Closing Escrow (Insert Blissful Harp Music Here) - Part 2
Such wonderful words…”closing escrow.” Sellers and buyers alike can appreciate this time at the end of a transaction. The seller receives his check, the buyers receives the keys to their new property and the brokers receive their check for a job well-done.
In part 1 we met Kent and John, a happy seller and buyer whose escrow just closed. I had the pleasure of representing the seller Kent.
A real estate transaction is complex and represents a sizeable financial commitment for both parties involved. The purchase agreement contract contains terms protecting both parties starting with a deposit to secure the buyer’s interest.
Next, a buyer usually has a period of time to perform his due diligence: researching all aspects of the property, hiring professionals to inspect the building and reviewing the legal aspects of how the property can be used.
Finally, there are provisions included for performance of both parties: what if the buyer fails to obtain a loan or he finds a major structural issue and wants to cancel the contract and receive a return of deposit?
An impartial third-party
An escrow is the process of giving something of value to a neutral third-party to hold and protect until a certain event happens. Then specific and agreed-to instructions are provided to the escrow holder as to how to disperse these things of value.
In our case the thing of value was money, John placed a $50,000 deposit into escrow, with a local title company, which was a third-party. John knows his funds will not be used in any way without his acknowledgment of the instructions to do so.
The escrow officer handles other aspects of the transaction such as the paying-off of the seller’s loan, facilitating the receipt of funds from the buyer’s lender, paying all vendors as part of the transaction and insuring all past liens and taxes from the seller are satisfied.
Protecting everyone’s interests
The escrow officer’s duties are dictated by the purchase agreement contract as well as the instructions given to him or her by the brokers involved and insures that the instructions are in agreement.
John had 45 days to perform his due diligence inspections. As part of his inspections he found there to be an old abandoned boiler from the heating system that contained asbestos. He obtained a bid for $15,000 to abate the asbestos and asked the seller to credit this amount back to him in escrow because it was a hidden pre-existing condition.
The seller agreed to the credit, but what if the buyer decided his findings were too significant and he chose to cancel the contract during his due diligence period? Having his deposit funds in escrow rather than in the hands of the seller provides the security that it will be available if a cancellation were to occur.
Working towards a successful closing will be our topic for part 3 as well as highlights of things included on a seller’s and buyer’s net sheet.
Burt M. Polson, CCIM, is a local real estate broker specializing in commercial, luxury estates and wineries. Reach him at 707-254-8000, firstname.lastname@example.org. Sign up for his email newsletter at BurtPolson.com.