What Is Escrow?
Escrow is a term used in the process of buying real estate, something lots of people do but nobody really knows how to explain it. Many people just go along with whatever they are told by their realtor because this time is a surge of emotion and a whirlwind.
I am here to explain it as best I can.
First of all let's look at the process of the home purchase.
1. The thinking about buying a home phase.
This is the discovery phase. Thinking about it, maybe going to open houses. Mainly it's finding your realtor, finding your lender and getting pre-approved for a mortgage, talking to your financial advisor and creating a plan and all of that business.
2. The searching phase.
You have your realtor behind you, you have your pre approval, you have your ducks in a row and now you are actively searching for the home you will buy.
3. The offer phase.
You have found the home you want, read through disclosures, done your due diligence, written the best offer you can write, negotiated and the seller has accepted your offer.
If the seller has not accepted your offer you are back to phase 2.
4. The escrow phrase.
Escrow is 2 things.
First, escrow is a term to define the period of time between acceptance of your offer to the house actually becoming yours. In other words when the grant deed is transferred from the seller's name to your name and when that deed is officially recorded with the city.
During this time period you complete any contingencies you might have like financing or inspection. You can visit the property with your designer, contractor, parents…and you are able to do a final walk through of the property 5 days to close of escrow. This walkthrough is not a contingency of the contract but it happens when staging is out so you can verify that the property is in the same condition as when you bought it ( no big damage that was not disclosed…)
During this time period you get homeowners insurance and title insurance. Title insurance protects your interest in the property from an outside claim and if you're getting a mortgage your lender will require a lender's title insurance policy. Think about it, your lender is essentially a partner in this purchase, their name is on title so they need to protect their interest. Makes sense right?
The second thing escrow is is a company that handles this time period. It's the escrow company and in San Francisco we have a few options such as Doma title, First American Title and Chicago title. In San Francisco the escrow company also sells title insurance.
The escrow company is usually chosen by the seller at the beginning of them listing the home. They open a pre escrow and get a preliminary title report and open an escrow account for when they get into contract with a buyer. However, the buyer is actually able to switch escrow/title companies if they want. Usually a good realtor will have an escrow company and an escrow officer they choose to work with.
Your lender will fund the escrow account and once the transaction is complete escrow will disburse the funds to the seller and the real estate agents, and anything else like property taxes or any liens. So you don't write a check to the seller, all the money goes through escrow.
Your lender will send final loan documents with the money to escrow and the buyer and seller will need to sign final documents. Once this is complete and upon instruction of your realtors escrow can record the deed and the deal is done.
Now comes the I'm a homeowner how do I take care of my home and grow my equity phase.