Understanding the Escrow Process
You’ve probably heard of escrow, but perhaps you don’t know exactly what escrow is and what the process involves. We’ll break it out for you and simplify what escrow is, what it does, why it’s a critical part of any real estate transaction and why private lenders in Seattle use escrow services.
What Is Escrow?
When a buyer and seller enter into a real estate transaction, they enlist the help of a non-partial third party to help close the transaction. This third party is known as an escrow agent and all of the elements necessary to close the transaction take place within the escrow. The escrow agent holds the money, draws up paperwork and finalizes the real estate transaction. The escrow agent protects both the buyer’s and seller’s interests in the transaction until both parties meet their contractual obligations, at which point the funds are released to the seller in exchange for a deed to the property to the purchaser.
How Does Escrow Work?
When two parties commit to buying or selling real estate, they agree to certain terms, such as the purchase price, closing by a specific date and a description of the property that is being sold. Additional terms may include:
- A valid title to the property
- An inspection or feasibility study
- A financing contingency
- Other specific contingencies or conditions
Escrow is essentially a third-party that acts as a referee or the middle person, ensuring that both parties do what they agreed to do in the purchase and sale agreement or contract.
When a buyer signs an agreement to purchase a property, this executed or signed document is given to escrow. The escrow officer will verify that all disclosures, inspections, feasibility studies and other requirements are completed and resolved before closing.
If an earnest money check is provided for in the purchase and sale agreement, escrow will typically hold the money, and it will be applied to the purchase price at closing.
Escrow is also responsible for receiving the funds needed to close from the buyer or their private lender in Seattle and then distributing those funds when all the contract terms are fulfilled upon closing.
Sometimes sales are completed, but the contract requires a hold-back of funds. This means that the sale is complete on paper and the ownership is transferred, but there are some additional funds still held in escrow until the parties hold up their end of the agreement. An example of items that may require a hold-back include:
- Temporary rent-back arrangements after closing
- Repairs not completed by closing
- New construction items not complete by the closing
Once the hold-back requirements are completed, escrow will disburse the hold-back funds to the appropriate parties close out the account.
Why Is Escrow Important?
Escrow handles the details and legal aspects of purchasing real property. The duties of escrow include, but are not limited to:
- Processing and coordinating all documents and funds
- Ordering the title search, ensuring that the record of the owner and status of the property are accurate
- Responding to all lender’s questions and loan requirements
- Responding to all authorized requests from parties
- Preparing the final Settlement Statement (or HUD-1) to show the exact costs and charges related to the real estate transaction
- Facilitating the signing of all closing documents, including lender paperwork for hard money lenders in Seattle and deeds
- Closing escrow once all conditions are met, and funds are disbursed
Private Capital Northwest is a premier provider of private loans in Seattle, Washington. As a leading hard money lender in Seattle and serving the Tacoma and Bellevue areas, we provide bridge loans, construction loans, fix and flip loans and other types of commercial loans. If you are a real estate investor or developer who is looking for a hard money loan, contact our team today for more information.
