What is escrow and where do all those papers come from? For many, escrow is a mystery. However, in simple terms, escrow is nothing more than an independent third party who makes sure all the terms of the sale are completed in order and on time. The terms for escrow come from the purchase and sale agreement that you arrange with the property seller. There are short term and long term escrows. Short term are typically closed in less then 60 days, long term can last 6 months to 30 years.

Since you will be doing lots of business with your escrow or closing agent, you should find one you like and who will put your buyers or sellers at ease. You want an agent that is optimistic and cheerful with their general disposition . You don’t want one full of doom and gloom. This is actually a huge thing. When people are signing papers—frequently for their biggest financial obligation ever—you don’t want the added stress and negative energy of an overly cautious escrow officer killing your deal. I have seen buyers get up and walk out of a closing because they were so afraid. The escrow agent made every disclosure and document sound like a life sentence. All buyers freak a little when they see the total of all their loan payments fully adjusted worse case on a loan disclosure statement. They could be borrowing $300,000 and see a $1million number to pay off their loan, making all the payments for 30 years at a fully adjusted rate. But a good closing agent knows how to handle that and keep it from becoming a sticking point. In different states, escrow agent functions and the closing process itself can vary, but the overall function is the same. The reason escrow agents are
independent is so they can protect both parties of the agreement. Their job is to make sure that all conditions of the transaction are satisfied, according to your and the seller's instructions. It is not the escrow agent's responsibility to move a transaction through the process, they simply act as an independent clearing house.

So how do you move a transaction into escrow and how do you close or finalize the transaction? When you have agreed upon the terms and conditions of the sale, you take the agreement and appropriate documentation to the escrow agency and give them their instructions. Make sure all instructions are in writing and signed. This will avoid misunderstandings and confusion later on. The following information should be provided to the escrow agent (much of it would come from the seller, but you should be aware of it):

·    Copies of promissory notes and deeds of trust
·    Title insurance policies
·    Copies of insurance policies
·    Termite or other infestation policies, where applicable
·    Tax statements
·    Reconveyance deeds
·    Quit Claim deeds
·    Power of attorney
·    Surveys
·    Copies of permits for additions (if necessary)
·    Copies of geology reports, if any
·    Copies of invoices for extensive repair work (roofs, plumbing, electrical, etc.)
·    Lender requirements

In addition to the above documentation, you should provide the following property and sale agreement information:

·    Full address of property
·    Desired closing date of settlement/escrow (business days only)
·    Purchase price of property
·    Amount of down payment
·    Amount of deposit
·    Financing terms, conditions, and lender's name
·    Terms of seller-assisted financing (if applicable)
·    Name and address of present lien holders and applicable loan numbers
·    Seller's name, address, and phone number
·    Buyer's name, address, and phone number
·    How will Buyer take title (joint tenants, community property, tenants in common, etc.)
·    Legal description of the property (can come from old title policy, grant deed, or property profile)
·    Is the buyer moving into the property at close of escrow?
·    Will escrow/closing papers be mailed, picked up, or delivered?
·    Are there any contingencies for the sale?

Sales may be contingent on a number of factors, and the escrow agency  rovides the clearing house to collect and maintain the contingency information. You need to be careful with contingencies.

·    Never accept a contingency without a time limit!
·    All contingencies should be approved or rejected in writing. Where possible, it is often easier to satisfy  contingency conditions prior to escrow.
·    Be sure to read all contingencies carefully to avoid last-minute loopholes or 'outs' at closing.
·    Flag all contingency removal dates or deadlines.

Some common contingency factors are:

·    Attorney or accountant approval
·     Clear title & ability to obtain title insurance
·    Sale of buyer's home
·    Successful financing arrangements
·    Construction, termite, or other physical property inspection results

In order to complete the transaction and transfer ownership of the property, all conditions and contingencies must be met. The escrow agency makes sure the agreement is complete before closing the transaction. The process for clearing and reporting of contingencies varies from state to state. Check with your local escrow agent. Once you and the seller provide all the documentation to the escrow agent, they will normally prepare what is called a HUD or closing statement and perform the following tasks:

·    Order a preliminary title report
·    Secure pay-off demands on outstanding loans
·    Request reconveyance (transfer of property ownership)
·    Obtain loan documents from lender(s)
·    Obtain release documents to clear outstanding liens
·    Issue receipts for deposits and other funds
·    Prorate taxes and interest
·    Prepare buyer and seller statements
·    Obtain title insurance
·    Record the signed documents to complete the legal transfer of the property

