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The Real Estate Escrow Process Explained

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Buying a home can be a notoriously complex process. The sheer amount of paperwork alone is often overwhelming, but one of the most frustrating parts is the jargon thrown around by experts in the field. While you might be able to follow some of it by context clues, things like the real estate escrow process can be difficult to analyze without a little bit of industry knowledge. If you want to get the most out of a purchase or sale, though, it’s important that you know about the escrow process and how it will impact you.

How the escrow process works

Escrow can be a difficult process to parse even if you have bought a house before. Since every sale or purchase brings new variables with it, it’s a good idea to know a few things about escrow so that you can figure out what to expect in different situations. Below are a few questions that many other home-buyers have about escrow, along with a few basic answers that can clarify the situation a bit. Each answer is crafted with the broadest definitions in mind, though, so the advice may not be applicable to every situation.

the escrow process

What is escrow?

While you might feel a bit odd asking for the definition of this term, the truth is that escrow is actually difficult to define in the context of real estate. It’s not that it is very complex, but rather that it has a few different definitions. In terms of your home-buying experience, you’re really looking at two different definitions.

The first definition of escrow concerns having a neutral third party hold onto something of value for you. You’ll absolutely be using an escrow account during this process, largely as a safety net for all parties involved. This other definition concerns the period of time between your initial accepted offer on the home and the moment when you close on the house. This is generally called the escrow period, and it’s a complex time that tends to involve getting a mortgage, having inspections done, and a bit of back and forth on the state of the property that you want to buy.

As a potential home buyer, you need to know about both types of escrow and how they’ll eventually impact you. The account will be important from a monetary aspect, but you may want to focus on everything that happens during the escrow period.

Can a seller accept another offer while in escrow?

The housing market can be competitive, and there’s often a fear that your best offer will be overtaken by someone with more money. That’s generally why so many buyers go in with a strong offer quickly, and one of the many reasons why many try to get through the closing process quickly. Unfortunately, the answer to this question may not be something that many buyers want to hear.

The bad news is that the answer to this question is complicated. If you haven’t signed an agreement yet – and especially if you haven’t put down any escrow money – then the seller is free to accept another offer. If you have put down earnest money, there’s a very good chance that the contract has become legally binding. That doesn’t mean that the contract can’t be broken, but rather that the seller might have more liabilities when it comes to breaking the contract. As a buyer, this means that you might be due some kind of damages, but you still might not be able to buy the house.

escrow process

Can a buyer back out during escrow?

The good news for buyers is that it’s not that hard to back out during escrow. The real question isn’t whether the buyer can back out, but rather when they can back out and how much money they are likely to lose.

The vast majority of purchase agreements have contingencies in place that can allow a buyer (or seller) to walk away from the agreement with ease. As an example, many purchase agreements allow the buyer to back out if he or she is unable to secure a loan for the home. In other cases, the buyer will be able to back out if they find any kind of major defect in the house during the inspection process.

Contingencies aside, it’s usually easier for a buyer to back out than for a seller to back out. It’s very hard to hold someone to a purchase that he or she is unwilling to make, so buyers generally have it a bit easier when they want to walk away from a purchase. What tends to matter, though, is how much the buyer will lose by doing so.

Can you get your deposit back from escrow?

This is another situation in which the answer depends on what you signed. In many cases, a buyer can get their money back from escrow as long as one of the purchase agreement’s contingencies has been triggered. If the house fails an inspection, for example, it’s hard to argue that the buyer should have to leave money on the table. Likewise, many builders will not only make their sales contingent on financing, but will put language in their contracts that allow potential buyers to put money down with a guarantee of a refund if they can’t find financing.

In other cases, though, you won’t be able to get back your escrow money. If you choose to walk away even though a contingency hasn’t come into play, you will often have to leave your earnest money with the seller. This is usually done to encourage people to follow through with their contractual obligations, especially as the earnest money is usually the only compensation the seller will get for trying to keep up their end of the purchase agreement. In most cases, though, whether or not you get the money back comes down to the contract you have signed. Always double-check your documents to make sure you are covered in case you have to break the purchase agreement.

Knowing the vocabulary is a huge part of being a successful home buyer or seller. If you are still confused, though, don’t despair – there’s a reason why most people turn towards professionals when they enter the real estate market. If you want to ensure you are taking the right steps to make it through escrow in a financially sound manner or if you just want to be sure that you’re looking at the right homes, make sure to contact a CENTURY21 Northwest real estate expert for help today.


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