What is "Escrow?"

Before answering this question, please watch the video for a funny description of what escrow is not. Much of what I will say here pertains exclusively to the common practices in Pennsylvania and specifically the Pittsburgh region at the time of this writing. "Escrow" means different things in different places, according to local conventional practice, so what you read here is specific to my market. I assume that other markets are somewhat similar, but each state and local municipality has different laws affecting the various events taking place between the acceptance of an offer and the closing.

1) "Escrow" begins when the offer is accepted.

When the buyer submits a written offer to the seller, and both buyer and seller have come to agreement regarding the terms of the sale, it begins a series of events that result in the fulfillment of the contractual obligations as written in the agreement, ultimately culminating in the actual transfer of ownership from seller to buyer at the closing.

2) Buyer deposits the "escrow funds" or "hand money" or "earnest funds."

Usually, the agreement states that the buyer must put up some amount of money to act as collateral if they fail to meet their contractual obligations specified in the agreement of sale. In this market, it is customary for the broker for the buyer to holds those funds in an "escrow" bank account set up specifically for that purpose. State law mandates that these funds be accounted for and kept separate from the broker's other funds. Basically, when you sign an offer and it is accepted, your agent will ask you for some amount of money to secure the transaction, which he or she will then deposit into the escrow account.

3) Buyer and Lender come to an agreement.

If you are getting a loan from a bank, the bank will go through a process of examining your financial situation in order to determine your "ability to repay." Most banks want to make sure their borrowers will have the ability to repay their loans. Due to unscrupulous lending practices prior to 2008 which resulted in a global economic disaster, the CFPB (Consumer Financial Protection Bureau) has mandated that banks make more specific disclosures about the costs involved in buying a home. New CFPB regulations also make it more difficult for banks to extend loans to not-so-qualified buyers. It can take some time to reach a final agreement between the bank and the buyer, so much of the "escrow" period is granted for this process to conclude. Once the bank and the buyer are on the same page, the bank will issue a statement saying they are ready and willing to lend the funds needed to purchase the property.

4) Property inspections are completed.

The buyer often chooses to conduct various kinds of inspections of the physical property. This is advisable in pretty much every situation. There are some exceptions, like if the purchaser is an expert contractor or home builder. Often, the agreement between the buyers and sellers allows a couple of weeks for the buyer to complete the inspection and either continue to closing, re-negotiate some of the terms of the agreement, or back out of the purchase.

5) A "title search" is completed.

In addition to the physical examinations taking place during various kinds of home inspections, the "title" or "settlement" or "closing" company or law firm will examine the paperwork relevant to the property. They're looking for any legal impediments to a "clean" sale. For instance, if the seller doesn't actually own the property, they don't have the ability to sell it to the buyers! This is obvious, but there are many more, and some very subtle problems with the paperwork that can make a sale difficult or impossible. For instance, there may be another mortgage on the property that the sellers haven't disclosed, or there may be an easement which allows the city to store toxic waste in the front yard, or any number of odd things. This is why "title insurance" is necessary. The closing company, after having examined all the paperwork regarding the house, will issue a "title insurance" policy basically saying they will compensate you if you incur losses as a result of some error or problem with the paperwork that they did not discover before you closed on the house. They have a strong incentive to be thorough in their investigation, since they will be the ones paying the damages if they missed something!

This whole process can take several weeks because it requires coordination between the various local governments, record offices, and your "closing company."

6) Utilities and other liens are resolved.

The final readings of each of the utility meters are completed and the sellers typically close their accounts or order the utility companies to cease service as of the date of the closing. The buyers set up utility service with the various providers to begin the day of closing. Any other "liens" or money owed to a utility, local government, or someone else with a right to collect money on the property, is itemized and will be paid by the seller at closing to ensure the property is transferred without causing the buyer to be liable for any unpaid fees the seller incurred.

7) The settlement document is released for review.

The settlement statement shows how all the money is being passed around at the closing. The new regulations mandate a 3 day review period, so you will get this statement from your closing company and have plenty of time to review it and understand exactly where all the money is coming from and where it is going. The sale of a property includes many smaller transfers of funds between buyers, sellers, governments, banks, brokers, and settlement agents. The flow of funds can be difficult to understand, but your real estate agent should be able to explain it to you sufficiently. If you think there is an error, now is the time to bring it up!

8) Closing.

At the "closing" or "settlement," the new deed of ownership is signed, the mortgage paperwork is signed, and everything is officially recorded at the county courthouse. The money and keys switch places, and everyone is happy (hopefully). Often, funds are transferred electronically via "wire" so be sure that you have enough money in the accounts you are using to pay your closing costs. At this point, "escrow" has concluded and the sale is complete. Congrats!

See, not so bad.

Hopefully this explanation has been useful, and you won't feel like the characters in Portlandia! If you have more questions about escrow, call any closing company, lawyer, mortgage lender, or real estate agent.

Jay Villella