Chapter 15
It Ain’t Over ’til the Check Clears
IN THIS CHAPTER
Discovering the ins and outs of escrows
Saying goodbye to your house
Coping with seller’s and buyer’s remorse
After sprucing up the old place, sorting through hordes of prospects to find the most ready, willing, and able buyer, and haggling over price and terms, you finally signed a contract for the sale of your house. Are your troubles over? Have you sold your house at last? Nope. You’ve only ratified (signed) an offer. Don’t start packing your bags yet. You have a lot of work to do before the sale is a done deal. This chapter will help you close your sale.
Entering the Neutral Territory of an Escrow
You may be delighted to know escrow has nothing to do with snails. Escrow refers to the holding and distribution of important documents and money related to the sale of your house.
After the offer is ratified, you need someone you can trust to hold the stakes while you and the buyer take care of unresolved contract details, such as arranging property inspections and getting financing for the purchase. On the first business day after you and the buyer sign the contract, either you or the buyer (or your agent or the buyer’s agent, if agents are involved) open an escrow. This process happens by delivering all the funds and documents related to your sale to a neutral third party — the escrow holder (also called an escrow officer).
In accordance with instructions from you and the buyer, the escrow officer keeps these funds and documents in an escrow file created especially for your transaction. Depending on real estate practices in your area, your escrow may be handled by a lawyer, a firm that specializes in doing escrows, or a title company. Sellers and buyers usually select an escrow holder based on their agents’ recommendations.
Based on your house’s sale price, escrow fees can run from a couple of hundred dollars to several thousand dollars. Brokerage customs where the property is located usually dictate whether you or the buyer pay for the escrow, or you split the fee 50/50 with the buyer. Regardless of custom or practice, responsibility for the payment of escrow fees is a negotiable item. In a strong sellers’ market, for example, buyers may offer to pay for the escrow to sweeten their offers, even though local custom decrees that buyers and sellers usually split escrow costs.
Understanding the role of the escrow officer
Even though you went through the escrow process when you bought your house, you may not remember much about it. After a few years, the whole experience probably seems like nothing more than a big, expensive blur. But even if you purchased your house just last year, going through escrow is much different from the perspective of a seller. Rather than putting money into escrow to obtain title to the property, you’re getting money out of escrow in return for relinquishing your ownership by transferring legal title to the new owner.
The escrow officer handles the nitty-gritty paperwork details so you can concentrate on the deal. To that end, here are some highlights from your escrow officer’s to-do list:
Order a title search from the title company: Soon after the escrow is opened, you and the buyers get copies of a preliminary report (prelim) showing who legally owns the property. The prelim also contains a list of items (such as loans secured by the property or public utility company easements to run power lines over the property) that affect the title or limit use of your property.
Look over the preliminary report carefully. Ask your agent, escrow officer, title company representative, or lawyer to explain anything in the report that you don’t understand. Don’t be shy — there’s no such thing as a dumb question. Tell your escrow officer if any information is incorrect. This helps the escrow officer get a head start resolving issues such as deceased owners still on title, loans or tax liens you’ve paid off, or judgments that have been satisfied but still appear on the prelim.- Request payoff information: If you have a mortgage, home equity loan, or other liens on the property, your escrow officer contacts the lenders to get your current loan balances and instructions for paying off the various loans at close of escrow.
Prepare and record documents: The escrow officer draws up a grant deed you sign to formally transfer legal title to the buyer. The deed is recorded when escrow closes.
An escrow officer’s job is to receive and follow your instructions. Be sure to instruct your escrow officer not to give the buyer the title to your property until you’re completely satisfied that all terms and conditions of the contract are fulfilled.Hold and disburse funds: Easy come, easy go. At close of escrow, the escrow officer uses funds the buyers and their lender put into escrow to make payments required to close the escrow, such as paying off your old loans.
If you don’t have a Social Security number or a green card if you are a resident alien and your property’s gross sale price exceeds $300,000, your escrow officer may have to withhold up to 15 percent of the gross sale price to comply with the Foreign Investment in Real Property Tax Act (FIRPTA). This act is an IRS code requirement pertaining to potential capital gains tax liability. See a tax advisor if you need more details.- Prepare estimated and final closing statements: These documents provide an accounting of all the money that comes into and goes out of your escrow.
