Escrow is an impartial, unbiased third party working for buyer and seller. Escrow holds funds and documents on behalf of the buyers and sellers and distributes them according to buyer and seller instructions.
To start the process, the agent (usually the listing agent) delivers to the escrow officer such items as, but not limited to, buyer's deposit check, details contained in the Residential Purchase Agreement, buyer and seller addresses and phone numbers, and information regarding the buyer's lender.
The escrow officer then prepares escrow instructions to be signed by buyer and seller. Escrow instructions reiterate the Residential Purchase Agreement and also contain information pertaining to the escrow process. The escrow is formally opened when both buyer and seller return signed escrow instructions to the escrow officer.
During the escrow, everybody has a job to do. Below, each party's responsibilities are outlined:
AGENT Assists his/her client in completing all of his/her responsibilities.
SELLER Delivers grant deed to escrow. Delivers clear termite inspection to escrow. Delivers information on the current mortgage holder to escrow. Delivers information on home protection (if any). Delivers any bills to be paid out of escrow to escrow. Fulfills any other obligations required by the Residential Purchase Agreement.
BUYER Deposits earnest money, down payment, and money to cover closing costs to escrow. Approves any documents outlined in the Residential Purchase Agreement. Fulfills any other obligations required by the Residential Purchase Agreement.
TITLE COMPANY Prepares preliminary title report. Arranges for and picks up loan funds. Delivers deeds to county recorder's office. Writes title policy. Confirms recording of deeds. Makes payoff to lender on seller's mortgage. Sends remaining proceeds to escrow (minus title fees). Sends title policy to insured.
LENDER Delivers loan documents to escrow for buyers to sign. Delivers funds for the buyer's loan to the title company.
ESCROW HOLDER Opens the order for title insurance. Obtains approval from the buyer on the preliminary title report, termite inspection, and any other items required by the Residential Purchase Agreement. Has buyer sign loan documents. Delivers loan documents to the lender. Receives funds from the buyer and lender. Pays buyer and seller bills, as outlined in the escrow instructions. Prorates taxes, association dues, rents, etc. Prepares a final statement (closing statement) for buyer and seller. This statement specifies amounts paid out of buyer and seller accounts. Records grant deed and trust deed and disburses funds. Delivers closing statements to the agents and/or buyers and sellers.
The escrow is closed after terms and conditions of the escrow instructions have been completed and deeds have been recorded.
The Appraisal Process
The buyer's lender will require an appraisal of your home before approving a loan for the buyer. The appraisal determines the maximum loan amount that the lender will make on the property.
The appraiser will use the market comparison approach to establish an opinion of value. The market comparison approach uses recent sales in the same neighborhood and compares location, condition, and amenities to establish approximate value.
The appraisal is usually a condition of the Residential Purchase Agreement because lenders limit the amount that they will loan based on the loan-to-value ratio. Loan-to-value ratio is defined as the relationship between the amount of the mortgage and the appraised value of the property, expressed as a percentage of the appraised value. For example, if a home is appraised at $300,000 and the lender will lend 80% loan-to-value (LTV), the loan amount cannot exceed $240,000.
When a home is appraised for more than the purchase price, the lender will only make a loan based on the purchase price. When a home is appraised for less than the purchase price, the lender will only make a loan based on the appraisal amount.
If the appraisal comes in below the purchase price, there are five possible solutions:
1) Increase the down payment. The down payment amount can be increased.
2) Reduce the sales price. The sales price can be reduced to the appraised price.
3) A combination of 1 and 2. Increase the down payment and reduce the sales price.
4) Obtain another appraisal. The buyers can obtain another appraisal.
5) Obtain a loan with a higher LTV. If the buyers were not originally applying for a loan with the maximum loan-to-value, the LTV can be increased.
The Inspection Process
In most cases, the buyer will obtain a professional inspection of your home. Quite often, the buyers will accompany the inspector during the inspection. The inspector's job is to disclose, in detail, the condition of the property. An inspection will usually take between one and four hours. Sometimes an inspector will suggest further inspections, tests, and/or investigations that the buyer should conduct. Generally, it is best if the sellers are not present during the inspection.
The law requires the sellers and brokers to disclose to a buyer all material facts known to them which affect the value or desirability of the property. In most cases, brokers are required to make a visual inspection of the property and disclose anything that would affect the value or desirability of the property. However, this inspection of the property does not alleviate the seller's responsibility to disclose material facts. It is best to consider everything to be a material fact, as it is much better to over-disclose than to under-disclose. The majority of lawsuits involving buyers and sellers of residential property involve lack of disclosure by a seller.
After the inspection/s are completed, the buyer's agent will submit a list of repair requests to us. We will then respond to it in writing within the prescribed time period. The Residential Purchase Agreement specifies the time periods for the inspections to be completed and responses to be made. It also specifies the seller's responsibilities in regard to repairs.
Understanding Title Insurance
Title companies, unlike most insurance companies, operate under the theory of risk elimination. Most of the premium for title insurance is used to prevent problems, as opposed to most insurance companies, which allocate most of their premiums to settle claims once a problem arises.
Title companies store and maintain records that affect title. This is done in the "Title Plant". Many title companies' records date back over one hundred years. This allows them to anticipate and eliminate potential problems with title transfers. They determine what encumbrances (claims or liens) are on your title. The title company works to clear encumbrances which buyers do not customarily assume before the close of escrow. The title company conducts a thorough search of public records to eliminate most of the risks against a future claim. When a claim is filed, the title company handles it according to the terms of the title insurance policy.
Title companies are required to file their rates with the California Department of Insurance. Rates and service vary from company to company. Buyer and seller choose services; however, referrals can be provided upon request. Our referrals are based on price, service, strength of the company, and past performance.
The walk-through inspection is usually done about five days before the close of escrow. We meet the buyers at the property and follow the following procedure:
Verify repairs. Most likely, there were repair or replacement requests that you agreed to.
Demonstration of equipment. You will demonstrate how to operate equipment such as pool, spa, sprinklers, alarm system, appliances, or any other items that the buyers may have questions on concerning their proper operation.
Set up utilities. The buyers will be provided with a list of all the utility numbers, and we will discuss with you the coordination of switching over the various utility services to the buyer.
Coordinate possession. We will plan the transfer of keys and finalize the possession time and date.
Items to be left at the home. We will discuss where you will leave such items as garage door openers, extra keys, instruction books, alarm codes, safe combinations, etc.
Change of address. You will be provided with a change of address card to be filed with the post office.
Home protection plan. If a home protection plan was purchased, the buyers will be provided with information pertaining to the policy, along with a service number to call should they need service.
Review closing procedure. We will discuss any remaining tasks that need to be completed before the close of escrow.