Escrow and closing are two terms that are often used interchangeably, but they’re not the same thing. If you want to close on your home in California with as little hassle as possible, it’s important to understand the differences between escrow and closing, so you can avoid mistakes that can slow down or even halt your transaction.
In this guide, we’ll talk about what an escrow account is, how it works, and why it’s essential to the home-buying process in California.
Step 1: Learn The Roles
Every home closing has different roles, with some variation based on where you live. In general, there are three players: seller, buyer and a neutral third party called an escrow agent. Your real estate agent will represent your interests as well as facilitate communication between all parties.
This is your best chance to learn who is doing what at every step of your closing process. If anything goes wrong—and something always does—you want to know if it’s you or someone else’s fault.
Step 2: Find An Agent
It’s important to have a professional on your side who is trained and experienced to guide you through each step of closing, especially if you’re unfamiliar with escrow. Your agent can also help you find a reliable lender.
You might have a friend or family member who can recommend someone, but most agents prefer an impartial relationship; they don’t want their clients feeling obligated to give them repeat business, so they often encourage buyers to interview several agents before deciding on one.
Before settling on an agent, make sure he or she has expertise with your area of choice—some specialize in luxury homes while others deal mainly with first-time homebuyers—and discuss how active they will be during your search and subsequent buying process.
Step 3: Create The Listing Agreement
The listing agreement is a contract between you and your client. It sets out expectations on both sides and offers protection for both parties.
A good real estate agent will take care of most of it for you, but if you’re writing up an agreement from scratch—or using an existing contract that wasn’t created by a professional—make sure to be thorough and careful with every detail.
As part of creating a solid listing agreement, you should formalize these key items
Step 4: Outline The Sales Price
It’s customary for homebuyers to pay an average of 3% over a property’s appraised value when purchasing a home, which is called contingency reserve. An appraiser determines an appraisal value by comparing recent home sales and similar properties nearby.
If you find a home that meets your needs but comes in below your price range, explain to your real estate agent that you will not consider any homes below a certain price point.
Your agent will talk with the seller on your behalf to make sure they understand that there is no room for negotiation because you have determined what you are willing to pay (in part based on their cost estimate). You may be surprised how quickly sellers adjust to what feels like intransigence!
Step 5: Open escrow with the seller’s real estate agent
It’s your last chance to get any repairs fixed and make sure everything looks exactly as you want it. If you don’t, your lender can make you responsible for future repairs. Make sure your new home is ready for move-in day.
You don’t want to show up with a moving truck only to find that all of your lights aren’t working, or that there are holes in your wall from doorways missing their trim molding. This can be a stressful part of buying a house but it should go off without a hitch if you are organized and prepared.
Step 6: Close On Your Own Property (Buyer)
If you are purchasing a home, you’ll likely want to arrange for an inspection of your property. A professional home inspector will look at all systems of your house including electrical, plumbing, heating and air conditioning, as well as structural elements like doors and windows.
While it’s not uncommon for some parts of your property to be inspected by someone other than a professional home inspector (for example, if you’re only getting a termite inspection or radon test), professionals recommend that buyers use a certified home inspector who is affiliated with one of three main organizations: ASHI , RHI , or NAHI .
An inspection can help ensure that there aren’t any major problems with your home before closing escrow.
Step 7: Arrange For an Inspection Of Your Property (Buyer)
The last thing you should do before making an offer is arrange for a professional inspection of your home. The home inspection is essentially a walk-through by a licensed inspector who looks for any deficiencies with your property, from minor to serious.
The results are often included in your written contract, and can help you negotiate repairs or lower your purchase price. It’s important to hire an inspector from outside of your real estate agency, so that he has no vested interest in whether or not you purchase or sell your house.
Step 8: Prepare The Final Walkthrough (Buyer)
During your final walkthrough, you should have your surveyor check all of your home’s systems to make sure they are functioning correctly. This includes checking water pressure, electrical sockets and general plumbing.
If you find any damage or defects that were not previously noted, be sure to document them on a separate sheet of paper before moving on.
During your closing walkthrough with a real estate agent, make note of any changes you want made to specific areas of your home. This can include things like painting an accent wall or having a lamp removed from one room and moved into another.
Step 9. Financial Information & Final Paperwork (Buyer)
If a loan is involved, you’ll need to provide a variety of financial information. This may include W-2 forms, pay stubs and tax returns for both you and your spouse.
Your lender will also want to verify that you have enough funds on hand to pay for your new home. More important than funds is credit history, however.
If there are any blemishes on your credit report, don’t leave them out—the sooner they’re disclosed, they sooner they can be addressed. Be sure to ask any questions about final paperwork and escrow early so you don’t lose track of anything or fall behind schedule—these small details can add up over time!
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