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As a seller, more than likely you may have already gone through the process of escrow, possibly in a previous sale or the purchase of a home. And if you’re new to the whole process then you’re probably wondering what escrow means. 

Either way, it’s important to note that the process of escrow now is way different than it was even 5 years ago. This is why it’s vitally important to familiarize yourself with the most current escrow process prior to putting your home on the market.

Today, when you enter into escrow as a seller this means you have accepted a buyer’s offer to purchase your home. In short, the purpose of escrow is to collect all the documentation to guarantee that a legal transaction has been completed and agreed to between a buyer and you the seller. 

The escrow company who does this is also responsible for collecting the money that the buyer is paying for the home and then delivering it to you the seller. To simplify, escrow collects money and documents.

How does escrow work when selling a house?

man signing a documentThe start of escrow really happens when the escrow company receives a purchase agreement signed by the buyer, seller, real estate agents and brokers. Next, the buyer then has 3 days after acceptance to deposit what’s typically a “3% earnest money deposit” to the escrow company showing good faith in the buyer’s interest in the home. *It’s important to note this deposit is protected for the buyer by 3 major contingencies most of the time. They are as follows:

  1. Physical inspection contingency
  2. Appraisal contingency
  3. Loan Contingency

These contingencies typically have set dates agreed upon in the purchase contract in which the buyer has to remove (in writing) by those particular dates.

Inspection contingency: In today’s market buyers will hire a general inspector and possibly a few other specialists, to dissect all aspects of your home to get a full understanding of its condition. Based on the inspection reports provided by the professionals a buyer could ask for repairs to be made, a credit from you the seller, do nothing or cancel the transaction. 

In response you as a seller can do 1 of 3 things, make repairs, give a credit or do nothing. There is a good chance the buyers will ask for some sort of credit back which is why it’s very important the seller have a strategy for handling these inspections. For our clients we focus on 3 very important aspects of the inspection and and from those findings we put our sellers in the driver’s seat when negotiating any buyer request.

The Appraisal contingency: This is where an appraiser (usually mandatory by the lender) is hired by the buyer to come to the property and compares its value to other recently sold homes nearby. This helps give the buyer and the lender confidence that they didn’t overpay for the home as most of the time the lender won’t make up the difference between the appraised value and the purchase amount. 

If the home were not to appraise, then a buyer could ask you as a seller to come down from your price, negotiate the difference, or cancel escrow. We actually use a technique here with the appraiser that helps ensure our clients’ homes have the highest chance of appraising at value. It has been incredibly consistent.

The loan contingency: Once the buyer receives a conditional approval for their loan, they then would remove their loan contingency (what is usually the final contingency). Removing all contingencies in effect removes the buyers’ protections to their deposit if they were to cancel or breach contract. 

What to look out for here is that one day before the loan contingency is up lender may say unfortunately these buyers do not qualify for the loan. It happens… and unfortunately for a seller that means potentially 20 additional days off the market that your home was not exposed to other qualified buyers. Here we also use a few different techniques that helps our clients dramatically decrease the chances of losing the deal this way.

What can go wrong in escrow

person looking into computer with hand on head thinkingObviously like anything else there are plenty things that could go wrong during escrow… One to look out for is when buyers won’t remove their contingencies on the dates specified in the original purchase contract. This is dangerous for you, the seller, for 2 reasons:

  1. You don’t know if the buyers are confident they can close escrow any more.
  2. In the case the buyers do eventually cancel, any potential buyers that may have been interested in your home before will have a higher chance of finding something else the longer your current buyers wait to perform on their responsibilities.

An experienced Realtor knows how to safeguard any potential time-wasting buyers from doing just that.

Another important step of escrow for the sellers is disclosures. This is where many sellers can find themselves in legal trouble even years after the property sold. Real estate for most people is their biggest investment and so if anything were to go sour there is a very strong chance this is where it would happen.

As an example, let’s say you as an owner had a leak in your water heater 5 years ago which you fixed, replaced, and never had a problem with sense. So, you then sell your home thinking it’s not even worth mentioning in disclosures or you forget about it entirely. Again, the problem has been resolved and working great for 5 years. 

Now the buyers have moved in, what we didn’t know about them before is that they are hypoallergenic and after a few days they notice they’re having trouble breathing.

The new owners then hire a mold inspector who determines that there are significant traces of mold near the wall where the water heater that leaked was fixed over 5 years ago. You as the seller are likely liable for failure to disclose that previously repaired leak. You could be responsible for mold testing, remediation, repairs, any health problems obtained, distress, relocation fees and more.

As you can see having a professional to help you understand what to disclose and how to disclose an absolute necessity. Once more this is another area where we specialize as helping you understand everything you need to disclose and how to disclose it is what will save you time, money, energy and potentially years of worry.

Do you get escrow money back at closing?

At the end of escrow, the buyers will fund the purchase with the remainder of their down payments and their loan contribution… This goes to the escrow company who then sends the remainder of the proceeds after closing costs (which typically includes escrow payment, real estate fees, title fees, taxes and a few other necessary costs) to you the seller after escrow has recorded the purchase with the county.

The bottom line

There are many integral parts of the escrow process that we are not covering here however, these are some of the biggest steps you’ll cross along the way. To find out what else is involved or to learn more about techniques we use to ensure a smooth escrow, leave your information here and we’ll make sure you have a full grasp of what to expect when selling your home.