Maximizing your escrow
If you want to eliminate escrow problems before they occur, call or visit your escrow officer as soon as possible to introduce yourself. See whether the escrow officer needs any information from you to make the escrow go faster and smoother. In addition to finding out how to contact you during the day, the escrow officer may need the following:
A Statement of Information: If you have a common name (such as Adams, Brown, Chan, Davis, Garcia, Jones, Lee, Miller, Nguyen, Smith, or Williams), you must complete a Statement of Information. Many title problems are caused by people with names similar (or identical) to yours. A Statement of Information helps to distinguish you from the scores of other folks with common names like yours.
What information is requested in a Statement of Information? You (and your spouse if you’re married) must provide your full name, Social Security number, exact date of birth, birthplace, date and place of marriage (if applicable), previous marriages (if applicable), residence and employment information, and so on. Whatever is necessary to prove precisely who you are — and who you aren’t.- Bills and documents: You can speed up the information gathering process by giving your escrow officer copies of your most recent mortgage statement, property tax bill, and, if you’re a condo or co-op owner, copies of the current homeowners’ association dues and assessments.
Getting an estimated closing statement
During your initial contact with the escrow officer, request an estimated closing statement based strictly on your known closing costs at that time and assuming the escrow closes as scheduled. This statement obviously won’t be precise. Factors such as whether you’ll have to give the buyers a credit for repairs, and if so, how much, have yet to be determined. No matter. At least you have an approximation of your expenses of sale. That helps you develop a rough idea about the amount of money you may have to spend on your next home.
Get the estimated closing statement updated a week before scheduled close of escrow. At that point, very few questions should remain. You’re basically waiting for the clock to tick out. Check your second estimated closing statement extremely carefully, line by line from top to bottom, to be absolutely certain it accurately reflects your credits and debits.
Escrow officers are human. They sometimes make mistakes. So do other parties in the transaction who may inadvertently give the escrow officer incorrect information. And when mistakes are found, whose favor do you think they are in? Probably not yours! Your money is on the table. Pay attention to details. Review the closing statement and question anything that isn’t clear or correct.
Summing up your final closing statement
You may think the most valuable piece of paper you get when escrow closes is your check for the proceeds of sale. From an accounting standpoint, however, the most precious piece of paper is the final closing statement. If you think of the escrow as a checking account, the final closing statement is your checkbook. It records all the money related to your transaction either as credits or debits.
In addition to the final closing statement, sellers also receive a Closing Disclosure when the buyer obtains a traditional first or second loan. Since the Dodd-Frank Act went into effect in 2015, buyers and sellers must receive a Closing Disclosure not less than three days before the closing so the parties have enough time to check the figures and make sure all is as it should be. The Closing Disclosure may come from the buyer’s lender. However, in most cases it will be given to you by your escrow officer. Review this two-page document carefully. Make sure all figures match those on the final closing statement.
Any money you receive in escrow is shown as a credit to your account. You won’t have many credits; the biggie is always your credit for the amount of the sale price. You may get a credit from the buyers for the unused portion of property taxes you prepaid. You get a check outside of escrow from your insurance company for any unused portion of your homeowners insurance premium. By the same token, if your lender collects extra money from you each month that goes into an impound account used to pay your property taxes and homeowners insurance premiums, any excess funds in the impound account are paid directly to you by the lender after the sale closes.
Debits are funds paid out of escrow on your behalf. Your biggest debit, as noted in Chapter 3, is usually the mortgage payoff. Other major closing costs listed as debits are the real estate commission, local transfer taxes, any corrective work credits you give the buyer, and, depending on the date the sale closes, a credit to the buyer for your share of unpaid property taxes. The list also includes an assortment of small charges for notary fees, recording fees, document preparation fees, messenger fees, and so on.
The final closing statement and Closing Disclosure are extremely important. Be sure to keep a copy for your files; you may need to refer to it when you prepare your income tax return. As Chapter 16 explains, some expenses of sale, such as the real estate commission, mortgage prepayment penalties, and property tax payments, are tax deductible. Furthermore, you may owe capital gains tax on a portion of your profit from selling the property.
Resolving disputes
Good escrow officers are worth their weight in gold in times of crisis when the shouting, tears, and threats of lawsuits begin. At moments like this, often only their incredible patience and crisis-mediation skills keep deals glued together. With luck, your escrow will be as smooth as silk from inception to close. But if an escrow officer gets conflicting instructions from the seller and the buyer, the escrow slams to a screeching halt until the parties resolve the problem.
What kind of conflicting instructions are possible? The conflict usually is a dispute between the seller and the buyer about whether some item of personal property (such as a refrigerator, fireplace screen, mirror, or light fixture) is included in the sale. Another classic point of contention is whether corrective work should be done before or after close of escrow.
