March 13th, 2023
Are you in the process of buying or selling a home? Are you feeling overwhelmed by all these real estate terms, deadlines, and contracts? Even though there are professionals around you, you want to feel like you know what is happening and have arrived at the topic of escrow. You’ve come to the right place! In this blog, we'll discuss the escrow process and how it works in California.
There are a few types of escrow - all of them have in common a type of transaction between two parties who work in their own interests and an intermediary that protects the fairness of the transaction. It can be a transaction of information, money, intellectual or real estate property.
Today, we will focus on escrow in a real estate transaction, mainly where one private entity sells a house or apartment to another private entity. In a typical real estate transaction, an escrow company is hired as an impartial party. They receive the buyer's funds and the seller's property deed and hold them in a secure account until all of the terms and conditions of the transaction are fulfilled.
During the escrow process, the buyer and seller work to meet certain contingencies and obligations, such as completing home inspections, obtaining financing, and satisfying title requirements. Once all conditions are met, the escrow company releases the funds to the seller and transfers the property deed to the buyer.
Most escrow processes involve multiple parties besides just the buyer, seller, and an escrow company. All other parties are there to ensure that the seller and buyer play by the rules during the home-buying process.
For example, here are some vital subjects in an average escrow process:
Additionally, companies that provide contingency closures (inspection, appraisal, insurance, etc.) play another important role in an escrow process.
Since each state’s standard procedure for an escrow process can vary in detail - we will focus on California, but you’ll get the gist.
In California, the escrow process begins with the creation of a purchase agreement, which is a legally binding document that outlines the terms of the sale. Once the agreement is signed by both parties, the buyer makes an initial deposit, known as an earnest money deposit, which is usually held by the escrow company until the transaction is complete.
The escrow officer will work with the buyer's lender to ensure that loan documents are in order. This may include obtaining a title search, paying off any outstanding liens or mortgages, and preparing the final settlement statement. The settlement statement outlines all the fees and costs associated with the transaction, including any prorated taxes and fees.
During the escrow process, both the buyer and seller will have certain responsibilities. The buyer should take care of the property’s future, and the seller should worry about a clean slate.
Meaning while the buyer makes arrangements for an inspection, financing, and repairs, the seller provides a clean title, pays for the repairs, makes sure there are no liens, and ensures the property is vacant for the closing.
After the purchase contract conditions are met, it is time to close the escrow and the sale. The closing day happens three business days after the seller and buyer receive a closing disclosure.
On closing day, the escrow process closes when the escrow company releases the funds and documents to the two parties. They sign the final paperwork, and the buyer pays the remaining balance due. The seller will then receive the funds from the sale, and the buyer will receive the keys to the property.
Once the escrow company receives the earnest money - it is considered an open escrow. It is not closed until the money is released from the escrow holder. It can happen when the sale closes and the purchase is finalized. Or if the buyer gives up on the sale.
It can take a month or two to close an escrow. This will depend on the proactivity of all invested parties. It can also depend on the state of the property. If there are issues found upon inspection or title discrepancies - it might take up to 90 days for the sale to close. Normally, if everything goes smoothly, it should not take more than 30 days.
In short, yes. That is what contingencies in a purchase contract are for - to protect your earnest money deposits in case something unpredictable happens. If you worry you might not get preapproved, you put the mortgage contingency.
If you think that the house you like might need more work than the seller disclosed - you put the inspection contingency in the purchase agreement. That way, you can safely back out and get your deposit back.
If you just want to hop on another offer, you might lose your deposit.
This is not a rule nor a regulation, but in most cases, the seller opens an escrow. Most likely, this happens because the seller doesn’t want to waste time and wants to choose a reliable escrow company.
Now that you’ve understood what the escrow process is and how much responsibility comes with a role of an escrow agent, we hope you’ll choose wisely who you rely on in your real estate transaction!
When choosing an escrow company in California, it's important to work with a licensed and reputable company. The California Department of Financial Protection regulates all escrow companies in the state, and you can check the status of a company's license on its website.
We are licensed, highly skilled, and believe in Lightspeed Escrow! We are here to make the escrow process faster and more efficient. By using our escrow company, you can have peace of mind that your transaction is being handled by experienced professionals.