Escrow & Legally Finalizing Home Purchases
Escrow is a process used to finalize the purchase of a home. An escrow account is held by a neutral third party (the escrow holder) that has the legal capacity to serve this function. You do not necessarily need an attorney to help you with this process unless a complication arises. The purpose of escrow is to collect deeds and money prior to the seller and the buyer exchanging them. An escrow account also can be used to record deeds, handle property taxes, pay off loans, and otherwise assist with the transfer of property. Escrow costs usually are incorporated as part of the closing costs. They generally are less than one percent of the purchase price.
The process of opening an escrow account starts when the seller accepts the offer that the buyer has made. The buyer then gives their agent a deposit check, which is made out to the escrow holder. The escrow account holds the deposit until the deal is concluded, when it is included in the purchase price, or until the deal is abandoned, in which case it likely will be returned to the buyer.
Escrow Holders
An escrow holder can be either an individual or an organization. Most often, it is a title or escrow company, but it can also be an attorney, a real estate broker, or the escrow department of a bank. You can get recommendations from your agent or someone else whom you trust, but you should make sure that you choose an escrow holder that will be available throughout the escrow period. You should prioritize service rather than price in choosing among escrow holders. If the seller does not agree with your choice of escrow holder, however, you probably should simply use their preferred escrow holder, since this should not be a major issue.
In some regions, the escrow holder may be relatively passive and rely on the buyer and the seller to resolve any contingencies or disputes over title between them. In other regions, the escrow holder may play a more active role in checking on the status of the process. They often work with the parties through their real estate agents. The escrow holder remains neutral throughout the process and will not intervene to resolve disputes between the buyer and the seller or make sure that the deal goes through.
Problems During Escrow
The seller has a right to back out of the contract without any penalty if the buyer fails to meet a required term. If they back out for a reason that is not permitted by the contract, on the other hand, the buyer can pursue the seller through arbitration, mediation, or a lawsuit to have them complete the sale and compensate them for their out-of-pocket costs. If the seller simply refuses to move out, the buyer will need to follow the same procedures to evict them as those that a landlord would follow to evict a tenant.
If the buyer backs out of the contract without a legitimate reason, any liquidated damages clause in the contract would apply. This provides the specific maximum amount that the buyer needs to pay the seller for breaking the contract. (Often, you can agree to give the seller an amount less than that.) If there is no liquidated damages clause, the seller can pursue damages from the buyer through arbitration, mediation, or a lawsuit, although determining the appropriate amount of damages can be complicated.
If the seller dies, the contract remains enforceable and must be honored by the seller’s estate. However, the process can become much more protracted if the house needs to go through probate, even if the seller’s heirs want to proceed with the sale. You may want to consult an attorney for advice on whether and how to back out of the deal if it appears to pose a greater burden than you want to handle.
If the seller failed to disclose a defect of which they were aware, and they are unwilling to cooperate in fixing the problem, the buyer can pursue damages from the seller and their broker. If the seller initially fails to disclose a defect but eventually discloses it late in the process, you should consult an attorney to see whether you can back out of the deal or get compensation for the defect. If the house is destroyed or severely damaged during the escrow process, the seller retains responsibility for making repairs and restoring the property to its prior condition. However, if the buyer no longer wants the house, they can likely get out of the deal by refusing to grant an extension for making the repairs.
Closing Escrow
If the parties have resolved any contingencies and are ready to finish the transaction, the buyer will be able to complete the paperwork for closing escrow. You should make sure to handle this process at least four business days before the closing date. Any cash that will be part of your purchase should arrive at the escrow office ahead of the closing. The escrow officer will collect the down payment and the loan proceeds in addition to the documents related to the transfer of the property. They will draft a new deed to transfer ownership to the buyer, which will be recorded at the county recorder’s office. They also will distribute the money in the escrow account to the appropriate parties.
