This post explains how escrow helps close deals.
Too many real estate investors take escrow companies for granted. Or, some don’t use them at all.
In 2019, Bigger Pockets reports that some investors simply send the entire purchase amount for real estate directly to the listing agent’s brokerage. Or, make the purchase payment directly to the seller.
It’s surprising that in 2019 some investors continue to sidestep escrow companies to close their transactions.
How an Escrow Company Helps Real Estate Investors
In a previous post, we revealed: “How to spot real estate investment scams”. Sadly, many real estate scams occur across America.
An escrow company looks after the best interests of the buyer and the seller in a real estate transaction. Look at an escrow company as a mediator. They perform the searches of the property’s title to verify if the seller really owns the property. They also search for any liens for unpaid property workers or back taxes owed.
Think of an escrow officer as the one to hold your hand throughout the entire transaction process. This includes how and when to send the purchase money.
In addition, the escrow officer sends you the final HUD-1 Settlement Statement which shows all the costs and fees the seller and buyer must pay in order to complete (close) the escrow process. Explained in detail line by line leaving nothing out.
Got questions about the HUD Statement? Simply call the escrow officer for an explanation.
Never Send Money to the Seller
Escrow laws created to prevent real estate scams produced the concept of an escrow company providing services to ensure neither the buyer or seller fall victims to a scam.
Thus, no need to ever send money directly to the seller. Don’t send the earnest money deposit or the balance of the purchase price to the seller. Never!
You can give an earnest money deposit check to a real estate brokerage who delivers the funds to the escrow company. Or, if the parties agree on using a specific escrow company, a check in the name of the escrow company.
Otherwise, give it to the escrow company.
How an Escrow Company Works in California
The California Escrow Law (Section 17003 of the Financial Code) sets forth the legal framework of what escrow companies do in California.
Very simply, an escrow company accepts deposits of funds, the title deed, and other legal documents (like the Purchase Agreement). Neither the funds nor the title deed changes hands between the buyer and seller. Upon completion of all written instructions the escrow closes.
In essence, the funds and legal documents remain in the escrow holder’s possession. Only when the terms of the escrow instructions fulfilled the funds disperse and title conveys to the buyer.
The principals to an escrow: seller, buyer, lender, and borrower provide the information necessary for the creation of escrow instructions. Most of the time, the real estate agents give the escrow company essential information too. The principals agree to them and sign the appropriate escrow instructions.
The escrow officer then follows the instructions to process the transaction. When all conditions complete, the escrow “closes”. The funds dispersed to the appropriate parties (seller, broker commissions, attorney’s fees, etc.) and title transfers to the buyer.
How Escrow Companies Chosen
Selecting an escrow company involves the principals agreeing on one. When a real estate agent participates, he or she often recommends an escrow company.
Duties of the Escrow Officer in California
The escrow officer must:
- Follow the written escrow instructions;
- Handle the funds and documents according to the instructions;
- Pay all bills authorized in the instructions;
- Reply to requests from the principals;
- Get all required signatures;
- Close the escrow when all instruction terms met; and
- Provide a full accounting in the Closing or Settlement Statement.
Buy Title Insurance
Make sure you purchase a title insurance policy. That’s because the policy protects you from hidden defects in the seller’s title, undiscovered liens and encumbrances, unknown boundary disputes, and other problems.
In addition, mistakes may happen during real estate purchase transactions. Title insurance provides you with protection in case mistakes occur.
What Do Buyers Do During Escrow?
The key to every real estate transaction during escrow revolves around the written escrow instructions. Buyers need to read and understand them. If you do not understand some (or all) of the instructions, ask the escrow officer to explain them.
Understand that escrow officers do not practice law. Unless you hire an attorney to perform the escrow services, escrow officers cannot give you legal advice. If you have legal questions, hire a real estate lawyer to advise you.
In addition, escrow officers cannot advise you about whether this is a “good deal”. Such advice belongs to experienced business and real estate consultants.
When asked to deliver funds to the escrow company, you must provide “good” funds in the manner requested by the escrow officer. For example, a personal check differs from a bank’s certified check (or a cashier’s check) which clear quickly. It takes more time to clear the personal check’s funds delaying the closing.
Most mortgage lenders forward their loan documents to the escrow company before the closing. If you don’t understand the loan documents, don’t ask the escrow officer to explain them. Instead, contact your lender to explain their documents for you.
Finally, at the closing, you will read the Settlement Statement which lists all the charges and credits to you. These include:
- The purchase price;
- The original earnest money deposit credited to you;
- Payments made to existing liens and encumbrances;
- Services fees and costs; and
- Funds deposited by your lender to complete the purchase.
If your account shows more credits (funds) than needed, the escrow company issues a refund check.
If questions arise regarding items in the Settlement Statement, the escrow officer can explain them to you.
Keep a copy of the Settlement Statement for your accountant for income tax purposes.
Hire an Experienced California Escrow Company
Now that you learned how escrow helps close deals, hire an experienced escrow company.
OpenEscrowNow provides you with experienced escrow officers to make your purchase transaction go smoother.
Contact Us to learn more about our escrow services and how we can help you.
Steven Rich, MBA – Guest Blogger
We hope you liked “How Escrow Helps Close Deals”. To learn more about the property management industry check out one of our many Blog Pages.
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