale Inspections (should be done outside of escrow)
• Required reports (e.g., 3R, Natural Hazards)
• Energy and Water Conservation (SF County)
• Deed of Trust reconveyance fees and any payment penalties
• Any judgments or tax liens
• Prorated portion of any unpaid property taxes
• Any unpaid HOA dues
• Any and all delinquent property taxes, bonds or assessments

The Buyer generally pays for:

• Title insurance premiums
• Escrow fee
• Document preparation costs
• Notary fees
• Recording charges for all documents in Buyer’s name
• Any loan fees or points required by Buyer’s Lender
• Inspection fees (for inspections done, should be paid outside of escrow)
• Prorated property tax (from close of escrow date)
• Interest on new loan from date of funding to thirty days prior to first payment date
• Assumption/change of records fees for takeover of existing loan (if applicable)
• Fire and Hazard insurance premiums for first year

Even the Best Plans…

Matters that Could Delay or Foul Up Our Transaction…. Solved

The best-laid plans of mice and men can get caught in a mousetrap, right? That’s probably an incorrect version of the idiom but the sentiment holds true: things can and will change despite our best efforts. Home purchases — even all cash ones — require a group of people coordinating a myriad of efforts across different offices, competencies and, in some cases, timezones. Here are the three main tracks that are in motion during the escrow period and the factors that can add delay to our expected closing date. Some delays are relatively harmless and are to be expected; others are fatal. Which are which will depend on our given contract, if there are back-up offers in place and the working relationship between the parties. In most cases, the most that is at stake is the 3% liquidated damages amount that the escrow/title officer is holding for the parties. If that amount is in anyway implicated you’ll definitely be aware of it if you’re working with us. What you’ll also be aware of are the potential solutions, work-arounds and concessions we can make to keep the transaction going.

There Will Be A Glitch — Just What It Is, No One Knows

Just look surprised, don’t worry, we’ll be prepared

CONTRACT-BASED CONSTRAINTS

What: Delay to submit deposit to escrow

Preferred Solution: Ask for a deadline extension in writing; wire money/cashier’s cheque

Risk: Failure to deliver a deposit to the title company within the standard 48-hours can effectively void the contract before it gets started. Risk is pronounced in multiple-offer situations.

What: Delayed inspections because of vendor availability

Preferred Solution: Ask for a deadline extension in writing

Not-So-Preferred: If you have contingencies, remove the Inspection Contingency, but couch any objections in removing the Finance Contingency

Maximum grace period: ± 2 days

TITLE-BASED CONSTRAINTS

What: Appraisal contingency unmet (i.e., property fails to appraise at contract price)

Preferred Solution: Be in constant contact with the lender; Do the necessary groundwork pre-offer; negotiate price and have cash reserve ready; We will provide supporting comparable sales to support our price

Less-Preferred: Contribute more cash

Not-So-Preferred: Demand price adjustment to match appraisal price

Not-Good: Above + if no concession comes along, refuse to continue with financing approval process.

What: Financing contingency

Preferred Solution: Be in constant contact with the lender; Do the necessary groundwork pre-offer; negotiate extension

Not-So-Preferred: Remove and hope for the best!

Less-Preferred: Remove and hope for the best and release part of deposit as non-refundable

Less-Preferred: Renegotiate price so financing requirements are met

Maximum Grace Period: ± 7-10 days

Other Risks: Apart from breaching purchase contract; Loan interest rate lock may expire unless extended usually at buyer’s expense

LENDER-BASED CONSTRAINTS

What: Loan documents aren’t processed in time, received in time

Preferred Solution: Be in constant contact with the lender and title officer; Ensure buyer funds are already at escrow (any extra amounts sent will be refunded after close)

Less-Preferred: Release some or all of deposit funds early as non-refundable

Not-So-Preferred: Negotiate/request extension for closing

What: Loan documents aren’t processed in time, funds aren’t received by deadline; title documents not sent in time for recording

Preferred Solution: Be early with everything; factor-in delays in writing original contract

Less-Preferred: Release some or all of deposit funds early as non-refundable

Not-So-Preferred: Negotiate/request extension for closing

Maximum Grace Period: ± 24-72 hours

Do We Have Contingency Removals?

(h2>Did we condition our offer on anything? If so, what?
If we have any, our Purchase Agreement contract will contain all of the deadlines and relevant dates for any conditions or contingencies we’ve predicated our purchase on. Usually it’s the buyers who are removing contingencies. Most commonly referred to as “contingencies” these time periods are the safe harbor period during which a buyer can withdraw their offer without the substantial risk of losing their 3% deposit that are usually based on one of three things (in order of broadness and latitude): (1) Appraisal; (2) Financing; and, (3) Inspections. 

This is when and where deals will either fall apart or succeed. Adjusting how long and if these contingencies are used  — i.e., the terms— in the Purchase Agreement can make our offer stronger or comparatively weaker than others.

Adjusting timelines during escrow is also possible, but beware if there is a ‘better’ backup offer ready, willing and able to go. The theory here is that the parties are so far along with each other that they’re ‘invested’ in the process. That or that sellers will worry about having the moniker of ‘back on the market’ attached to their listing. Oftentimes you’ll see properties ‘back on the market’ due to ‘no fault of the property.’ Nevertheless there is still psychology at play here as the entire process of having to have a buyer get out of escrow is still taking on everyone involved. Thus, sellers will tend to pick offers that are ‘sure things’ versus those with what are tantamount to Get-Out-Of-Jail-Free cards. For buyers, finding a property that is back on the market may be advantageous too as a seller is more keen to accept a better alternative and fast.  

There are a lot of other considerations at play too such as good faith, what happens if someone should fail to extend a contingency period along with the wisdom of waiving a contingency. This is why it’s all that more important to contact Kevin and Jonathan. 

And On Home Warranties

Home warranty/protection plans are generally offered by third-parties (often affiliated with the escrow/title company) to a buyer or even a seller. These of the plans may provide additional protection of certain systems and appliances in the home. It’s always a good idea to get these programs as they cover most appliances and home systems. If our property is new construction, then certain statutory protections will apply too as will original manufacturers’ warranties.