For many buyers and sellers (and some real estate agents), the escrow process is a "Confusing process where you sign a million documents that you don't understand, but you know you have to because “they told you so”. This is partially because real estate agents and escrow officers like to toss around phrases FILLED with three-letter acronyms when we talk about the transaction. We say stuff like “Yep, didn’t get the CIDs from the HOA, got neither SI, and the buyers VOE is still in limbo”. We say this stuff ‘cause we think we sound cool. Sort of like CSI, but no DNA testing. It doesn't need to be this way, however, and in fact it really shouldn’t be. You should understand every document that you sign which is not so hard to do, and (believe it or not), the escrow process is actually designed to simplify the real estate transaction.
In very simple terms, a Santa Rosa or Windsor real estate transaction looks like this; the seller has ownership in real property (represented by a deed to the property). The seller is willing to trade this deed for the buyer’s money. The buyer has money which they want to trade for the deed to the property.
How do they go about doing this? Should the seller first sign-over the deed to the buyer and hope the buyer actually gives them the money? Should they each hold their money/deed in their left hand and simultaneously take the others with their right hand? What if there is more involved than just the money and a deed? Maybe they should have a neutral third-party standing between the buyer and seller acting as the conduit for this transfer? We just invented the Escrow Process used in Santa Rosa, Windsor and the surrounding area.
In very simple terms, the neutral third-party (called the Escrow Officer) takes the signed deed from the seller along with a list of things that the seller wants the Buyer to do BEFORE the buyer can have the deed. Meanwhile, the buyer places their money in the hands of the escrow officer and also provides a list of things the seller must do BEFORE the seller can have the money. These lists of requirements for the buyer and seller are called “Escrow Instructions”. Once BOTH the Buyer and Seller have each completed all the items on their respective lists, the Escrow Officer trades the money for the deed. The whole thing is only slightly more complicated than this as you will read in the next few sections, but the basic fundamental concept is accurate. All buyers and sellers of real estate in Sonoma County go through this same basic process.
NOTE: at several locations in the following text there is reference to the “CAR RPA-CA”. This is a very common Purchase Agreement in the Santa Rosa / Windsor area, which was created by the California Association of Realtors (C.A.R.). The timelines noted are the DEFAULT times, any of which may be modified by the Buyer or Seller while completing and negotiating the Purchase Agreement.
California is referred to as an “Escrow State”. This differentiates us from states that use lawyers to facilitate a real estate transaction. The word Escrow looks a lot like Escargot, but does not involve snails, rather “Escrow” is used to describe the process when both the Buyer and Seller satisfy their contractual obligations to each other for a real estate transaction under the guidance of a third-party. The escrow process is overseen by a neutral third-party called the “Escrow Officer”. The escrow officer also acts as an agent for the lender and coordinates the interaction between the Buyer (or borrower) and their lender. The Escrow Officer is the “traffic cop” in the transaction (except they don’t have guns, or a badge, or drive fast, but they all like doughnuts…), they make sure that every party to the transaction performs their required responsibilities in strict conformance with the escrow instructions. The escrow officer will contact each party in the transaction as necessary to inform them of items required, or approvals needed during the term of the escrow, and will coordinate the document exchange and distribution of funds. If you are represented by a licensed real estate broker, most of the communication from the escrow officer will be done through your broker who will help you meet your escrow requirements.
If you have participated in a real estate transaction in other States, most notably the East Coast, this same process is often called “Settlement”. Also, in some States, the Buyer and Seller each hire the services of a lawyer to perform the escrow process. In California, and specifically in Santa Rosa, Windsor and the surrounding areas, most people do not use a lawyer for a typical residential transaction, but rather rely on the escrow officer to manage the transaction. That said; if you like hanging around with lawyers, hire one. Tell them “Nobody got CIDs from the HOA, and the buyers VOE is still in limbo” and then watch if they go chase an ambulance.
In Sonoma County, and in particular the Santa Rosa, Windsor and the surrounding area, it is most common to use a title company as the escrow agency. There are approximately nine major title companies currently offering this service in the Santa Rosa area and each company has several locations to make it easier for the clients. The selection of the escrow company has traditionally been the buyer's choice, however in recent times, I have seen many Multiple Listing Service (MLS) posts where the seller has “pre-selected” a title company and started the escrow process in an effort to reduce the length of the escrow. To me this seems a little weird because unless there is strong possibility of an easement or boundary dispute (rural property) this does very little to speed the escrow process. Maybe it’s a fad. Maybe there are bananas involved.
