Escrow Process - Closing a Home

What is Closing?

Closing (usually called closing escrow) is the process which typically ends a real estate transaction. In Arizona, the industry is regulated by the Department of Banking. Closing is primarily handled by escrow officers in either title companies or independent escrow companies and involves the deposit of funds and a deed or other instrument by one party for delivery to another party upon completion of certain conditions or events.

Escrow is opened after an offer to purchase has been accepted. The closing date is set during the negotiation phase, and may vary depending on a number of factors such as the lender’s ability to provide funds, availability of the property, any contingencies in the contract. On the closing date, the parties consummate the purchase contract, and ownership of the property is transferred to the buyer. Ownership is officially transferred when the contract is registered with the county recorder of the county in which the property is located.

Why do I need an escrow?

Whether you are the buyer, seller, lender, or borrower, you want the assurance that no funds or property will change hands until ALL of the instructions in the transaction have been followed. You want to make sure that title to the property being transferred is not clouded by any liens or improper recordings. The escrow holder has the obligation to safeguard the funds and/or documents and to disburse funds and/or convey title only when all provisions of the escrow have been complied with.

How does it work?

The principals to the escrow – buyer, seller, lender, and borrower – open escrow after the real estate offer has been accepted and there is a contract in effect. The escrow officer will process the escrow, in accordance with the escrow instructions, and when all conditions required in the escrow can be met, the escrow will be "closed." Although all escrows follow a similar pattern, there can be differences depending on the title company, lender, etc.

Generally the escrow/title company :
• follows the instructions given by the principals and parties to the transaction in a timely manner
• prepares an estimate of settlement costs for the buyer
• handles the funds and/or documents in accordance with instructions
• researches title to the property to make sure there are no liens or problems with title, and issues “title insurance” to protect the buyer in case something is overlooked
• pays all bills as authorized
• responds to authorized requests from the principals
• closes the escrow only when all terms and conditions have been met
• distributes the funds in accordance with instruction
• provides an accounting of actions taken – the Closing, or Settlement Statement.

The key to a making the transaction as easy as possible is to READ and understand your escrow instructions. If you do not understand them, you should ask your escrow officer to explain them. Neither your escrow offer nor your real estate agent are attorneys and cannot practice law, therefore you should consult an attorney for legal advice. The escrow officer is there to follow the instructions given by the principals in the escrow.

Respond quickly to correspondence. This will assist in the timely closing of this escrow.

If you are required to deliver funds into the escrow, make sure that you know how those funds need to be provided. Most escrows now require that the funds be wired from your bank, or at least provided in the form of a cashier’s check. Personal checks are not acceptable for most escrows.

When the escrow officer closes the escrow, the transaction must be recorded in the office of the County Clerk before the property is yours, if you’re the buyer, or before a check is issued, if you’re the seller. Sometimes it takes a few days for the paperwork to be completed as well.

Escrow and your new loan

If you are obtaining a new loan, your escrow officer will contact the lender, who will need copies of the documents involved in the transaction. The lender and the escrow officer work together to make sure all aspects of the escrow are taken care of in a timely manner.

What is a Closing Statement?

A closing statement is the written accounting of what took place in the transaction. It shows the purchase price, the funds deposited or credited to your account, payoffs on existing encumbrances and/or liens, the costs for all services and determination of the funds you are entitled to at the close of escrow. Most escrow offices provide a preliminary statement for you to review. If anything does not make sense to you, you should ask your escrow officer for an explanation.

Keep your transaction papers together in a safe place. You may need the information many years later to prove costs and/or profit on the sale of the property.

What fees and costs are involved?

Title companies, like any other businesse, will charge fees that are commensurate with the costs of producing the service, the liability undertaken, and the overhead expenses which include a profit factor. Therefore, the fees will vary between companies and from county to county. Normally, the escrow holder will follow its minimum fee schedule, which will provide for extra charges based upon the differing elements of your escrow. On occasion, an additional fee will charged for unusual expenditures of time on a given transaction.

The escrow holder has no control over the costs of other services that are obtained, such as the title insurance policy, the lender’s charges, hazard insurance, recording charges, etc.

Your escrow officer, upon request, can provide you with an estimate of the escrow fees and costs as well as fees charged by others, provided such information is available.

What if the transaction is cancelled?

There are occasions when a contingency cannot be met, or when the parties disagree during the period that escrow is open. Some escrow holders provide for such an event by incorporating an instruction in the typed or printed General Provisions.

Ordinarily, the escrow holder will take the position that no funds on deposit can be refunded until the escrow holder is in receipt of mutual cancellation instructions signed by the principals. The escrow holder cannot normally make a determination as to who is the "rightful" party in a dispute on a cancellation until the principals agree; the escrow holder is not a judge. Sometimes the escrow holder may be forced to allow a court to decide which party is entitled to what documents or funds.

You may be charged a cancellation fee, as this is a charge for professional services rendered and quite often for several "out of pocket" expenses that have been incurred on the client’s behalf. Who pays property taxes? The terms of your contract and the resultant escrow instructions determine how the property taxes will be handled. In Arizona taxes are usually prorated, with the seller paying taxes up until the time of sale, and the buyer thereafter. Depending on the time the transaction takes place, this may mean that the seller receives a refund of taxes already paid. That is indicated on the closing statement.

In summary

Using an escrow/title company to handle your real estate transaction is a wise and safe decision. Your interests will be protected and you will have a clear record of it for the future.