Your offer has been accepted. Now what? The accepted offer is just the first step in a real estate transaction. Next step is to open escrow. And what is that exactly? Simply put, the escrow is the process of having an impartial third party manage the exchange of money for real property. In a real estate transaction, the buyer does not pay the seller directly for real property. The buyer deposits funds for purchase into an escrow account overseen by a neutral escrow holder until certain conditions are fulfilled.
Escrow accounts are used in real estate transactions so that the buyer can perform due diligence on a potential purchase while assuring the seller of his capacity to close on the purchase. For example, if there are conditions to the sale, such as the passing of an inspection, the buyer deposits funds in an escrow account assuring the seller, in the process of allowing the house to be inspected, that the buyer is capable of making payment. Once the conditions to the sale are satisfied, the escrow transfers the payment to the seller and the title is transferred to the buyer. This arrangement allows the parties to the escrow (the buyer and seller) to deal with each other without risk.
It works like this. Once the purchase agreement is signed by all the necessary parties, the agent representing the party who will pay the fees selects an escrow holder. Then, the buyer’s earnest money deposit and contract are submitted to the escrow. From this point, the escrow holder will follow the mutual written instructions of the buyer and seller, maintaining an impartial stance to ensure that neither party has an unfair advantage over the other. Additionally, the escrow holder follows the instructions of the buyer’s lender, the seller’s existing lender, and the parties’ agents and provides an accounting of all funds deposited in escrow.
The escrow holder, acting with impartiality, verifies that a title insurance policy can be issued pursuant to the terms of the contract. The escrow holder arranges for the transferring of title to the property to the buyer, arranges for the issuance of the title policy, pays any liens and all costs associated with the sale that are chargeable to the buyer and seller, and disburses the sale proceeds to the seller. All the while, the escrow holder ensures the transparency of the transaction, carefully maintaining the privacy of the buyer and seller.
The final step is the close. Close of escrow happens upon the completion of the purchase. The escrow holder will oversee the final paperwork and handle the exchange of funds and the recording of deeds. They will ensure that all the monies are properly disbursed, the documents are signed and recorded, and that all necessary conditions have been met.
Important tip: A final settlement statement will be delivered by mail. Be sure to check the statement very carefully and call the escrow holder immediately if you spot an error or find a discrepancy. File this statement with your most important papers, including the purchase documents, as you’ll need it when you file your next income tax return.