It’s important to deal with any changes in the escrow quickly. Some changes affecting the buyer can trigger issuance of a new Closing Disclosure with a new three-day waiting period which might extend your escrow beyond your scheduled closing date. The primary changes that trigger a new three-day waiting period are as follows:
- The Annual Percentage Rate (APR) of the buyer’s loan increases by more than 1/8 of 1 percent.
- A prepayment penalty is added.
- The loan changes, for example, from a fixed to an adjustable loan.
Changes that only affect the seller probably won’t trigger a new three-day waiting period. However, be sure to confirm this with your escrow officer.
A wise real estate attorney, Kip Oxman, has a saying that works miracles in dispute resolution situations: “When all else fails, RTC.” You can find the answer to most disagreements if you read the contract. The real estate purchase contract included in Appendix A is an example of an extremely explicit contract intended to eliminate the ambiguity that creates disputes.
Avoiding the curse of December escrows
Escrows are perverse creatures under the best of circumstances. They’re proof positive of Murphy’s Law, which states that whatever can go wrong will — and always at the worst possible time. Experienced escrow officers are all too aware that nasty surprises can and often do rear their ugly heads whenever you least expect them.
What kind of surprises? The list is unpleasantly long — missed deadlines, title glitches, problems paying off existing loans, changes in the buyer’s loan terms, insufficient funds to close escrow, and the like.
December escrows are notoriously perverse. Holiday partying saps people’s strength and reduces their effectiveness. Folks forget to sign papers before going on vacation, and December 31 is an absolute deadline if you must close this year for tax purposes.
If you end up with a December escrow, make sure you meet your deadline by following these tips:
- Stay in touch with your escrow officer. Don’t let your file get buried in a pile of pending escrows on the corner of your escrow officer’s desk. You or your agent should check with the escrow officer every few days to make sure everything is going smoothly.
Order loan demands as soon as possible. You must pay off any of your existing loans that are secured by the property before the buyer can have a new mortgage put on the property. Instruct your escrow officer to order payoff statements on all your existing loans immediately.
Lack of receipt of loan payoff statements is the single biggest cause of escrow delays.- If you’re leaving town for the holidays, tell your agent and escrow officer well in advance of your departure. Special arrangements can usually be made to close your escrow — no matter where you are — if people have advance warning and know how to reach you. The key to success is keeping everyone informed.
- Check the calendar. Many offices stay open only until noon on Christmas Eve and New Year’s Eve. When Christmas and New Year’s Day fall on Saturday or Sunday, office hours get extra crazy. Some businesses and public offices close the preceding Friday, others close the following Monday, and still others close Friday and Monday to give their employees a four-day holiday. Be sure to check the holiday office schedule of your agent, escrow officer, and other important people in your transaction. Don’t let a holiday office closing derail your deal.
- Allow time between the date you want to close and the date you must close. Give yourself maneuvering room to resolve last-minute problems that inevitably appear when you least expect them. Don’t schedule your closing on the last business day of the year. You’ll have no margin for error if you need to close by year’s end.
Some deals fall through needlessly. These escrows could’ve been saved by applying a basic principle of winning golf — follow-through. Golf pros know there’s more to the game than simply making contact with the ball. Pros continue their swing “through the ball” after they hit it because they know the last part of the stroke is as important as initial contact with the ball. If they don’t follow through, the ball won’t end up where they want it to go.
Your house isn’t sold until your escrow closes. Follow-through is equally important in real estate deals. Buyers, sellers, and agents often carelessly say a house has been sold as soon as the purchase contract is signed. That kind of foggy thinking can sink your transaction. You and the buyers have only ratified an offer at that point.
Letting Go of Your House
The day escrow closes is legally confusing. You still own your house when the day begins at 12:01 a.m., but you aren’t the owner of record when the day ends at midnight. Sometime during the day, the escrow officer notifies the buyer that the deed has been recorded, officially announces the buyer is now the proud owner of your house, and, of course, gives you the money you’re owed from the sale proceeds. Your sale is a done deal. Congrats!
But in all the excitement, don’t forget you have to bid adieu to your house. This section helps you do that.
Moving daze
If you’re one of the fortunate few, moving day won’t be a problem because the place you’re moving into will be vacated long before your escrow is scheduled to close. Lucky you. Life is sweet.
Moving day is considerably more treacherous if, like most sellers, you’re involved in a daisy chain of concurrent transactions — selling your old house and simultaneously buying a new home from people who are also buying a new home for themselves, and so on like an endless hall of mirrors. In that case, your move’s timing is just a tad less complex than the D-Day landings in Normandy during World War II. You may find yourself living on the street if you give up possession of the house you’re selling before you can move into your next home. Don’t worry. Millions of folks have coordinated sell-buy moves without a hitch. The secrets of success are lead time and planning.
