REAL ESTATE TOPICS:  ESCROW

Escrow is the `state of existence’ in trust and control by a selected “disinterested party” to a real estate transaction for the mutual benefit of the “interested parties” and allows for the independent progress to a mutually desired end point.  The escrow “officer” is the person assigned to coordinate and execute the tasks necessary to this end; handling the paperwork and monies associated with processing the sale and purchase of real estate.  They serve as a disinterested party facilitating the transaction guided only by the contractual paperwork signed by all parties with an interest in the contract.  All monies pass through and are distributed by the escrow company.  This practice is designed to protect the interests of all parties involved without bias.

“Escrow” may be “opened”, by any party to a real estate contract – Buyers or Sellers, or by the Sellers’ real estate agent but more typically, by the Buyers’ real estate agent by delivering to the escrow officer a legible copy of the Purchase Contract and any and all related amendments and addenda, along with the earnest money check (made payable to the escrow company.)  A receipt is provided to the agent for the earnest money check and an “escrow number” is assigned for tracking purposes.  This marks the beginning of the escrow period.  The Purchase Contract will identify the desired end of the escrow period, known as the “Close of Escrow” (COE).  This date can be changed by written agreement between the parties to the contract.

The escrow officer then begins “working” the file by creating escrow instructions based on the contractual commitments in the contract and any addenda.  The first step is to order a preliminary title report and commitment for insurance from the selected title company (often affiliated with the escrow company).  Upon receipt of those documents, they provide a copy of them to all parties involved with the transaction (this includes:  Buyers, Sellers, their respective agents, and the lender).  It is essential that all parties carefully review this report to ensure there are no unacceptable issues related to issuing a clear title and providing title insurance.

Also, when applicable, all necessary information is requested from the Homeowner Association (HOA) governing the property to include a copy of their Covenants, Conditions, and Restrictions (CC&Rs), and current status of HOA dues and/or assessments.  These documents must be reviewed and accepted by the Buyers within five days of receipt.

Unless an all cash purchase is being made, the Buyers will need to provide all information about their lender and anticipated loan to the escrow officer.

All pertinent information about the status and payoff amount on the Sellers home loan(s) is ordered.

The escrow officer will remain in communication with both parties’ lenders to help ensure timely receipt of all pertinent information and to facilitate funding of the new loan and payoff of any existing loans.  Keep in mind that it is ultimately the responsibility of the lenders to have the necessary documents and funds to the escrow officer prior to Close of Escrow (COE).  Unfortunately, some lenders have the attitude that they only work for the investors behind the loans.  Buyers must remind their lender of the importance of their fiduciary relationship with them and the importance of timely processing of the loan underwriting and funding.

Buyers must provide the contact information about their selected homeowners insurance (property, casualty, and liability) company to the escrow officer as payment for this will actually become part of the loan payment.  The lender will impound the funds necessary and actually make those periodic payments.  The same thing happens regarding property taxes.  On some loans (when permitted by the lender), buyers may elect to do this themselves rather than have these monies held in an impound account by the lender.

Incidentally, Sellers must ensure that their homeowner insurance remains in force until COE and Buyers must ensure that their coverage begins at COE.  And, for both parties, it wouldn’t hurt to a little overlap in coverage – for the few dollars this may cost.  Should there be a change in the actual COE, both parties should ensure that they are covered.

It is during this time period (within 10 day of contract acceptance – unless otherwise agreed to in writing) that all inspections and discovery will be accomplished by the Buyer with assistance from their agent.  And, in most cases, the lender will order an appraisal of the property.  Financing and the purchase contract are contingent upon an appraisal that supports the agreed upon purchase price.

During the escrow period, it is the responsibility of the respective agents to keep the escrow officer supplied with copies of any documents generated related to the transaction.  This may include: copies of any termite reports, home warranty information, amendments and/or addenda to the Purchase Contract that may be generated, the completed Buyers Inspection Notice and Sellers Response (BINSR), and any other information or communication between the parties that may be pertinent to the transaction.

Buyers will also need to tell the escrow officer how they wish to “hold title” to the property.  A discussion of ways to hold title in Arizona can be found in the article entitled Property Title Options.  It may be advisable to consult an attorney, accountant or other professionals if a confident decision cannot be made about this important matter.

