October 4th//Escrow

Opening Escrow: What You Need to Know about the Escrow Process

Many people have seen the words “in escrow” accompanying a “for sale” sign on a listed real estate property, but what does “in escrow” really mean exactly?

What it means is that the Seller has accepted an offer from a buyer to purchase the property and both parties have entered a process that will be handled by an escrow company. Like with most real estate transactions and unlike most purchases for goods and items, a buyer can’t take possession of the property the day the offer is accepted, while at the same time, the Seller cannot have access to the purchase funds. Therefore, the sale is technically NOT finalized.

Here is what is needed:

  • There has to be a contingency period where the buyer may order inspections on the property to make sure the property is free from major flaws, infestations or debts (relative to the buyer’s level of acceptance).
  • If the Buyer is using a loan to purchase the property, the Buyer will need time to go through a loan application process and give the lender a chance to also inspect the property (since they will have an interest in the property as collateral).
  • Also, the deed to the property must change hands from the seller to the buyer and recorded with the county where the property resides (a process that may also take several weeks to complete).

As you can see, there are several processes (among many others) that must take place before the sale is considered final and the property is considered “sold.” This is where escrow comes in, as the Escrow holder will oversee much of these processes.

Escrow is a neutral third party that will hold the purchase funds on behalf of the buyer (to make sure funds do not go to the seller until the property is transferred to the buyer) and the seller (to show that the buyer is making a commitment to making the purchase). However, it is important to note that Escrow does more than just hold the buyer’s funds.

So how does the escrow process begin?

Once a buyer’s offer is accepted by the seller, the process of escrow starts when both parties agree on which escrow company it wants to use for their transaction. The selected escrow company will then generate a document known as “Escrow Instructions” which will serve as written instructions for the escrow company throughout the entire process on how and when to disburse the purchase funds.

After both parties approve and sign the escrow instructions, the buyer will then proceed to deposit an initial down payment into the escrow company’s trust account (usually representing 3% of the purchase price) for the escrow holder to hold on to. Once the Escrow Holder receives the signed escrow instructions and the buyer’s initial deposit, escrow is now considered “open.” At this point, the listing agent for the home will probably proceed to update his/her advertising for the property to say that the sale is “pending” or “in escrow.”

So what happens next in the process? When does the sale become final and the escrow considered “Closed?”

Well, you will have to tune in to my next blog post.  In the meanwhile, did you get a good idea of what happens when escrow is opened? If you are a real estate agent, would your clients benefit and become more comfortable from knowing about this part of the home buying process? If you have any comments or feedback, I would love to hear from you!


**One last thing: Did you know that the word “Escrow” comes from the old French word “escroe,” which means scrap or roll of parchment? Appropriate considering the terms of holding funds in escrow would be documented in writing!

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