The only way the Seller can demand the use of a specific title company is if the Seller PAYS for the title fees. If the Seller demands the use of a specific title company but does NOT pay the fees, that is a RESPA violation and can mean big fines for the Seller. So, in most cases, the Buyer has the final say in what title company to use, regardless if the Seller has opened escrow somewhere.
That said, all title companies in Sonoma County are bound by the same ethical and legal requirements, so their impartiality is assured regardless of whether the Buyer or Seller selects the company. Remember that the selection of the title company is a negotiable item (even if a pre-escrow is opened by the seller) and if you have a strong preference for a particular title company, you can negotiate the use of this company regardless of whether the other party has made prior arrangements. See my article on The Art of Negotiation for a tip.
Most people think that the escrow process starts when they deliver the signed Purchase Agreement to the escrow officer. This step is called “Opening Escrow”. However, the escrow “process” actually begins when you create the original purchase agreement between the buyer and the seller. In a Santa Rosa real estate transaction, the purchase agreement spells out the conditions, and responsibilities that both the buyer and the seller have agreed to. It is this document that the Buyer and Seller will refer to throughout the escrow to determine if all parties are performing their agreed to obligations. For this reason, remember that it is important to pay close attention to the preparation of this purchase agreement, and that you understand every one of your responsibilities as outlined in this document. At a minimum the Purchase Agreement must address the following topics;
I have found that for most escrows in the Santa Rosa / Windsor area, the CAR RPA-CA works very well for creating the purchase agreement and escrow instructions. It is also perfectly sized to line bird cages, should one decide that the Seller is asking too much or the Buyer wants the darn house for free. Best of all a single CAR-RPA is a total of about 40 pages including carbons, so you can also line your friend’s cage. If your friend lives in a cage. (I’m just trying to keep you awake, OK?).
In addition to the mutually signed purchase agreement and joint escrow instructions, the seller is also typically required to provide the following documentation to the escrow officer;
In addition to the mutually signed purchase agreement and joint escrow instructions, the Buyer is also typically required to provide the following documentation to the escrow officer;
When you buy or sell a home you (or your agent) will provide the escrow officer with the signed purchase agreement and any additional escrow instructions which have been created. These should be provided to the Escrow Officer within 3-days of signing the purchase agreement.
In addition to the usual “contact information” for all parties (and their agents), the escrow officer will also ask for the seller’s "Statement of Information" (SI for you CSI fans). The statement of information is simply a document containing your "vital information" and helps to identify you, and differentiate you, from every other person with a name similar to yours. This information is critically important in the title search and issuance of title policies. You may not be the only person using the name “Barack Obama” and the SI helps differentiate between YOU and the “Other” Barack Obama.
For the Buyer, the escrow agent will also need to know the full contact information for the buyer's lender, as well as how the buyer would like to take title to the property (called “vesting”). The lender will require you to fill-out a Verification of Employment (VOE) to confirm that you really DO work for “The People of the United States” like you said you do.
The Buyer’s Earnest Deposit” is also placed into the escrow account either by the real estate agent or the buyer directly.
The escrow officer will want to know if there are any credits agreed to between the buyer and Seller. The escrow officer will also need to know if there are any real estate commissions to be paid, and if so, how much, to whom will they be paid, and who is paying them. These are all usually spelled-out in the Purchase Agreement.
Once you have officially “Opened Escrow”, on your Santa Rosa property, the escrow Officer creates a file to manage your transaction and gives that file a number, called the "escrow number". This is a number that you will want to keep in a handy place because it makes referencing your particular transaction much easier whenever you are talking with the escrow company.
As soon as escrow opens, the Seller (or their agent) should contact the Home Owners Association (if one exists) and order copies of the HOA Docs for the Buyer’s review. The CAR RPA-CA default states that the seller is required to request this information from the HOA within 3-days of signing the purchase agreement. There is typically a cost for this information which is normally paid by the Seller at the time of the request.
Once the Escrow Officer has enough information on the property, they will order a preliminary title report. The preliminary title report is a review of the public records regarding the property and from these records the report is created within about three days. The CAR RPA-CA default states that the Seller must provide the Preliminary Title Report as well as all other “Seller Disclosures” to the Buyer within 7-days of signing the purchase agreement. Read this for more information on the Preliminary Title Report.
Early in the Escrow process, the Escrow Officer will contact the Buyer’s lender or mortgage broker and notify them that an escrow has been opened and provide the required contact information. The Escrow Officer will also contact the Seller’s lender and request a Beneficiary Demand and/or a Beneficiary Statement.
