Understanding the Escrow Process
Eric Shewfelt of Wilshire Escrow explains the Escrow Process in the Los Angeles area. As the oldest independent licensed escrow company in California, Eric knows the ins and outs of the escrow process - from collecting money, finalizing loan documents, finalizing deed documents and freeing the title of previous commitments.
What Happens in this Mysterious Escrow Period?
Escrow is when you, as a Seller, have come to agreement on price, terms, and conditions for the sale of your home. The instrument that is used to specify the transactions is the Residential Purchase Agreement RPA.
Once an agreement is reached, and you have a fully executed RPA signed by all parties, you can open escrow.
Escrow is a neutral third party that is put in place to communicate and to keep balance between the two parties. An Escrow, or Title, Agent acts as intermediary in making the deal happen. They have no influence, they can only act on instructions from the Buyer or Seller as agreed upon.
** In California, there are about 45 different people who will touch a file when it goes under contract, from real estate agents to appraisers, home inspectors, and insurance representatives. There are a lot of people involved with ensuring a smooth and successful closing.
Helpful Tip: It’s really important that the Sellers identify everything excluded from, or included in the sale. Items that are often in the gray area are: appliances, washer and dryer, dishwasher, stove, refrigerator in the garage, window treatments, chandeliers, bookcases and potted plants.
Once Escrow Opens:
- In Real Estate, we use calendar days not business days when processing a contract. Escrow typically runs 30 days, but can go faster or slower depending on the needs of the family.
- The Buyer must deposit their (3)% earnest funds, which is an initial deposit into Escrow within three (3) calendar days of acceptance.
There are three major contingency periods in the course of Escrow. The RPA boilerplate contingency period is 17 days, but the time of a contingency can be adjusted by mutual agreement and contingencies are “passive” not “active.”
Physical Inspection Contingency:
- This is the time when the Buyer gets to investigate the physical condition of the home. You can expect that the Buyer will have a number of inspectors conduct a physical inspection of the house.
- This is also the time for a Buyer to understand any local, city, or state ordinances, natural hazards, and current building codes that effect where the property is located, or how it is enjoyed. These may include information on a Home Owner’s Association rules, a Historical Preservation Overlay Zone, and rental restrictions.
- Additional Inspections common in Los Angeles real estate transactions are: chimney, sewer line video inspection, foundation, roof, heating and air conditioning (HVAC), pool, and possible geological evaluations. Depending on the condition of the home, they may bring out tradesmen for plumbing, electrical, and, in other cases, an abatement remediation specialist if mold or asbestos is found. All combined, it can seem as intrusive as getting a physical from a stranger, but it is to your benefit that the Buyer is fully educated and understands what they are buying. Your job is to provide disclosures about the property and make the property accessible.
- All the Buyer’s inspections are customarily done at the Buyer’s expense. Some trustees elect to have pre-market inspections done on their property to provide information to prospective Buyers, and to streamline the process and understand any issues.
- There are a few inspections that the Seller is typically responsible for. Those include the Termite Report, and the cost to retrofit the home to meet any Mandatory State Compliance Items such as having lo-flo toilets, an emergency gas shut off valve, Smoke & CO2 detectors installed, and bracing a home’s water heater.
Septic vs Sewer:
** We can’t emphasize enough the need for full disclosure about any known issues with a house. We understand that if you are selling a loved one’s home, it’s possible you haven’t lived there in decades. We are here to guide you through the disclosure process.
- During the Buyer’s Physical Inspection Period, The Buyer may ask for a Credit for Repairs from the Seller. Some Buyers may ask for a large amount, some not as much. Typically, the requests are primarily for action items that effect the safe habitability of the home. The request for repairs is negotiable. Most Buyers believe, “If they don’t ask, they don’t get,” but it doesn’t mean that the Seller must agree to every request. Remember: “Everything is negotiable.”
** This may be a stressful period as the Buyer discovers information about the house. We work with you to educate the Buyers about the property before you go under contract, so that the Buyers understand what the house is, and isn’t. We are with you every step of the way.
Loan and Appraisal Contingencies
Both the Loan and Appraisal Contingencies are usually tied together.
The Loan Contingency Period is when the Lender verifies the Buyer’s FICO scores, and ability to borrow, before ensuring a loan to the Buyer for this property. Once the Lender has given full loan approval, the Buyer can remove their loan contingency. Part of the approval process is that the property Appraises to value. The Buyer’s mortgage lender will require the property to be appraised by a professional—selected by the lender—who will come to the property and assign a dollar value.
** It’s common for a Generational Home to receive an all-cash offer (sometimes several all-cash offers that have to compete for a house) While there is no bank involved, many all-cash Buyers will remove their appraisal condition but may still conduct an appraisal as the Buyer is essentially their own bank.
Contingency Free Deal
Once the Buyer removes the Physical, Loan, and Appraisal Contingencies, and submits a Contingency Removal Form, you, the Seller, will have a contingency-free deal and you, the Seller, will turn over the house to the new owner.
The Final walk-through allows the Buyer and Buyer’s agent to visit your house and make sure that you’ve left it in the agreed-upon physical condition. You’ll need to have moved out of the house (unless otherwise agreed), made any negotiated repairs, left behind all fixtures and other agreed-upon property, and left the place clean. If you fail to meet one of your obligations, the Buyer can delay the closing, bring up new repair or price requests, or even cancel the sale. Make plans to have your house empty and spotless by the final walk-through date.