What Happens during Escrow?
Once you open escrow, your inspection period begins. This is sometimes known as the buyer investigation period. The default period is typically 17 days, but this may be changed depending on what was specified in your offer or if this time period is countered or overridden by an addendum. You may cancel the offer (without risk to your deposit) during this period if you find reasonable objections such as major inspection issues, HOA law suits, disclosure issues, etc, or if there are issues in approving your loan During this period, you are also obligated to work with your lender, get an appraisal, and get final loan approval.
Your tasks during the buyer investigation / review period
Deposit earnest money: You generally will have 3 business days to bring your earnest money deposit to escrow. It is typically paid with a personal check, but you can also wire funds directly to escrow. The earnest money deposit should not be confused with a down payment, which is usually a much higher amount. The earnest money deposit (also known as a "good-faith" deposit) is typically between 1 and 3 % of the purchase price and it is made by a buyer to demonstrate that he/she is serious (earnest) about wanting to complete the purchase. This deposit is often used to fund a few of the initial escrow expenses such as ordering HOA documents.
Order home inspection: We will provide you with several home inspectors that you can contact to perform a whole home inspection. While this is an optional step, it is highly recommended. The home inspection is a limited, non-invasive examination of the performed by a professional, certified home inspector. The inspector will provide you with a complete report of his findings which you can use to request repairs, repair credits, or additional inspections. If the inspection reveals that there are significant issues with the home, you can also use the information to cancel the sale. You can read more about home inspections, here.
Other inspections: You may request additional inspections if there are other concerns with the home; especially if the general inspection recommends further review of a potential issue. Examples would be a roof inspection, mold inspection, soil or geological inspection, or others. These extra inspections are generally paid by you the buyer, but you can always request that the seller pays for it as part of a request for repairs agreement.
Order C.L.U.E. report: C.L.U.E. is short for Comprehensive Loss Underwriting Exchange. This is an optional report, but you may want to order it if you discover that the seller (or prior owners) have had an insurance claim on the property within the past 5 years. The report includes the date of the claim, the name of the insurance company involved, policy number, claim number, address, cause of loss, amounts paid, status of the claim, and the name of the insured and the claimant.
Order appraisal: If you are financing the home, we will contact your lender to order an appraisal. The appraisal is a professional estimate or verification of market value that uses comparable sales in the neighborhood or with similar homes in the area to help justify the sales price and loan amount. The appraisal should come in at purchase price or higher. If it comes in lower than purchase price, the lender will not fund the loan for the contracted purchase amount. In this case there are several options. The buyer can request that the seller reduce the purchase price to the appraised amount. If the seller refuses, the buyer has the option of bringing in enough cash to make up the difference. Very often, the parties agree to a compromise where the seller lowers the price by a certain amount and the buyer agrees to bridge some of the gap with extra cash.
Begin working with your lender: Once your offer is accepted, you should also contact your lender to begin loan processing. You may need to provide additional documentation or verify certain information (all known as 'conditions') in order to get full loan approval.
Complete escrow instructions: Once escrow is opened, you will receive a packet of escrow instructions. Some if the documents need to be completed (questionnaires, how you will take title to the home, etc) while others only need your signatures. It is important to complete and return these as soon as possible, especially if you are the buyer and the home you are purchasing has a homeowner's association. Escrow will need your signed authorization to order HOA documents. If you are the seller, there may be a document that you need to sign and also notarize. Drop by a notary public (most UPS stores have someone who can notarize) and return the document to escrow.
Order homeowner's Insurance: You should contact an insurance agent regarding homeowner's insurance and order a policy that becomes effective when you take possession of the home. If you are buying a home in condominium or townhouse complex, they will already have a blanket fire insurance policy (because of common walls), so this should save you a little on your insurance costs. You will still want a policy that covers, theft, liability, water damage, and other issues.
