The Road to Closing: An Overview of the Escrow Process
No two escrows are exactly alike, so please use this article to prepare yourself with the basics of what happens during the escrow process in a residential real estate transaction.
Also, this is not a substitute for legal advice — it’s just a realtor sharing what she knows.
What Is Escrow?
Escrow is a legal arrangement in which a third party (Escrow/title company) temporarily holds money and/or property until particular conditions have been met — like, say, the fulfillment of the purchase of a home.
Escrow is used in real estate transactions as a kind of safe that protects both the buyer and the seller throughout the home-buying process.
Length: The length of escrow depends on the terms of the contract. A cash purchase can close escrow in as little as even days, whereas with a bank-funded purchase, escrow is usually 21–30 days in length.
Getting Into Escrow
In real estate, an escrow starts when a seller accepts the offer that a buyer has put forth.
It goes like this:
A buyer finds a home they love, and they ask a realtor to represent them and write an offer on the property to submit to the sellers.
The realtor and buyer put their heads together, decide on the price to offer, and the terms required to get the deal done. This offer has a higher chance of acceptance when the price is strong and the terms are easy for the seller; however, the terms must provide enough certainty for the buyer, too.
The most common terms are:
- Financial: Are you paying cash or getting a loan?
- Investigation: How much time will you need to inspect the house and discover important info about the area?
- Days to close: As few as seven days with cash, while a bank loan will likely close in 21–30 days.
Once you’re confident that your realtor has shown you comps to prove your valuation of the house is on point, they’ve explained each of the terms and you’re comfortable with them, the realtor writes up a Residential Purchase Agreement (RPA) contract for the seller to consider.
The seller can either accept the offer, counter, or reject the offer. If the seller (verbally) accepts or counters with something acceptable to the buyer, that’s the very moment escrow begins.
You are now “in contract” (yay!)
Next, there’s a predictable escrow process and contingent timing for each stage:
The Five Elements of Escrow
1. Deposit earnest money into escrow — that’s you
2. Remove investigation contingency — that’s you
3. Remove appraisal contingency — that’s your lender
4. Remove loan contingency — that’s your lender
5. Present a clear, clean title — that’s the title + others that are not you
Once in escrow, the property sellers are pretty much kicking back and watching it all happen. Hopefully, if all goes well (and their title is clear), their hard part is over.
1. Earnest Money Deposit
Earnest money is exactly what it sounds like, a deposit to show you’re good for your word. Once you’re in escrow, you need to deposit your earnest money into the escrow account. What did you offer them in your contract? That is the minimum dollar amount that you are required to deposit so you’re not in default. Earnest money is usually a maximum of 3% of the home’s total purchase price.
To be competitive in a seller’s market, you might offer a deposit as soon as one business day after the opening of escrow (that’s what I recommend my buyers do), so be ready! Once you go into contract, you’ll need to get your funds into the title company. Please, always speak with your realtor before wiring funds.
2. Investigation Contingency
You’ll notice I didn’t call it an “inspection” contingency. Investigation means so much more than just inspections — it covers everything. Walking around the neighborhood, Googling stats, checking the Megan’s Law website, sorting out school districts, etc. Whatever research you need to do to feel confident you’ve looked under the hood of this house and its neighborhood counts. If you’re buying a condo, you’ll also have the extra investigation phase for the Home Owners Association (HOA) documents.
Before buying a house, I highly, highly, highly recommend you get inspections done. Have them check out the roof, the body of the house (inside and out), provide a pest report — all of it. In cities around the Bay Area, you’ll also have inspections (and potential fixes) for sewer lateral, sidewalk, and other miscellaneous items to check off your list. Your agent will know what’s needed for your county or municipality — ask them.
Let me say it again: It’s essential to get a home inspection.
A home inspection can uncover any hidden problems with the house such as leaks, mold, or structural issues. This information can help you negotiate repairs with the seller or decide whether or not to proceed with the purchase.
The most common practice in the San Francisco Bay Area is the sellers pay for and acquire the inspection reports. They gather them up neatly in a disclosure package and present them to any and all serious buyers before offers are written.