The agents and the escrow officer will coordinate with all parties to schedule appointments for both Sellers and Buyers to sign all documents just prior to COE.  Unlike “Settlements” in some other States, contract signings in Arizona are scheduled at different times for the buyers and sellers.  Depending on the circumstances and the location of the parties, the Sellers often sign documents first, followed by the Buyers.  If either of the parties are out of town, signing can be accomplished by overnight shipment of documents.  Telephone assistance will be provided by the escrow officer as needed.

All parties to the contract must bring valid photo identification for Notary Public purposes.  Also, all monies will only be accepted in the form of a cashier’s check.  No personal checks are accepted and they won’t even consider cash.  The escrow officer will identify the exact amount of money that will be needed.

The escrow officer will prepare all closing documents to include settlement statements (known as the HUD-1) for both parties.  And, they will coordinate and prorate and pay HOA dues, assessments, lien payoffs, homeowner insurances, other payoffs and payouts, home warranty, termite inspections, home inspections, commissions, and any and all monies due.

The escrow officer (or their assistant) will conduct all signings walking both parties through and explaining all documents.  Copies of all signed documents are provided to the parties to the contract.  All monies are accounted for on the “HUD-1”.  Monies are collected and distributed from and to all appropriate parties and vendors that are to be paid out of escrow – to include the listing real estate broker. 

If a Power of Attorney is going to be used, this must be discussed with the escrow officer in advance to ensure that it is in an acceptable form and that there is lender approval for doing so.

These signings are typically conducted a day or two prior to the scheduled COE.  The signed lender’s paperwork usually needs to be sent back to them for final review and approval prior to actual funding.  Occasionally there are delays – so allow some flexibility in your plans about receiving monies and/or keys and possession of the property.

COE is defined as “Recordation” of all appropriate documents including the deed.  Until this happens, ownership does not transfer.  The escrow officer will record when all the paperwork is in order and they are in receipt of certified funds necessary to close the transaction.  Upon notification from the escrow officer of recordation, the real estate agent will turn over the keys to the property.

In other locations around the country, especially back east, it is customary for the parties to the contract to sit across from each other at a table, sign documents and exchange money for keys.  It just doesn’t work that way in Arizona.  There are cases when delays occur.  Many times it is because the lender is unable to deliver funds as scheduled.  There can be other types of delays as well.  Keep in mind that there may be dozens of people, working for many different companies involved in this process.  There are plenty of opportunities for missed appointments, miscommunication, dropping the ball, unforeseen delays, unexpected technical difficulties, failed faxes and emails, courier delays, etc., etc.  Though most of the time things go as planned, COE can be delayed for hours or days.  Buyers should plan accordingly.  For example, if COE is scheduled for Friday at 4:00 pm and the loan does not fund on time, it could be delayed until Monday at noon – or later.  Scheduling the arrival of possessions in a moving van at 4:00 pm on Friday and not having the keys to the property will obviously be a problem.  Real estate agents cannot allow possession until recordation of documents, including the deed, and transfer of ownership.

So, this is going to be a busy time with lots of responsibilities to fulfill by lots of people.  It can be very stressful if you let it be.  Stay calm, pay attention, communicate clearly, make notes and schedules, complete tasks in a timely fashion, and take advantage of the advice you receive from the professionals involved in this process.  Before you know it, you will be enjoying your new home.

DISCLAIMER

John P. Hale is owner and Designated Broker of Touchstone Residential Realty, Inc., 2485 West Tom Watson Drive, Tucson, Arizona 85745.  He has been a residential real estate agent in the greater Tucson Metropolitan area since 2000.  In addition to being licensed as a Broker rather than a salesperson, John holds the following designations awarded by the National Association of REALTORS^®:  ABR – Accredited Buyer Representative, ASR – Accredited Seller Representative, CRS – Certified Residential Specialist, and GRI – Graduate Realtor Institute.  And, John is among the very few that have been named, MRE – Master of Real Estate by the Arizona Association of Real Estate.

Please note that this article was written by him to reflect the author’s opinion of good practice at the time of its’ writing for the general benefit of those considering sale or purchase of residential real estate, it is not intended as definitive legal advice and you should not act upon it as such without seeking independent legal counsel.  Frequent changes in the law and standards of practice may cause this information to become outdated and no longer applicable or even incorrect.