The date the buyer actually takes possession of and moves into your house depends on the terms of your contract. Look at paragraph 9 of the sample purchase contract in Appendix A to see an example of a “Closing and Possession” clause used to specify date and time of possession and delivery of keys from seller to buyer. The next sections cover the usual options.
Buyer moves in the same day escrow closes
Same day move-in is fine if you’re absolutely, utterly, positively, beyond-a-shadow-of-a-doubt certain of two factors:
- The escrow has closed on the house you’re selling.
- Your next home is vacant so you can move right into it — if you intend to move directly from your old house into the new home you’re buying.
If the closing of your escrow is delayed or the seller of the house you’re buying can’t vacate the place, you have a logistical problem. For two moving vans to occupy exactly the same driveway at exactly the same time borders on the impossible. Moving into a house while someone else is moving out is something you’ll never attempt more than once. There are easier ways to go crazy.
If you can’t move into your new home until the sellers vacate it, you must track three escrows: the escrow of the house you’re selling, the escrow of the home you’re buying, and the escrow of the new home for the people whose house you’re buying. You need as much advance warning as possible from the sellers of your new home if they run into problems that can possibly delay the close of escrow on your new home. With adequate lead time, you may be able to negotiate an adjusted close of escrow on the house you’re selling.
Buyer moves in the day after escrow closes
We recommend the buyer move in the day after escrow closes because you can be certain that escrow closed. After all, you’re still the owner until the title transfers. Moving day is stressful, even under the best of circumstances. Why create unnecessary stress for yourself by trying to move out while the buyer moves in? The sellers of your new home may use the day your mutual escrow closes to move out and then you can move in the following day.
Regardless of whether you move out of your house the day escrow closes or the following day, make cancellation of your homeowners insurance, utilities, and phone service effective one day after your scheduled close of escrow and move. Carefully coordinate canceling your homeowners insurance policy with your insurance agent to avoid any gaps in your coverage.
Buyer moves in after a seller rent-back
Sellers sometimes stay in their house several weeks after escrow closes while waiting to get into their new home. If this situation happens to you, you sign a separate rent-back agreement that becomes part of your purchase contract with the buyer. The rent-back agreement covers who pays for utilities and maintenance, what happens if property damage occurs after escrow closes, how much rent you must pay the buyers, and what penalties result if you don’t vacate the house by the date specified in your agreement.
Sellers customarily pay rent equal to the amount the buyers must pay for principal and interest on their mortgage plus property taxes and insurance, so they break even on the cost of owning the house during the term of your rental. PITI, as this sum is known, is prorated on a per-day basis from close of escrow until you vacate the property.
For example, suppose that PITI is $150 per day, and you expect to be out three weeks after escrow closes. You and the buyer instruct the escrow officer to hold four weeks PITI in escrow so each of you has a cushion if you encounter an additional delay moving into your new home. When you move, you and the buyer jointly instruct the escrow officer to pay the buyer $150 per day for the actual rental period and to refund the unused portion of PITI funds held in escrow to you.
Don’t let the buyers do any work on your house or, worse yet, move into the house prior to close of escrow. If you vacate your house prior to the close, the buyers may ask your permission to start fixing up the house before close of escrow. After all, painting or waxing floors, for example, is much easier and faster if the house is empty. Don’t do it! The buyers may poke around and find a molehill that they turn into a mountain of trouble for you. If the deal falls through, you may get your house back in terrible condition. If the house catches fire, your insurance may not cover the losses. No matter how piteously they plead, be firm.
The final verification of condition
A smart buyer inspects the property a few days (ideally the day) before escrow closes. Why? To be sure your property still is in the same general condition it was in when the buyer signed the contract to buy it and to verify the seller completed all agreed-upon repairs. That’s why most residential real estate contracts contain a clause similar to paragraph 15 of the C.A.R. purchase contract in Appendix A — the “Final Verification of Condition” clause.
If the buyer discovers that your living room picture window fractured during your going-away party, a giant sinkhole suddenly appeared last week in the middle of your driveway, and 200 fresh gopher holes emerged in what was a flawless carpet of velvety grass only yesterday, the buyer can instruct the escrow officer to stop the escrow until the problems are resolved. Because delaying the closing can create new problems such as expiration of the buyer’s loan commitment or inability to purchase your new home, it may be better to close on time but have your attorney or escrow company hold back some of your proceeds until repairs are completed. If you and the buyer can’t work out a mutually satisfactory solution, the dispute can kill the deal.
