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How Does Escrow Work, and What Is the Seller’s Job During this Time?

At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.

Curious about your role and responsibilities during escrow as a seller, and how on earth escrow works in general? While much of a seller’s job throughout escrow is to hold tight as the buyer works through the details on their end, this guide will explain the basics of escrow and provide you with some easy tips for how you can help move the needle toward closing, too.

A calendar that explains how escrow works.
Source: (Nathan Dumlao / Unsplash)

What is escrow?

Phrases like “once the home is in escrow” or “the buyer’s earnest money will go into escrow” can raise a lot of confusion, especially if you’re a first-time seller. Sounds like a bunch of jargon! It helps to know that escrow has a couple of distinct but related meanings in real estate.

Closing time

Escrow refers to a specific period of time in a real estate transaction between offer and close. Escrow kicks off after you sign the purchase agreement from a buyer, and it ends when all the funds are disbursed at closing.

“Once we have a fully executed contract in which the buyer and seller both sign off on the particular offer, then the buyer is required to deposit ‘earnest money’ into the escrow company,” says Ehren Alessi, a top Las Vegas real estate agent who’s sold 86% more single family homes than his peers.

So begins escrow. Now, your home sale will circle the runway like a plane for at least several weeks. That’s because most transactions hinge on meeting a number of contingencies laid out in the contract — like the inspection, appraisal, and title search — and it takes time to meet these contingencies before closing.

A third-party account for safekeeping

During this holding pattern, which can last 30-60 days, a third-party escrow account will open up to safely hold any funds and key paperwork related to the transaction at an arm’s length. This may include, in addition to your buyer’s earnest money, real estate fees, loan fees, third party payments, and your profits as the seller.

To avoid any conflict of interest, an escrow officer or title company will manage the account. If you think of the alternative — you or the buyer personally hanging onto the money all that time — it’s clear why no one would be comfortable moving forward without an escrow arrangement.

But escrow isn’t free. Escrow service fees which cover the holding of funds and transfer of documents may vary from state to state, and you and the buyer will likely split the costs.

What’s the seller’s job during escrow?

While the buyer works to finalize the details of their mortgage and schedule the home inspection, the seller should take care of the following:

Prepare disclosures for your buyer

If you haven’t already provided your buyer with necessary property disclosures that document any known issues about your house, you’ll likely need to do so within a few days after you accept an offer as part of moving escrow forward. The seller’s disclosure statement is a legally binding document, so remember to:

  • Be honest when you fill out the form:
    If you lie or try to cover up a hazard or problem with your property, that’s not just bad karma; you may be held legally responsible if a buyer claims damages.
  • Share anything you’re already aware of, don’t look for problems:
    Disclosures are meant to help buyers make an informed decision about the property they’re purchasing, but sellers can’t be expected to go evaluating their house for problems or share details they aren’t privy to.
  • Return the disclosure form to the buyer in a timely manner:
    Disclosure form due dates vary by state, but the sooner you can provide yours to the buyers, the better. If the buyers decide a particular issue is a deal-breaker, it’s in everyone’s best interest to cancel the contract now versus waste time taking additional steps to closing.

Note that real estate disclosure requirements vary among states. Most states have their own disclosure forms with some states’ being “caveat emptor” or buyer beware — meaning there’s no official disclosure laws. We have a list of all 50 states’ individual rules with links to their respective forms, but real estate agents generally advise sellers to be forthcoming about any known issues or material defects with the property out of good faith.

Be responsive to any title issues or questions

As part of a “background check” on your house, a buyer’s lender will require a title search that essentially evaluates the property’s history of ownership, identifies any outstanding liens against it, verifies that you’re the sole owner of the home and that you have the right to sell it, and ensures the details of the home (size and location, for example) are recorded properly.

During this time you’ll want to be available to dispute or respond to any issues with the title that may arise. You’ll need to, for example, provide receipts for contractor work that’s showing up as unpaid, write a check for any outstanding child support acting as a lien against the property, or clear up a boundary encroachment concern.

A preliminary title search is one option to get ahead of any title issues so you aren’t blindsided during escrow. Though certainly not mandatory, a preliminary title search conducted before you list the property can give you peace of mind that your title will likely clear later on.

