John M. Lee: Escrow Can be a Complex Process

How many times have you heard horror stories about the difficulties and nightmares associated with escrows? Newspapers and people involved will dramatize these situations because they make good stories.

If the transaction was smooth and easy, people do not make a big deal of it and there is no story to report. Anticipating what can come up and being prepared for it can minimalize escrow problems.

The California Financial Code (Section 17003) defines escrow as follows:

"Escrow means any transaction wherein one person for the purpose of affecting the sale, transfer, encumbering, or leasing of real or personal property or any other thing of value to a third person to be held by such third person until the happening of a specified event or the performance of a prescribed condition, when it is then to be delivered by such third person to a grantee, grantor, promisee, promisor, obligee, obligor, bailee, bailor, or any agent or employer of any of the latter."

In essence, escrow is a place where the money is held and where the money and documents exchange hands after all the terms of the contract have been fulfilled.

After the contract is ratified, signifying that the price and all the terms have been agreed upon, an escrow is opened. The initial deposit is sent to the escrow company. In northern California, the title insurance company also usually acts as the escrow company.

The title insurance company will search records to insure that the sellers are indeed the owners of the property and to determine who else has claims or interest in the property. The company summarizes its findings in a Preliminary Title Report.

Before closing the transaction, the title insurance company makes sure property taxes are paid, the seller's mortgage loans are paid off and that there are no liens or judgements against the property before it is transferred to the new buyers. In effect, they are guaranteeing clear title to the buyers so that they can sell it in the future.

If after purchasing the property the buyers find there are other claims against the property, they then have a claim against the title insurance company.

The sellers or their agents in the meantime will need to perform on their end by following through on their agreements in the contract.

This often means ordering the Report of Residential Building Record, or 3R Report, obtaining an energy and water conservation inspection and certification of the property, making sure that smoke detectors are up and working, performing the termite or roof repair work as required, ordering the loan payoff and packing in anticipation of the move.

While all this is going on, the buyers or their agent orders the inspection reports and applies for the loan at the same time. When the inspection reports are done, if there are any damages, there is typically a second round of negotiations. After everything has been agreed to, an increased deposit is usually put into escrow.

At the same time, the buyers have completed and submitted a loan package to the lender, who will check the buyer's credit history, employment history, salary and bank deposits. The lender will also send out an appraiser to give him an estimate of the property's value. If everything is in order and the buyers qualify for a loan, the lender will give a loan approval notice to the buyers.

Before closing, the buyers will also need to get fire insurance to cover the property after the close of escrow. Once the loan is approved, the lender will send the paperwork to the escrow company for the buyers to sign. The documents are usually signed at the title company.

The escrow company requests funds from the lender and once the transaction is complete, the Grant of Deed is recorded and the buyers become the owners of the property.

On a typical transaction, escrow will take about 30 to 45 days, with the loan process taking the longest time. The complexities in escrows lie in the fact that all these things are taking place simultaneously. If any one of these items goes wrong or is not done in a timely manner, it can affect the whole transaction, leading to a delayed closing and frustration of all parties involved.

John M. Lee is a top-selling broker at Pacific Union. For questions about real estate, call him at (415) 417-6231 or e-mail isellsf@aol.com.