A Beneficiary Demand is a document from the Seller’s lender stating the loan pay-off and what kind of information and fees the lender will require to release the seller from debt on the property. The Beneficiary Demand has an expiration date, so if for some reason the close of escrow is extended, this may require a new, updated Beneficiary Demand from the lender. This is the document the Escrow Officer will use to calculate the seller’s loan-payoff.
A Beneficiary Statement contains much of the same information as the Beneficiary Demand, but does not include the information (such as fees and a calculated pay-off date) required to pay off the loan. A Beneficiary Statement has much of the same information as a payment coupon and is often used for a buyer assumption of the Sellers loan, or for a second mortgage. The Beneficiary Statement used to be referred to as the “BS”, but when the escrow officer requested the Seller’s BS, they got more than they bargained for. BS is no longer used to refer to the Beneficiary Statement, and is now more commonly used in reference to certain statements made by California licensed real estate agents.
The buyer should be performing all of their inspections of the property during this time. The CAR RPA-CA default allows the Buyer 17-days from signing the purchase agreement to complete all inspections and release any conditions on the purchase. 17 days is not a lot of time, so both Buyer and Seller need to be very aware and diligent in the execution of their responsibilities as required by the purchase agreement.
Once the complete list of required documents and actions are created, the Escrow Officer will “Process” the property file. The escrow officer will obtain any information required to clear title defects or satisfy existing liens and encumbrances against the property or parties to the transaction. During this time, the Escrow Officer will contact each party to the transaction and let them know about any information or documents required of them.
The buyer is required to sign off on the "Preliminary Title Report" and all other Seller Disclosures and notify the seller of any unacceptable items in the report or the disclosures. The buyer will also be finishing any other required inspections and will begin releasing their “conditions” as they are able to. Any negotiations that are required as a result of the buyer's investigations will now be completed between the buyer and the seller, and changes as a result of these negotiations will be reflected in the escrow documents. The CAR RPA-CA default states that the Buyer must complete all inspections and investigations and return to seller signed copies of Statutory and Lead Paint Disclosures within 17-days of signing the purchase agreement.
The escrow officer will now collect any documents previously requested from all parties and verify completeness of information and the required signatures. The lender will place the Buyer’s new loan documents into escrow and request the Buyer’s approval and signature. The Escrow Officer will follow the lenders instructions and requirements for finalizing these documents with the Buyer. The escrow officer will order the Owners and Lender's Title Insurance policies from the title company. For more info on these two policies, read my post on Title Policies.
The Buyer must obtain the required Hazard Insurance for the property and provide documentation to the Escrow Officer of such. With the many changes we have seen in the risk market over the last year, I strongly recommend that Buyers get a quote from at least one company as soon as practical. Some insurance companies are no longer writing policies for certain types of properties and/or may have ownership requirements that some buyers cannot meet. The key is start early.
Side note: When changing insurance companies recently, I was asked the date and location of my FIRST driver’s license. Say What? That was so many years ago, I don’t even think they HAD drivers licenses back then. At least I know I didn’t… The point is, GET THIS EARLY. It’s a weird world. You have been warned.
The Escrow Officer makes a final review of all conditions and verifies they have been met, and will then calculate the pro-rated items such as taxes, insurance and rents, and will prepare the Settlement Statement for both the Buyer and Seller.
The Settlement Statement (sometimes called the “closing statement), will show in detail every cost and payment for the buyer or seller and represents the complete financial picture of the transaction. This document is essentially the ‘financial bible” for the transaction and will be used for reference in answering any question about costs, both during and after close of escrow. This statement will be available for both the Buyer and Seller to review before signing.
Typically within five days prior to close of escrow, the buyer will perform the final walk-through on the property to ensure that the seller has maintained the property and that the over-all condition of the property is as expected.
The Escrow Officer will now request that the Title Insurance Policies be drawn and will arrange closing appointments for all parties to sign the necessary documents.
The Buyer and Seller in a Sonoma County escrow typically have different signing appointments with the Escrow Officer. If you have a good real estate agent, they will go to this meeting with you and can provide assistance through the entire process. If they are reluctant, offer them bananas. This meeting can go as fast as 30 minutes, or can take several hours. It all depends on how well prepared YOU are! During this meeting, the escrow officer presents each of the documents appropriate to you and requests a final review, approval and signature. There are quite a few documents involved in this process including the settlement statement, HUD-1, a copy of the escrow instructions, loan documents, grant deed, deed of trust, the fire insurance requirement form, any truth-in-lending disclosure statements, and any other documents created in the process. This is where you feel like you are signing your life away. Take it in small bites and use your real estate agent and escrow officer for guidance. I suggest that you ask for a copy of the closing documents early and go through them at home before the signing. It can take the pressure off. If you have bananas, your real estate agent may even join you.