Alessi recalls a preliminary title report that revealed the home’s parcel numbers were recorded incorrectly to make it seem like the property was smaller than it was. ”[This] is a big deal, because if I’m selling my home and a plot of that land isn’t included it drops the value of the property or I can’t sell it until it’s recorded the right way,” he says.

Make your home available for the inspection

There’s a good chance your buyer will schedule a home inspection — 57% of contracts in March 2020 required one. The buyer arranges and pays for this, but here’s how you can help:

  • Complete necessary repairs before you list the home
    If you can, get ahead of any issues likely to crop up in the inspection that could delay your settlement. Inspectors are primarily going to focus on signs of water damage, structural issues, aging roof, old electrical, plumbing problems, pest infestation, and issues with the HVAC system.
  • Communicate your availability
    As the seller you’ll need to leave for the inspection, so let your agent know which days and times would work for an inspector to come through so they communicate that with the buyer’s agent. Keep in mind that home inspectors often complete 3-4 inspections per day so the more flexible you are, the quicker you should be able to complete this step.
  • Keep your home clean and accessible
    Your teetering stack of moving boxes shouldn’t block the crawl space the inspector needs to access to complete the inspection. Make sure you also leave items like keys for locked basement doors or remote controls for fans where they can find them, like on the kitchen counter.
  • Consult in advance with your agent for what fixes you’ll allow
    Go through a sample inspection report with your agent so you’re not making an emotional decision when the clock is ticking.

Get past the appraisal

The lender needs an appraisal to confirm your home is worth the price you’re selling it for. Appraisers typically do an onsite visit as part of their evaluation, so therefore:

  • Check your phone or email for updates
    You need to agree to the appointment before it’s scheduled — updates will pop from appraiser to buyer’s agent to your agent to you and back again.
  • Prepare your home like a showing
    Mow your lawn and trim any weeds that snuck their way in, and freshen up any clutter that’s appeared since the height of showing season.
  • Organize paperwork ahead of time
    Write up the details of any major renovations, so your appraiser knows how much you spent on the palatial master bathroom you’re a little bummed to leave behind.

Pay off your mortgage

Paying off your mortgage is a satisfying moment, but your escrow officer will likely get to do the honors. They’ll order a payoff statement during the escrow process to confirm what you still owe on your mortgage so that when you reach closing day, they know how much to send to your lender to close it out.

They won’t touch your escrow account for homeowners insurance and property taxes, however (if you still have one). If your lender required you to have a cushion of extra payments in the escrow account, you should get a refund check when they file a release of lien. Reach out to your lender if you haven’t received one in a few weeks after closing.

A key used with an escrow account.
Source: (MinuteKEY / Unsplash)

What happens to the escrow account after closing?

Once you receive the net proceeds from the sale, and the buyer’s funds go where they need to go, the escrow account used for the real estate transaction will close. There are only a couple of occasions where the escrow account would stay open:

    1. You ‘rent-back’ your home from the new buyer:
      If, for whatever reason, you realize you won’t have another place to live after closing, you can negotiate with your buyer to see if they’ll let you pay rent to delay your move out date. You’d have to add this into the contract, and would most likely keep a security deposit in the escrow account until you officially move out.
    2. You are waiting on repairs to be completed:
      If weather or a busy contractor season delays repairs you agreed to cover during negotiations, you may be able to close on time but keep the funds for the repairs in the escrow account until they’re completed.

Escrow can be an anxious few weeks for everyone in a real estate deal, since so many details need to come together and there’s so much money on the line. When in doubt, work with a top local agent who’s seen it all and will guide you to the bitter end. They’re not going anywhere!

“We’re not here just to write a contract, escrow it, and see you at closing,” says Misty Wood, a top-selling San Antonio agent. “Every Realtor should have the heart of a teacher because we’re here to guide and direct the transaction.”

Header Image Source: (Dane Deaner / Unsplash)

Disclaimer: Information in this blog post is meant to be used as a helpful guide, not legal advice. If you need legal help with escrow, please consult a skilled lawyer.