Be sure to maintain your property inside and out until escrow closes and you move into your new dream home. Make sure the movers don’t damage the property when removing your belongings. Unless you and the buyer make other arrangements your property should be left broom clean, which means to remove all garbage, trash, and litter, and then vacuum the carpets and sweep the floors.
Surviving Seller’s Remorse or (Gasp) the Dreaded Double Whammy
Most house sellers and homebuyers suffer, to greater or lesser degrees, the ravages of a peculiarly debilitating distress during their transactions and for up to six months after their deals close. This masochistic form of self-reproach has a name. Depending on which side of the contract you happen to be on, it’s either called seller’s remorse or buyer’s remorse.
Seller’s remorse is a stupendously strong conviction on your part that you’re about to sell your house for way less than it’s really worth. The fact that your sale price established a new high for the neighborhood is secondary to your perception that you’re giving your house away. When you’re in the cruel grip of seller’s remorse, facts take a back seat to perceptions.
Don’t feel like the Lone Ranger. You’re not alone. The buyers of your house probably have an equally strong conviction that they’re paying you way more than your house is worth. Their doubts began when they signed the purchase contract. Factually speaking, your house could be well worth every cent they’re paying. That doesn’t matter. Once again, the only thing that counts is their perception that they’re overpaying.
If you’re selling your old house and at the same time buying a new home, you are most likely being devastated by the dreaded double whammy — simultaneous buyer’s and seller’s remorse. In the worst-case remorse scenario, you suspect you’re getting financially creamed when you sell and when you purchase.
All too often these concerns are ignored or ridiculed by agents, friends, and family. You’re patted on the head and told, “Don’t worry. Everyone goes through this. Tough it out. Take two aspirin and get a good night’s sleep. You’ll be fine tomorrow.” Not true. Unless you get remorse out in the open, it can tear you and your deals apart.
Confronting your fears
The first step in your recovery program is seeing seller’s or buyer’s remorse for what it is — plain, unadulterated fear. As a seller, you fear you undervalued your property. As a buyer, you fear you overpaid.
By scrutinizing these hidden fears in the bright light of day, you can counter them with facts. Maybe you did undervalue your house. Perhaps you are overpaying for your new dream home. Instead of just wringing your hands and gnashing your teeth until you worry yourself sick, get the facts about fair market value (see Chapter 10).
A seller’s fear (giving the house away) is the flip side of a buyer’s fear (overpaying). For that reason, sellers and buyers end up doing the same things to squelch their fears and factually establish the fair market value of the property they’re selling or buying. Regardless of whether you’re zapped by seller’s remorse or buyer’s remorse, after signing the contract you can
Discuss your deal with friends, neighbors, business associates, and folks standing in front of you in the checkout line at the supermarket. You ask anyone and everyone you can grab if they think you’re getting a good deal. This exercise is only good for venting your fears.
Precisely 99.9999 percent of the people you talk to won’t have the faintest idea about fair market value of the property in question.Read classified ads in the real estate section of your newspaper even more intently than you did before you signed the contract. As a seller, you circle all the ads for houses that aren’t nearly as nice as yours with higher asking prices. As a buyer, you circle ads for houses that sound similar to or nicer than the one you’re buying but have lower asking prices.
Keep in mind as you brood over real estate ads that most houses don’t sell for the asking price. Conversely, most houses read much better than they eyeball when you tour them.- Spend Saturday and Sunday touring open houses. The streets are filled with remorseful buyers looking for better deals and remorseful sellers searching for less-nice properties with higher asking prices. Seeing, after all, is believing. Touring property is the best way to determine whether your fears are valid (which is highly unlikely if you follow the advice in this book) or groundless.
Facing the ultimate test
The faster you get your fears out in the open and confront them with facts, the less you suffer. Accept the fact that property can have more than one correct price. Pricing and negotiation are arts, not precise sciences. If you have the time, energy, and skill to search long enough and negotiate hard enough, you may find a buyer who’ll pay a little more for the house you’re selling or, conversely, a seller who’s willing to accept a slightly lower price for the next home you purchase.
Don’t beat yourself up with asking prices. Asking prices are fantasies. They remind us of an old saying: “If pigs had wings, they could fly.” You don’t see many flocks of pigs in the sky, do you?
Sale prices are facts. You can sleep soundly if the price you received as a seller or the price you paid as a buyer is in line with the sale prices of comparable properties.
Knowledge is power. If you follow the principles we cover in this book, you have nothing to fear. Your knowledge makes you extremely powerful. Get on with your life and remember — your home is an excellent long-term investment.