Whether you're in contract to buy or sell a home or property, you're probably eager for everything to go smoothly during the escrow period and its culmination, the closing.
Even though both buyer and seller are likely to have some combination of professionals by their side, possibly including a real estate attorney, real estate agent, and representatives of the lending bank(s), it's important to understand the basic mechanics of the escrow period and closing.
What Is the Escrow Period?
The days and weeks in between the contract signing and the closing (which date is usually specified in the purchase contract) is in most U.S. states referred to as the "escrow period." It usually lasts between 30 and 60 days (or less if the buyer pays all cash for the property).
The home buyer will be particularly busy during this time, depending in particular on what buyer contingencies were placed into the contract. If, for example, you are a home buyer who added an inspection contingency, then you will need to hire an inspector, review the inspector's report, negotiate over any needed repairs, and perhaps even decide whether to cancel the contract based on the extent of the home defects the inspector found. In addition, you will need to work on getting title insurance and homeowners' insurance.
If you are the home seller, you'll need to be responsive in allowing access to the property for inspections, dealing with any liens that the title search turns up (for example, if you still need to pay off a home contractor who filed a mechanics' lien), and more prosaically, getting ready to move all your personal property on time. Also, if you added any contingencies to the contract, such as that it's canceled if you can't find a home to purchase and move to within a certain time, you'll need to take action per the agreed-upon terms.
The other professionals involved in the transaction will also be busy. The buyers's mortgage lender, for example, will likely order an appraisal of the property, and perform its final review of the loan in preparation for approval and issuance.
Escrow Company's Role in the Closing
The typical real estate sale contract names an “escrow agent,” "title agent," or “escrow company,” which is simply a third party that will help to safely bring about the exchange of money for title to the property. Escrow instructions tell the agent how to hold and care for the relevant items.
To understand what the escrow agent does, imagine that you want to buy a rare diamond. You don’t want to give the seller cash without proof that the diamond is real; the seller doesn’t want to give you the diamond without first receiving the cash. An escrow agent solves this problem by holding the cash and the diamond until the condition—the independent verification of the diamond—is met.
When handling a home sale, an escrow agent usually does some or all of the following to bring about a successful exchange:
- hold the buyer’s earnest money check until the closing
- order a title search (to make sure that the seller has clear title to the property)
- hold the money that the bank has loaned the buyer
- obtain and hold a deed from the seller transferring the property to the buyer and arrange for the deed to be recorded in the appropriate county office or agency at closing, and
- calculate the amounts owed by both buyer and seller for things like property taxes and homeowners' association transfer fees, and track the actual payments.
A word of caution: An escrow agent is typically not an attorney, and so can’t tell you how the deal is progressing or advise you as to whether your transaction is being handled correctly. If disputes arise over the contract terms, the money to be transferred, or someone's inappropriate actions in the course of the deal, you might need to get help from an experienced real estate law attorney.
What Is the Closing?
Actually closing a real estate sale is when the deal is completed and both parties get what they bargained for—money for the seller and a home for the buyer. For the closing to proceed, all issues regarding matters such as financing and insurance will need to have been resolved already.
Most likely, the sales contract contains a closing date, which is when (assuming all the prerequisites have been dealt with), the final papers are signed, money changes hands, and the title document now showing the buyer's name as owner is recorded in a local government office. It’s the date the buyer becomes the owner of the home.
The actual closing typically requires some in-person meetings, but not necessarily the buyer and seller in the same room at the same time. More and more parts of it can be handled electronically, however. Your real estate agent or escrow company will be well acquainted with the practices in your area.
Can the buyer move into the house on the closing date? Not necessarily. The sales contract should state when the seller is to move out and the buyer is to take possession of the property. In most cases, the buyer takes possession at closing, but the parties can also negotiate alternatives, such as the seller remaining in the home for a period of time, until he or she can close on another home purchase or complete the construction of a new home.
Protections for the buyer may also be reflected in an escrow arrangement, such as money being held in escrow to be paid to the buyer if the seller remains in the home longer than agreed.
The escrow agent will explain what form of payment it will accept for any parts of the purchase price that the buyer is paying in cash; perhaps a cashier's check or wire transfer, unless the contract provides otherwise. In today's paperless world, wire transfers directly to escrow agents are increasingly common.
In addition, if you are the buyer and have taken out a mortgage to finance the purchase, you must be given certain disclosure statements as required by the Real Estate Settlement Procedures Act (“RESPA”) and its many subsequent amendments. RESPA is a federal law designed to provide clear disclosure of closing or “settlement” costs and to reduce the amounts buyers are required to deposit in mortgage escrow accounts. (Mortgage escrow accounts are a sort of forced savings account, in which the lender collects prorated amounts from you as an add-on to your monthly mortgage payment, then later uses this money to pay your property tax and insurance bills. They are sometimes required by a bank, especially for first-time buyers or those making low down payments, where there's concern that the buyer might not be able to afford future payments.)
At least three days before the closing, the buyer should receive a statement showing all closing costs. As the Consumer Financial Protection Bureau notes, the purpose of these three days is to give the buyers/borrowers time to double-check the costs to ensure that it matches their records. If the bank requires setting up a mortgage escrow account, at the time of closing the buyer will receive an itemization of the estimated property taxes, insurance premiums, and other charges that the lender will need to pay from the account during the first 12 months of the mortgage.
What If the Real Estate Deal Doesn't Close?
Not all home purchases successfully close. Perhaps one or more of the contingencies weren't met, and the parties couldn't delay any longer or negotiate around them. An unmet contingency means the deal is over without anyone being legally in breach of contract.
Or, perhaps someone pulls out of the deal, thus breaching the contract. Buyers who do this stand to lose whatever earnest money they put down (although this too can be negotiated, especially when the buyers have acted in good faith and the deposit was substantial).
If the seller pulls out of the deal, the buyer's main recourse is to sue for monetary damages. Suing for "specific performance," that is, to force the sale to go through, is not likely to succeed in court.
Questions for Your Attorney
- How much will it cost for you to represent me at closing?
- A seller won’t sell me the house unless I agree to use the escrow company of his choice for the closing and to pay for it. How are such arrangements customarily handled in my area?
- What should I do if I don’t get the proper disclosure statements from my lender as required before the closing?
- How long will the actual closing take?
- If I can’t make the closing date, can the seller cancel the deal?