In many states, escrow and/or title companies act as the escrow agents. Some states require the involvement of real estate attorneys. Whatever the procedure, it is always a good idea to get some guidance from a fee-based professional on your first few transactions. If you are paying them a fee, their loyalties should be clear and their advice should be in your interest. For beginning, and even experienced investors, it often makes sense to work with a real estate agent. Not only do they know the market, but they often know the procedures better than you will. However, not any agent will do. Find a good one and develop a mutually beneficial relationship. It provides another set of eyes and another mind to help you in your investment goals. Refer to the report about agents in this course. The down side of real estate agents is they only are compensated if the transaction closes so be aware they may not act in your best interest. They are however licensed professionals and have a fiduciary responsibility to make sure everything is properly disclosed in a transaction. Look for a broker not an agent. Brokers have a lot more education. If you choose to have an attorney look things over make sure their core focus is real estate, not litigation. Law is complex and my number one complaint is that attorneys never tell you “they don’t know.” They will make something up, or worse you end up paying for them to learn. All have some real estate law in law school, but a great many do not practice real estate. For that reason you would get better advice from an experienced, competent, real estate broker.

Title Insurance:
When you place a property in escrow, the escrow agent will generally order a preliminary title report. This title report or title search is simply a search of county records regarding the contracted piece of property. The search should reveal any defects in the title as well as any encumbrances such as liens of record. The search will also show the current tax status, either current or delinquent. A
complete title search consists of:

·    The exact legal description
·    The estate or interest in the property
·    The vesting of the estate or interest
·    Any exceptions (lien encumbrances, defect affecting the particular interests, etc.)
·    Assessor's parcel number
·    Delinquent taxes, assessment bonds, or tax liens

However, a title search does not cover all your bases. Some things don't normally appear in the property records such as zoning restrictions, unrecorded leases, riparian rights (water), adverse possession claims, and mechanic's liens. If there are any questions when you read the preliminary title report or do your own research, be sure to discuss those questions with your escrow agent. As careful as you will be, however, it still pays to purchase title insurance. In fact, you should never, never, never buy a property without title insurance. The title may look clean, and the search may not turn anything up, but sometimes some  thing will come to light after the deal is made that could easily cost you money. Title insurance companies rarely have a claim, but when they do, they are  serious money. I have seen several mistakes over the years in various situations. I once saw a lien recorded in first position. that was supposed to be recorded in third position. The recorder made a mistake and it cost the title company $26,000. It also doesn't hurt to ask about extended policies that cover unrecorded liens and items not of public record, especially if you are buying a property that has had a lot of activity in recent years. It can be worth a few extra bucks for peace of mind. There is little worse than putting all the time and effort into a transaction only to have it not close, or worse yet, to make commitments and then have title deficiencies cost you money, eroding or eliminating your profits. Title insurance is not legally required, and it may seem like an unnecessary expense, but all it takes is one expensive problem to eat up all your profits. I recommend purchasing title insurance, even on lease option transactions. Let me give an example. You find a perfect propertyfor a lease-purchase deal. You structure a great deal for the purchase. You then find and write up a sandwich lease to an end buyer who is excited and thrilled to be getting a new home. You put it together, and a year goes by with the buyer making all of their payments on time to the seller, everything looks great.


The buyer is now ready to exercise their purchase option. They notify the seller. You go out and buy a new car in anticipation of a $20,000 payday coming. Escrow is contacted, they prepare instructions and order title, and oops! What's that? What do you mean the seller has a judgment that's record-ed against the property from an old business debt, and your new buyer won't be able to close? The only way the deal will close is if the debt is paid and the only one with any money is—that's right, you pay it from your profits. So you end up closing the deal to keep from being sued by your buyer, and you come to the closing with your checkbook to pay some of the sellers closing costs. The above horror happens often to new investors and even some lazy experienced ones. The truth is, it may only happen once, or maybe never at all, but there are lots and lots of reasons to use title insurance, even though it's tempting to save those fees.  Remember when you get a transaction under con-tract, your next call should be to a title company to check the title for additional liens etc. As always, when in doubt consult with an attorney or a real estate professional.

