Close of escrow is the point during the sale of a property when both the buyer and seller have fulfilled their responsibilities, and the transaction is officially complete.
The term escrow means a contractual arrangement in which a third party agrees to take custody of a sum of money or asset until a condition has been fulfilled. In the case of a real estate transaction, a neutral third party, such as an escrow company, agent, or mortgage servicer, will hold onto the buyer’s earnest money deposit until the closing of the transaction.
Once both the buyer and seller have fulfilled the duties required by law, that money will be disbursed to the seller, and the buyer will take ownership of the property. This is known as the close of escrow.
1. Buyer Provides Earnest Money Deposit
The escrow process begins when the seller accepts an offer and the buyer agrees to put down an earnest money deposit. This deposit shows that the buyer is serious about purchasing the home. Once the deposit is made, the seller will agree to take the property off the market. The deposit will then be put in a third-party account not controlled by either the buyer or seller until the close of the sale.
2. Approve the Seller’s Disclosures
Next, the buyer will receive a seller’s disclosure form, a legal document that includes any undisclosed information about the condition of a property. Each state has different requirements about the type of information needed to be disclosed. But it typically consists of a list of questions with boxes for the seller to check off or provide a simple yes or no answer. There will also be space to elaborate or provide additional information not addressed on the form. The buyer must review the form and agree to the seller’s disclosures to proceed with the transaction.
3. Complete Home Appraisals and Inspections
Even though the seller is required to provide information about the property’s condition on the disclosure form, the answers must also be verified by a licensed inspector. There may be issues the seller is hiding or is unaware of that will be brought to light during the inspection process. After that, the buyer will also want to have the home appraised to ensure the price they offered is fair. If the inspection or appraisal reveals any new information about the condition of the house, the buyer and seller may have to return to the negotiating table.
4. Review all Escrow Documents
Once the inspection and appraisal process is complete, the buyer and seller will review the necessary escrow documents with their respective agents or attorneys. Examples of escrow documents include the transfer deed, bill of sale, seller’s affidavit, mortgage deed, and mortgage application. It’s essential to fully understand these documents before closing and keep an eye out for any errors.
5. Take a Final Walkthrough of the Property
Right before the closing, the buyer will want to conduct a final walkthrough to verify the condition of the property. If any issues needed to be addressed following the inspection or appraisal, the final walkthrough is the time to make sure they were properly handled. Plus, they will want to ensure that the seller has removed their belongings and that no new issues have come up since the inspection. This is the buyer’s last chance to voice any objections before signing the contract, so it’s important they pay close attention and voice any concerns.
6. Meet and Sign the Closing Documents
If everything checks out, the buyer and seller will meet to sign the closing documents. These documents include title forms, escrow statements, the deed of trust, any documents related to the mortgage, insurance documents, and more. In some instances, some of these documents may have already been signed, but anything outstanding must be completed before the sale can close. The buyer will also bring a check to cover the rest of the down payment and closing costs. Once the forms have been signed and money exchanges hands, the deed will be transferred into the owner’s name. This officially signals the close of escrow.
After the close of escrow, the earnest money deposit will be disbursed from the escrow account to the seller’s account, along with the funds provided by the buyer or mortgage lender to purchase the property. The buyer will also receive the keys and be able to move in. But, how soon after the closing this process is officially completed will depend on the circumstances.
For instance, it may take several days after the close of escrow for the seller to receive the funds so that everything can be processed. Likewise, the buyer may not be able to move in right away, depending on the agreement made with the seller. But close of escrow means that the ownership is officially transferred from the seller to the buyer, even if it may take a bit more time for everything to settle.
All kinds of issues can occur during the close of escrow process that buyers and sellers should keep in mind.
Common issues include:
- Problems with the title: There could be an issue with the title that needs to be resolved before closing, such as an outstanding tax lien or an ownership dispute.
- Issues with the property: If an issue with the property is discovered during the inspection or final walkthrough, it could delay the closing until it’s fixed.
- Incomplete paperwork: Missing documents or errors in the paperwork could also delay the closing process.
- Contingencies: Home sales often feature contingencies, and if they are not met in time, it may delay the closing. For instance, the sale may be contingent on certain repairs or upgrades being made, so potential construction delays could postpone the closing.