Review seller disclosures: The seller is required to complete a number of disclosures which provide potential buyers with information about the home such as past repairs, water leaks, noisy neighbors, or anything else that the seller is aware of and that may have implications for you, the buyer. The seller is only required to disclose items that he/she is aware of. For example, they cannot be held responsible for things that may have happened with the home unless they actually know about it.
Review HOA documents: If the home you are purchasing belongs to a homeowner's association, you will receive a packet of documents to review which tells about rules, regulations, and current issues (if any) in the association. If there are multiple associations (egg, a condominium complex plus a city-wide HOA) you will receive a package from both associations. It is important that you review these documents to be sure you agree with the rules of the rules of the association. These rules are commonly known as the CC&Rs (the covenants, conditions and restrictions). You should also check for unexpected expenses such as possible lawsuits within the association, as well as special assessments. Both of these items could have large financial implications to all members of the association and unless these are paid off as part of a purchase agreement, these costs will be passed to you. One additional note: If you have not received all of the HOA documents during the inspection period (typically because of a delay on the part of the property management company), you do have the right to receive and review these documents for a period of up to 5 days, even if this is past the standard 17 day contingency period.
Review Natural Hazard Disclosure Statement: This report, as also know as the "NHD", will let you know if the home you are buying lies within any potentially hazardous areas such as a flood zone, fire zone, earthquake zone, or other hazardous condition.
Review Title Report: This report will let you know about existing liens or encumbrances on the property that could potentially effect your ownership or costs of owning the property.
Review termite report: It is traditional in Orange County to have the seller pay for a termite report and to perform all immediate repairs. This is specified in the CAR form WPA, which is usually turned in as part of your offer. Aside from pests, the termite inspector may also note items such as wood rot or wood deterioration in their report. As the buyer, you should review this report and make sure all noted items are addressed by the termite company. This is known as getting "termite clearance". Clearance is often a requirement by lenders in order to complete funding. Please note that it is typical for attached properties (condominiums, town homes, multi-family properties) to receive local termite treatment (using chemicals) rather than through the process known as fumigation, or "tenting". This is because it is not possible to "tent" an individual attached unit.
Review Lead Based Paint Addendum: If you are buying a home that was built in 1978 or earlier, you will receive this addendum which warns you that lead based paint may have been used at one time in the home. If this is a concern to you, you may order a separate inspection to determine if there is a lead paint hazard in the home.
Review additional disclosures: You may receive other disclosures that may be City, State, or Federally mandated. One example is the Statewide Buyer and Seller Addendum (CAR form SBSA). These types of forms were developed to inform buyers about certain material facts in the area, such as jails, power plants, airports, or other items that might affect your desire to live in the area.
Request for Repairs: Once you have completed all of your inspections, you have the option of submitting a request for repairs (CAR form RR) to the seller. This document may outline certain items that the buyer would like the seller to repair as part of the purchase acceptance process. The buyer may also request that the seller credit the buyer with a certain amount to cover repair items. This is often done for expediency, as the time used for actual repairs could delay closing. This process is negotiable between the buyer and seller, and they typically compromise on the amount and cost of the repairs. Note that on any repairs credits, the seller can only apply credits to your closings costs, and only to the degree allowed by the buyer's lender. All seller credits must be listed on the HUD1 statement provided by escrow.
What happens after the inspection period?
Once the inspection period is over, you will be expected to remove some or all of your contingencies. This is to assure the seller and listing agent that you intend to go through with the sale. Removing all of your contingencies will now put your earnest money deposit "at risk", for in the event that you change your mind about moving forward with the purchase, the seller may lay claim to your deposit. Generally you will be expected to remove all of your contingencies, however, it is also common to remove as many as possible while perhaps negotiating to withhold removal of one or more in case loan approval is still in process.
