What is escrow and how does it work?
Escrow is essentially a third-party financial service that holds onto the key elements of a real estate transaction. In this case, the key elements are generally the buyer’s initial money deposit, as well as the initial signed purchase contract. Basically, this company won’t let the money be processed to the seller until the entire process is complete and all necessary documentation accounted for. This means that all of the required inspections have been completed. It ultimately aims to achieve complete transparency in the deal and provide protection throughout. Only on the very final closing day is when the funds will be released.
Escrow offers protection to the buyer.
As a buyer, escrow services protect you from any unwanted and unexpected surprises down the road. Specifically, it ensures that all of the required property inspections are completed before the seller receives any money. On the other hand, it allows you to show that you have the money and are willing to purchase the property.
Escrow also protects the seller.
From a seller’s perspective, escrow is beneficial as it shows you that the buyer is serious and has sufficient funds for the transaction. This way, you know you’re not wasting your time as a seller only to find out last minute that a buyer doesn’t have the necessary funds. Instead, this almost locks the buyer in and begins the process. However, it should be noted that the buyer can back out. But in that case, escrow offers you a fee sacrificed by the buyer in consolation.
Understanding how the escrow process really works.
Purchase under contract, open escrow account – At this point, the buyer and seller will have agreed on an initial purchase agreement. Both parties must sign the contract before it can be entered into escrow alongside the initial deposit – known as the Earnest Money Deposit. As we’ve already mentioned, the third party escrow service provider will hold the funds and contract up until closing day.
Time for the bank’s appraisal – In order to cover its own tracks, the bank must appraise the property itself. Please note that this is the bank which will be providing the mortgage to the buyer. It should be kept in mind that the bank’s appraisal can sometimes result in a value lower than the purchase price. This means that you must come up with the shortage, or renegotiate a deal with the seller.
Agree on a mortgage – Once everything has been sorted out with the bank’s appraisal, this is where you go ahead and actually sign the contract for your mortgage. At this point, the buyer has officially secured funding. Although, they should have typically been pre-approved prior to going through this process.
Conduct the necessary inspections – These inspections include everything from home, pest, environmental and other types. Be sure to have all of these completed to ensure you know everything about the property. There’s no benefit to taking shortcuts here.
Find homeowner’s insurance – For the life of your mortgage, you will be required to have homeowners insurance. It’s also recommended that you get hazard insurance on the property in the case of anything like flooding.
Receive title report and insurance – These will be required by whoever is lending you the mortgage. It also ensures that there are no liens on the property or any other claims by third parties.
Final review and approval – Check everything over once more, before the funds are released and the property ownership is transferred.
So as you can see, escrow plays a very special role in real estate transactions. Ultimately, it helps to ensure a fair and transparent transaction for all parties involved. Today's market is filled with many opportunities for the savvy investor. Our Elite Legacy Education trainers will introduce you to proven strategies that can help you launch your career as a successful real estate investor.
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