May 31, 2020
One of the things I noticed that my clients have questions about is the various steps of the closing process. This is, of course, normal, since the escrow process is a big deal. For most clients, the selling or buying of a house involves the largest financial decision that they make in their lives. So let’s take a closer look at this process and see if we can make it a little less intimidating.
What Escrow Is and Why It Is Needed
“Escrow is the process of transferring the home ownership from seller to buyer. The escrow company, who is usually the title insurance company acts as an intermediary between the buyer and seller. The escrow/title insurance company searches the title history, obtains the owner's payoff amount (if applicable), prepares the settlement documents and manages the closing between buyer and seller,” states the website anytimeestimates.com.
Various terms are given for this third party or company -- "escrow agent/representative," "escrow company," or just "escrow." (Some states utilize real estate attorneys rather than escrow companies during the closing process.)
Because time is required for the buyer to obtain their financing, the escrow company will need a place to hold the funds involved in the transaction, so an escrow account is opened. Because it involves the handling of money in the account, the escrow agent is a neutral third party that works neither for the buyer nor the seller in the transaction. Escrow requires instructions agreed upon by both sellers and buyers to release funds to either side.
The goal for all parties in escrow is obviously to close it, resulting in good news for everyone. Buyers have a new home to move into, sellers can move on to wherever they are going, and real estate and escrow agents get a transaction closed and are finally paid for the work involved!
The Nevada Escrow Process
From here on out, what I discuss for the rest of this blog is for escrow in the state of Nevada ONLY, as this may vary depending on what state your transaction is in.
“Congratulations! Your offer has been negotiated and accepted so now we can open escrow!” These are wonderful words that are good news to both buyers and sellers.
The Earnest Money Deposit (EMD) is the first thing that goes into the escrow account. The EMD is an amount the buyer promised to the seller that represents the buyer's good faith to buy a home. It will become part of their down payment once the loan is funded.
As we go through the escrow period, there are three milestones that serve as precautionary guards for buyers in Nevada. Each of these is like a ‘stop’ sign on this path toward closing that is designed to protect the buyers EMD. Let’s now delve into how buyers and sellers navigate through the closing process if the purchase is a financed transaction. Cash transactions are much simpler and typically don’t involve as much.
Escrow From the Buyers’ Side
Buyers have much to do to perform per terms of the sales agreement so they’re more involved in the escrow process. The time needed for the escrow to close is determined by the closing date as agreed upon in the purchase agreement, which is largely dependent on when the financing funds will be available, as deemed by the loan officer. In the current climate involving the coronavirus pandemic, this may be around 45-60 days, or even longer, as lenders are being more strict in their underwriting of the loan. In more normal times, it can be as little as 30 days for loan final approval and closing. Here’s the discussion on each of these milestone stop signs:
The “due diligence” period is the first one to be encountered. It is the agreed upon window of time (usually between 10-14 days) that begins the next day after the sales agreement is executed and gives the buyer the time to get an inspection done so that they can know what defects the home may have. An inspection is not required but is strongly recommended. This is done over and above the Seller Real Property Disclosure (SRPD), provided by the seller to let prospective buyers know what may be wrong about the house and what repairs the sellers have done to correct items in the past. The SRPD is a document letting buyers know to the best of the sellers’ knowledge what they know to be wrong.
These both serve to give buyers a good idea of the current condition of the house they are purchasing. While in the due diligence period, the buyer should pay a few hundred dollars for a professional inspector to come and inspect the house. Yes, this is an additional nonrefundable, out-of-pocket cost incurred by buyers to inspect the prospective new home. From the list of recommended items, the buyer and seller will negotiate any repairs to be done. Once completed, both parties can proceed on to the next step and this stop sign is removed.
It is in this due diligence period that the buyer has the most liberal opportunity to change his or her mind as to whether they will continue with the transaction, since they literally are able to walk away for any reason.
The appraisal contingency is the next stop sign to overcome. This one typically lasts 20-25 days from the day after the execution of the purchase agreement. The appraisal is ordered by the loan officer and is another third party that works neither for the buyer or the seller.
Todd McClure, a loan officer with Umpqua Bank, says, “I request the appraisal after I learn from the buyer’s agent that the sales process has progressed nicely, that they’ve moved past the inspection and repairs, and that we are moving toward a close just as soon as the appraisal is returned.”
Buyers, please note that the appraisal cost is the second out-of-pocket cost to be incurred by them. These are non-refundable costs and are a part of the purchasing process.
The loan contingency is the third and final stop sign. This window also begins the very next day from the execution of the sales agreement. All agreements specify that the buyer is to begin their loan process within a day or two typically from opening of escrow and have an agreed upon number of days (typically 25-35 days in non-pandemic times) to complete the underwriting process to get final approval for their loan. During this time, the lender will underwrite the loan by verifying the buyer’s qualifications and confirming their employment status. This loan contingency date can be extended and if this is needed, to protect your EMD. However, both buyer and seller need to agree upon an extension date. Loan officer, McClure, says that because he gets his clients to provide their documentation early in the qualification process for the majority of his loans, he can move the loan through his process within 7-10 days after the buyer submits their loan disclosures to him.
It is imperative that the buyers refrain from any purchases other than the ordinary cost-of-living purchases and not use their credit cards at this time. Please follow the advice or directives from your loan officer in this period, as any additional purchase(s) can affect whether or not you are able to obtain the loan!
Once you have final approval from the underwriter, this stop sign can be removed and we can move forward.
On that note, the last thing I want buyers to be aware of is the closing costs of their purchase. Closing costs are provided by escrow and are generally rolled into the financing of the home. Website finder.com states, as of April 7, 2020, “across the state, the average home sells for between $300,000 and $400,000. If you buy a property in that range, expect to pay between $3,996.75 and $7,105.33 in closing costs after taxes.”
Escrow From the Sellers’ Side
While buyers have quite a bit more work to do while in escrow, there are some things that sellers need to be aware of. So here’s the summary of how the closing process involves them:
Sellers can stay in touch with their listing agent to know the buyers’ progress as they move through the above process, as communication is on-going between both agents to update each other.
As the buyer progresses past each of the three stop signs, sellers will want to make sure that they are progressing on their move out of the house. Be sure to arrange your packing and stay on top of your moving timeline.
Closing costs. Sellers have their own costs involved in the selling of your house. While less than the buyers’ closing costs, sellers can expect to spend about 1-2% of the sales price toward their closing costs. These include everything from escrow and recording fees, Nevada Real Property Transfer Tax and Form 1099 fee, among others.
Stay in communication with your agent and the escrow agent to make sure you understand your closing costs, which in most cases, will be deducted from your proceeds. All of this is prepared by escrow. These costs are in addition to broker commissions to be paid to both agents that you agreed to when you began the listing with your chosen real estate agent.
In the end, the closing of a home is an exciting event for all parties involved. While most escrows do indeed close, the process can be rather stressful, requiring agents to assist their clients through a variety of bumps and unanticipated surprises. Like snowflakes, no two closings are the same, at least in my own experience. There are many different things that can happen during escrow that may delay the closing of the sale. However, good communication between all parties usually leads to a solid closing and everyone is relieved and happy!