Sellers provide them to you in advance of you writing an offer so that you know, in detail, what you’re making an offer on. This gives you little ability to negotiate that $17,000 pest report because it was included. Think of it this way: every single house for sale with inspections already done and available to the public are, in essence, as-is.
So, if they did all the inspections, do you need to pay for and order inspections too?
It is 100% your call.
What’s your risk tolerance? What does your gut say? Do you need to double up and get your own inspectors, or are you satisfied with the detail provided in the seller’s?
Either way, do your due diligence.
Timing: In your contract, you stated the number of days you’d need for investigation. Next, it’s time to satisfy those conditions within the time you promised to lift that contingency. If you don’t, you’re in default — and you have money on the line. Try not to get yourself in this spot, but if you do, your realtor can see if the sellers are willing to grant you an extension to the timeline.
3. Appraisal Contingency
If you pay in cash, you won’t have an appraisal or loan contingency. After removing the investigation contingency, you’re done with your part (for the most part).
If you’re getting a bank loan, a bank requires an appraisal to fund your loan. The appraisal contingency is next on your checklist.
Somewhere between 8–18 days, the bank will send an appraiser out to the property. If you have a good realtor, they’ll be there to greet them (and try and take the temperature — which they never get. Appraisers’ lips are usually tightly buttoned up.) Your realtor will offer them recent comps for the neighborhood in hopes of swaying them to endorse your listing price (or exceed it). Since appraisers are professionals, they come up with their own valuations, but a little context never hurt anyone.
If you have an appraisal contingency and the house does not appraise for what you’re offering, you have two choices:
1. Make up the difference in the valuation with cash
2. Walk away from the deal and get your deposit back
If you wrote an offer funded by a bank loan without an appraisal contingency, you are on the hook to make up the difference in cash, or your deposit is in jeopardy.
Once the appraiser has spoken and you’ve resolved discrepancies between the appraiser’s numbers and your offer’s, your agent can lift that contingency for you.
4. Loan Contingency
Again, cash-only deals don’t apply here, but for the rest of us bank loan customers (most of us), this is usually the part where we’re just sitting around, sipping tea and waiting for the loan to be funded.
A pre-approval takes the edge off, but the bank is working behind the scenes for this one, and once they’re good and ready to fund, the contingency gets lifted.
5. Clear Title
This is not your part, but it doesn’t mean you won’t be affected by it. The title of a house must be “clear” and not “cloudy” before it transfers to a new owner. “Cloudy” means someone expects money from the sale of this house. This must be cleared before you own it so you don’t inherit someone else’s debt.
For example, if the homeowners didn’t pay property taxes, the government will want to get that debt settled before a transfer of sale. Another example is a contractor may have remodeled the house, and the owners stiffed them. In this case, the contractor can put a mechanic’s lien on the title to stop anything from happening before he’s paid. Fun fact: Many properties belonging to the Trump Organization have mechanic’s liens. They are notorious for not paying contractors and using the strategy of “settling” their debts for less to clear their titles (yeah, it’s a bad look).
There are a handful of other reasons a title could be cloudy, not clear, but these are usually issues that can be seen pretty quickly; you’ll likely know before you go into contract if there’s an issue, and a 30-day escrow is usually enough time to clear what’s clouded.
The escrow company will triple-check that the house title is free and clear and ready to be transferred to you, and when it is, that contingency is lifted.
Close
All your contingencies are lifted, the loan is funded, the title is clear and transferred to you, and you’re almost ready for your keys!
First, a notary will swing by, and you’ll need to sign about a gazillion house-related documents, including ones for the mortgage loan. Once everything is signed and the funds have been transferred, you officially own your new home!
Congratulations on building generational wealth, securing your future, and possibly funding your retirement, as well.
. . . .
Wendy Newman is a Realtor with KW Advisors — San Francisco (DRE 02159040). She’s excited to help you find your happy place — literally — and she’ll have your back every step of the way.
You can reach out to Wendy at WendyNewmanRealtor.com