In the event that the buyer refuses to remove all contingencies, the seller's agent has the option of issuing a 24 hour Notice to Perform to the buyer. This form notifies the buyer that they have 24 hours to either remove all contingencies or cancel the offer. The seller's agent must decide if it is wise to issue this form. If there were multiple offers on the home or if backup offers are available, the listing agent will undoubtedly decide that issuing a Notice to Perform is correct course of action. The logic is that if the current buyer cannot perform, it is better to cut your loses and move on to another buyer. However, if this was a difficult home to sell, the listing agent may feel that cooperation with an existing buyer is the smarter route.
What happens as you approach the closing date?
Final walk through: Roughly 5 days before closing we will do a final walk through of the home .Its primary purpose is to verify that the property is in the condition you agreed to buy. You will also want to verify that agreed-upon repairs were completed and that nothing has gone wrong with the home since you last looked at it. If you also agreed to items that were to be sold with home, you will want to confirm that they are still there (for example, a refrigerator). You will then sign the verification of property condition form. If there are any issues, we will notify the listing agent right away.
Complete any remaining escrow documents: If you have any questions, you will want to go over them with your escrow officer and return the signed package to escrow.
Sign loan docs: Your lender will send the loan documents to escrow and they will schedule a time for you to come in and sign. They will also go over the clauses with you and provide you with copies of the documents.
Deposit final funds: If you are the buyer, you will be required to deposit all of your final closing funds to escrow. This will include the remainder of your down payment (or full payment if you are a cash buyer), plus enough cash to cover closing costs and final expenses. This will usually be in the form of a cashier's check, or it can be wired directly to escrow. Most escrows over-estimate the final closing amount to ensure that they have adequate funds to close. Once the final figures have been calculated, you will receive a refund check for any overages along with your closing package.
Sign and notarize any short sale documents: In certain short sales, there may be an additional document that needs to be signed and notarized by all parties (buyer, seller, and both real estate agents). This is typically to ensure hat none of the parties are related (also known as an "arms length" agreement). This is required in order to successfully close the short sale, so be sure to get this done promptly!
Call utilities: Don't forget this step! Call all of the utilities like gas, water, electric, trash, phone, and cable. I would recommend doing this about a week before you close to ensure that they will all be on for you when you move in. If you are buying a home in Orange County, CA, here is a list of utility company contacts: Orange County utility companies - By city
Tips for a smooth escrow
Good document handling capabilities - Unfortunately, we're not yet in a paperless environment. During escrow you will have to handle and sign many paper documents. Having access to a computer, e-mail, a printer, and a FAX machine during escrow will be very helpful. This will also allow you to work remotely. Many documents will be e-mailed to you as .pdf files which you will be able to download, print, and sign. These documents can be faxed or e-mailed back to the sender. As you can see, having good technology tools at home or work is important.
Finally, stop your home searches! - By this time you are probably very used to searching for homes on the internet, getting listings by e-mail, etc. This can be a hard habit to break, but after opening escrow, it will be very counter-productive to continue to look at other homes. Ask your agent to terminate any automatic listing e-mails.
Finally, what not to do during escrow
Unless you are an all cash buyer, you will want to "freeze" your financial status while working with your lender. Many people do not realize that lenders will continually monitor your finances while you are in escrow, even though you were previously pre-approved. Any changes to your finances during escrow could threaten to disrupt your loan approval!
Second, make your best effort to avoid doing anything that could cause a delay in closing. A few examples would be, 1) being out of the area or difficult to reach. 2) Changing lenders right before closing. A delay of closing on your part could result in daily penalties or worse - Sellers could demand close of escrow and cancel the purchase agreement if you do not comply!
1) Don't buy anything significant on credit cards or run up any new bills.
2) Don't take out any new loans (e.g., a new car, furniture, etc).
3) Don't change jobs during escrow! - This may kill your loan!
4) Don't close any accounts - It may make you look like you have less available credit.
5) Don't make any late payments - This could effect your credit scores.
6) Don't change lenders during escrow - If you change lenders right before closing, it could cause a significant delay in closing escrow!
7) Don't plan a vacation during escrow or be difficult to reach - You will need to be available to sign loan docs, disclosures, escrow instructions, etc.