The California Escrow Process - Explained

I work with so many first-time homebuyers and clients buying real estate in Los Angeles for the first time, I thought this article might really help inform and educate people on what the process looks like.

The first step in the home buying process is to get approved for your mortgage financing. In light of today’s credit crunch, this is now somewhat of a lengthy process, and can take some time. No more are the days when you could call up your mortgage broker and get prequalified over the phone. Nowadays, you need to be what’s called ‘conditionally pre-approved’ before you’re even ready to submit an offer.

This pre-approval process involves providing the lender with a variety of documents – everything from income statements, bank records, tax returns, expense verification, etc. Your lender will give you a complete checklist of what they’ll need from you, depending on the type of financing you need.And, by the way, I work with the very best mortgage brokers, so please let me know if you need an immediate referral to one. After finding the property you’d like to purchase, I can review the comparable sales with you to help determine the value range of the property.

The best comparable properties are going to be within the closest proximity to the subject property. Even within Santa Monica real estate, for example, I would not compare a property in zip code 90405 (Sunset Park) with a property north of Wilshire in 90402.

When the bank sends out the appraiser, they will generally go back no more than 6 months when reviewing past sales, so my approach will be the same in order to verify the property’s value range.

Once you are ready to make your initial bid, we will prepare your offer, which is made up of 5 items:

1. The purchase contract: Generally speaking, this is a standard boilerplate California Association of Realtors contract. In the case of new construction, this may be a Department of Real Estate approved builder’s contract. In either case, I fill in the blanks and then review with you in person or over the phone.

2. A pre-approval letter from your lender: As I described earlier, it’s critical that your financing be lined up before your offer is submitted.

3. A letter of introduction: This is a letter that I draft that explains who you are and what you like about the property. It will go to you for final editing and approval.

4. Earnest money deposit (3% of the offering price) - this is applied toward your purchase price. This deposit will be placed into escrow once your offer is accepted.

5. Verification of your funds for to cover your full down payment & closing costs: This can come in the form of bank or investment account statements or a letter from your CPA.

I present the offer to the sellers (usually via the sellers agent, unless I am representing both parties), and we wait for a response – generally 24-72 hours is a typical timeframe. More often than not, sellers will reject your initial written offer, but instead will respond with a written counter offer. The counter offer will address items in the contract that the seller would like to be different. In case you couldn’t guess, price is the item that is countered most often!

But a seller might also request different terms – shorter escrow period, different contingency periods, etc. Once buyer and seller negotiate price and terms, and the offer is finally accepted, then escrow is opened. Escrow is a neutral 3rd party and their job is to make sure all obligations in the contract are fulfilled before the seller gets their money and the buyer gets keys to the property.

Escrow length ranges from 15 days (in cases of all-cash purchases) to as much as 30-60 days, depending on the speed of the lending institution. I then send a copy of the contract to your lender and you will promptly provide them with any additional information and/or paperwork that they need. The lender will schedule an appraisal directly with the listing agent. Your next step is to schedule a general inspection with an inspector of your choice. I am happy to provide my short list of professional inspectors/inspection.

The inspector checks all the major systems-plumbing, electrical, heating, etc., and also looks for cosmetic damage and problems (sloping floors, doors that stick, cracks in walls/ceilings, etc.). A condo/townhome inspection will only include the unit and not the common areas (building, hallways, pool, etc.). If you are purchasing a single family home, the inspector will also check the exterior (roof, foundation, etc.).

You may also choose to set up specialty inspections - mold, fireplace, roof, electrical, etc. I always recommend a sewer inspection whenever a client is purchasing a single family home,. Geological inspections are important if you are buying a home on a hillside or in a hilly area. After reviewing the complete inspection report(s) we may complete a Request for Repairs form (asking for a credit and/or repairs) - depending on what was found in the inspections.

You will need to call an insurance company to verify that the property is insurable and get quotes for the cost of insuring the property. Insurance for a standard condo/townhome is very simple as you are just insuring your personal contents – the building is almost always insured by the Homeowners Association. The other inspections that take place during escrow include the termite inspection, which is usually paid for by the seller. A retrofitting inspection will make sure the property is up to California state code for smoke detectors, low-flow toilets & shower heads, water heater strapping and the gas shut-off valve.

If the property you are purchasing is a condo/townhome, you’ll receive copies of all the homeowners documents.to review along with the standard required seller disclosures. You generally have 5 days to review this paperwork which includes copies of the meeting minutes for the past year, budget and financial information (including the amount currently in the HOA reserves) and a copy of the CC&R's (Covenants, Conditions and Restrictions).

You’ll sign your loan documents as soon as they arrive at escrow from your lender, or no later than within 5-7days prior to escrow closing. For out-of-area buyers, escrow will arrange for a traveling notary (for out-of-country buyers, you will go to your local US Embassy for notarization). Five days or less prior to closing, you may do a final walk-thru of the property, just to give you a chance to verify that any seller repairs were completed.

We also make sure the property is in the same condition as is was when we initially wrote our offer. Two to three days prior to closing you will wire the additional balance of your down payment & closing costs to escrow. Once escrow confirms receipt of your funds, they notify the bank, and the bank funds the mortgage loan and wires the proceeds to escrow one or two days prior to closing.

Closing day is somewhat uneventful. We sit and wait to hear from the title company that they have recorded the new grant deed in your name with the LA County Recorders Office. Then, you get keys to your new home! Then we celebrate at The Lobster.

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