Closing:
Once everything is complete, title is clear, and all conditions are met, you are finally ready to close the deal. This usually happens at the escrow or title
company office. The escrow agency prepares the papers and the buyer and seller meet to apply signatures and complete the transaction. Some of the
documents you expect to see at a closing are as follows:

·    Loan and financing documents
·    Settlement summaries and fee listings
·    Reconveyances
·    Disclosures
·    Warranty deed

If everything has been completed, the closing should go smoothly. You show up, your buyer or seller signs a bunch of papers, and you walk away with a hopefully profitable property or check, or both. However, sometimes things can still go wrong, even after the deal is ready to close. I have experienced at least one or two of these problems myself over the years and have heard of the rest of these things from other investors. I have collected this information so that when problems arise, you know who to blame, and who not to. Hopefully, this list will help you avoid problems or at least know how to solve them when they do arise.

·    Scheduling your closing either too late in the day or too late in the month can cause your file to fall right off the edge, and quickly be delayed by a few days or so.

·     Has your party done a lot of closings before? If your client/buyer is inexperienced they might just freak out a little bit when reading and signing documents they are not familiar with. (If they are inexperienced, you might want to educate them or be there with them). This depends a lot on your title/escrow officer and how well you know them. A good title officer is adept at handling specific questions from nervous buyers and sellers.

·    Inaccurate "good faith estimates" and either lack of or inaccurate "net sheets". This one happens a lot and is almost always the title company's fault. The title officer is always willing to correct these problems, however I have seen problems develop when the buyer/seller sits for long periods of time awaiting correct  paperwork. I have even seen buyer/sellers walk out because they get nervous about the transaction. Cold feet kick in, and they leave. This is why I always recommend getting a good title and escrow person, and use that person as much as you can to keep those lines of communication, and accountability open.

·    Inexperienced escrow officer. Find out ahead of time who is handling your closing, and what kind of experience they may have. If the title person handling the transaction does not feel 100 percent confident, and understand completely the paperwork he/she is asking your client to sign, then you stand a good chance that your seller will walk out of the closing without signing.

·    Settlement agent not receiving all of the real estate purchase contract (REPC) and addendums etc. This one is your fault. You need to check, double check, and even triple check that your title officer has all of the paperwork that he/she needs. (Make sure you get it to them at least 48 hours in advance). If you drop the ball here, don't get mad at your title guy.

·    Lack of mortgage, mortgage lender, title person, and/or realtor communicating between themselves. This one is much too common, and it's always someone else's fault. Seldom does anyone take responsibility for it. This has happened to me more times than I care to remember. This is probably the leading cause of closing problems, and can sometimes take hours or even days to resolve. Whenever you are working on a deal, DO NOT assume that all the parties involved are communicating. Most likely they are not, and if something goes wrong, it's your deal they are killing, not theirs. You must be proactive or prepare to rip your hair out with frustration as things begin to fall apart, as they sometimes do. It is like playing ping-pong. When you hit the ball over the net, someone needs to hit it back. Call them up and encourage them until they do.

·    Surprises! This one falls into the category above, but I made it its own because generally the surprises can be clearly aimed at whomever is responsible. It is typically a lender that drops the ball, because he neglected to tell you about the prepay penalty or the interest rate hike, or any number of additional requirements they deem necessary prior to closing. Get to know your lender. This can make or break deals. I like to get real friendly with the lenders. Know them on a personal basis. And I send the ones I like more business to build loyalty.

·    Loan package/instructions not being received far enough in advance. This one is the lender's fault, and they do it more than anyone wants to admit. It will make you angry and screw up everything, and they don't care. After all, it's not their house deal they're killing.

·    Loan doesn’t fund. Your lender is out of cash and they start stalling asking for another funding condition. Happens more then you might think.

Most of the items I have listed are the fault of the title companies, Realtors, and mortgage companies. Regardless of whose fault an item may be you are the one ultimately affected. In spite of everyone's best efforts, many real estate transactions don't close on the exact day agreed upon by the buyer and seller, so be flexible. I am constantly amazed by people that get all worked up because a closing doesn’t happen on time . Being cheerful and cooperative will go a long way toward maintaining good relationships from escrow officers, lenders etc. Remember they would prefer to have everything flow on schedule as well. It is not their life's purpose to mess with your deal so give them a break. incompetence is another story, but your attitude can go a long way toward solving potential problems.

Many of the above items I have experienced first hand, and although they don't always kill deals, they can make life a bit more stressful. The more educated you become, the more it helps you in structuring transactions and taking the necessary precautions to minimize closing problems.