The HUD-1 for a Santa Rosa escrow is similar to the Settlement Statement in that it shows a detailed layout of both the buyer and seller's costs in a "debit and credit" format. While this document has essentially the same information as the settlement statement, it is a format that is required by most lending institutions. When having a conversation with your lender about the escrow they will typically make reference to the HUD-1. In most cases you'll be able to obtain the same information from either document.
If the Buyer is not planning to wire their money to the escrow account, they will be required to bring a certified or cashiers check to the escrow officer to cover final closing costs, prorated items not included in the loan, and any additional funds required to obtain the loan. For a Santa Rosa or Windsor escrow, it is important that these funds are deposited into the escrow account at least one day prior to the day of closing. Each party is required to sign their documents in front of a notary and must provide proper identification such as a driver's license or passport to prove their identity.
The most common problems that occur during the signing process are issues associated with the buyer’s loan documents. This may be a disagreement on fees, or a buyer's misunderstanding of loan document. Having (or insisting) that a representative of the lender participate in the signing process can typically provide a quick solution to these issues. If your lender (or mortgage broker) cannot attend the signing, you should obtain a copy of the documents prior to the signing and review them with your lender either in a separate meeting or over the phone. Bananas don’t motivate lenders like they do real estate agents, but I think shiny balloons work pretty well, so try that with a reluctant lender. Sometimes Monopoly money works too, just make it look a little worn.
Buyers; If your lender does not participate in the signing process, remember that the lender documents which the escrow officer places in front of you to sign, are from the lender not the title company. The escrow officer “may” be able to tell you what the form is about, but in many cases, they may not be familiar with the form at all, because it is strictly a requirement from the lender. If you don’t like the document, believe it is wrong, or don’t understand it; don’t yell at the escrow officer. Escrow officers in Santa Rosa and Windsor are doughnut-packing-traffic-cops and they don’t take well to being yelled at. Yell at your lender, it’s their document, not the title company’s. This is a good reason to have a lender representative at the signing to answer any questions that may come up.
After the documents are signed by buyers and sellers, the Escrow Officer performs a final review of the escrow instructions and all required documents to assure completeness. The escrow officer will prepare document “packages” for each party to the transaction and will include all documents that each party requested or may need for their records of the transaction. For the Buyer, this includes a package of the loan documents which are sent directly to the lender for their final review and approval. The lender will typically review, approve and fund the buyer’s loan within 24 to 72 hours after receipt. Close of Escrow cannot occur until the escrow officer receives funding from the lender.
Once the lender deposits funds into escrow, the Escrow Officer (with assistance from title personnel) will record the deed, deed of trust and other documents required to complete the transaction. These documents are recorded with the Sonoma County Recorder. “Close of Escrow” officially occurs when the documents are recorded with the Sonoma County Recorders Office. Once the documents are recorded, the buyer is then the owner of the property and the Owner's and Lenders title policies can be issued.
After recordation, the escrow officer then disburses all funds from the escrow account in accordance with the written escrow instructions. This includes paying off the Seller's mortgage and giving the Seller any net proceeds, paying the broker commissions, paying any required property taxes, recording fees and making any other payments required as a condition of the loan approval or to satisfy other terms of the purchase agreement.
The Escrow Officer then closes the escrow by preparing the final settlement statements, making copies for each party and delivering the appropriate statements, funds and remaining documents to the principals, agents and/or lenders.
The buyer has a number of inspections to complete during the escrow and the seller has a duty to provide a clear title to the property. Sometimes one or both parties cannot, or will not, go ahead with the sale of the property. When this happens, the escrow officer will NOT return any funds or instruments to either party until BOTH parties have signed mutually agreeable cancellation instructions and provided these to the escrow officer. Remember that the escrow officer is an IMPARTIAL, neutral third party to the transaction, and cannot perform any action that is not agreeable to both parties and in writing. For this reason, it does not matter how “illegal” the other party is behaving; until such time as BOTH parties sign instructions, the escrow officer cannot remedy the situation. Also, it is worth noting that escrow companies are now allowed to charge a cancelation fee to cover the costs of services performed up to the date of the cancelation. Not all title companies DO charge this fee, but they can, so you may want to ask.