When You Buy A Home: “The process” by L.S.
Formation of contract:
A typical California residential purchase transaction does not involve lawyers. The buyer’s agent prepares an offer by inserting information specific to the transaction into a form developed by the California Association of Realtors or a similar form used in the locale, and presents the offer to the seller through the seller’s agent. Negotiation is conducted through real estate agents, and an exchange of counteroffers/addenda. Upon both sides’ executing an identical set of documents (which can be by seller’s acceptance of the original offer, or either side’s acceptance of an umpteenth counteroffer), a contract is formed. Real estate agents call this event “ratification,” for reasons that escape me.
Opening escrow:
Listing agent will have obtained a preliminary report (“pre”) and opened an escrow with the title company that issued that report. A preliminary report is technically an offer to issue a policy of title insurance. It means that the title insurer has studied the public records, and is willing to insure that title is as stated in its pre, with only the exceptions and exclusions stated in the pre. The state of title is important to the parties, so obtaining a pre is a necessary first step. However, customarily the buyer selects the escrow holder, so that the offer may designate a different title company as escrow holder. (In Southern California escrow companies are independent from title insurers, which creates a distinct set of complications.)
The buyer’s agent will contact the escrow holder, and the two establish a mechanism for buyer’s transfer of 3% of the purchase price into escrow. 3% is the statutory maximum for liquidated damages in a residential purchase transaction (involving 4 or fewer units), and is the amount specified in the forms used for presenting offers. The deposit is accomplished within the time prescribed in the contract, usually no later than three days after contract formation.
Closing escrow:
If the purchase contract contains contingencies, e.g. financing, inspections, the parties do what is necessary to obtain the waiver of those contingencies. For example, if there is a financing contingency, the lender will require documentation to establish the creditworthiness of the buyer, and an appraisal. The buyer must obtain final loan approval in time to waive the financing contingency by the deadline (or any extension granted by the seller). If there is an inspection contingency, the buyer must retain the expert and cause the inspection to be conducted so that the contingency can be waived by that deadline. Once all the contingencies are waived, it is time to close.
The parties will be asked to sign documents either at the escrow company office or at a remote location before a traveling notary. Documents to be recorded must all be notarized. These include the seller’s deed granting title to the buyer, and the deed of trust by which the buyer grants the lender a security interest in the real property. At the time of signing, the escrow officer or notary will “introduce” the documents by identifying what they are and giving the shortest possible explanation of their function. By this time, if all involved are doing their jobs, the parties will have heard an explanation in advance by their agents and the escrow officer, and will have had their questions answered. The escrow officer will have drafted a set of escrow instructions for the parties to sign, and will have circulated “estimated closing statements” stating in detail who is to deposit what into escrow and who is to receive what disbursements out of escrow.
Where financing is involved, the lender will have submitted its own set of instructions, stating that money it has deposited may be delivered to the seller when all conditions it has set are satisfied, including the payoff of prior loans and issuance of a title policy insuring the lender that its security interest will have the priority it should. The seller’s instructions will state that the deed to the property may be recorded when the escrow is prepared to deliver the net proceeds of sale as set forth in the final closing statement. The buyer will instruct that money may be released as stated in the closing statement when the title insurer is prepared to insure the buyer’s title, subject only to liens and encumbrances as set forth in the pre.
The seller will sign a deed to the property. In the case of an all cash transaction with no financing, the buyer will not be asked to execute loan documents (promissory note and deed of trust). Both will sign escrow instructions. There are some incidental documents to be signed, such as a document establishing whether or not the county may reassess the property for property tax purposes. The buyer may be asked to acknowledge receipt of disclosure documents in addition to those initialled during contract formation.
The escrow holder has the duty to follow all the instructions of all the parties. When everything matches, escrow can close. The seller and seller’s mortgage holder get their money, the expenses of escrow, title insurance premiums and other expenses are paid, and the buyer gets the keys. It may take a short while before the hard copy of the title insurance policy arrives, but title is insured and the buyer is protected as of the closing date.
LEWIS SOFFER
Realtor® / Broker Associate
lew@afirealestate.com
BRE #01172145