Escrow & Inspections: Understanding the Real Estate Transaction Process

What is Escrow?

The term “escrow” will be referred to often in a real estate transaction. While the word is used interchangeably for different events that take place during and after a real estate transaction, the initial use of the term comes up early in the home buying process. Escrow is when a neutral and impartial third party holds on to funds during the real estate transaction as a way to protect both the buyer and seller during that process.

Escrow is used to guarantee the seller that the buyer has the necessary funds for the real estate purchase and that those funds will be handed over once the title to the property is transferred. It also guarantees the buyer that they will not be taken advantage of by a fraudulent seller that does not actually hold claim to a title for the property. In the end, escrow helps to ensure trust in the real estate transaction where neither party knows the other and where both parties have a lot at stake.

The first time this term will come up is when a buyer makes an offer to purchase a home. A buyer will make an earnest money deposit to accompany the offer. Those funds will go into a trust account and stay “in escrow” for protection of those funds until either it is credited toward the purchase of the home, or otherwise dispersed if the sales transaction does not end up closing.

Escrow Agent

You will also hear the term escrow used to describe a title company or attorney that is hired to handle the closing of the real estate transaction. They are often called an “escrow agent” because they maintain all of the documents and funds that are related to the transaction until the day of closing. The length of time that funds stay in escrow may depend on the length of time it takes to complete the sale of the real estate. Also, as a principal party to the transaction, there is usually contract language in a real estate purchase contract regarding one’s right to select the escrow agent.

The Escrow Process

As the real estate transaction moves forward, escrow plays an important role for all the parties to the transaction. There may be contingencies to the transaction, such as an inspection, seller repairs or lending approval, as well as other matters that either the seller or buyer need to complete by certain deadlines in order for the sale to close. Also, a buyer may back out of the transaction for no legitimate reason, wherein the seller has held their property off the market for a length of time, incurred additional expense, and lost out on other potential purchasers. In these instances, the funds in escrow are available for disbursement to the parties pursuant to the terms of their contract for the purchase and sale of the property. If the transaction goes to closing without any problems, then the escrow funds will be credited to the purchase.

Escrow is a very important and crucial component of the real estate transaction. It provides protection and peace of mind to all the parties in what is one of the largest financial endeavors that they will undertake.

What is a Home Inspection?

Another very important component of the real estate transaction are home inspections. Inspections will provide the buyer the opportunity to identify major issues concerning the home prior to closing.

In the contract to purchase and sell real estate look for a contingency clause that allows a buyer to undertake an inspection within a certain period of time, and if certain defects are revealed, those matters can be addressed to be repaired by the seller or the contingency should allow the buyer to be released from the contract without penalty.

By undergoing a thorough home inspection a potential buyer can find out:

  • If a problem is a safety issue, major defect, or minor defect.
  • What items need replacement and which ones should be repaired or serviced.
  • Items that are fine for now, however, they should be monitored closely.
What do Home Inspections Cover?

Exterior Inspection

  • Foundation (cracks and settling)
  • Exterior Walls (siding, cracks, soil contact with the home)
  • Roof (damage, poor installation, shingles, vents, gutters)
  • Chimneys (cracks, blockage)
  • Grading (yard slope and drainage)
  • Garage or Carport (framing, ventilation, ingress and egress)

Interior Inspection

  • Electrical (wiring, outlets, circuits, electrical panel)
  • Plumbing (bath, shower, faucets, leaks, pipes, water pressure)
  • Heating, Air Conditioning, and Ventilation (furnace, air conditioner, insulation, ducts, water heater)
  • Windows (open & close, insulated)
  • Kitchen Appliances (refrigerator, stove, dishwasher)
  • Washer and Dryer (venting, exhaust system)
  • Fire Safety (detectors)
  • Bathrooms (leaks, ventilation, toilets)
  • Attic (structure, openings, insulation)
  • Basement (cracks, water damage, mold)
Hiring a Home Inspector

A buyer should only hire a home inspector that is qualified by training and experience to perform the required inspections. In some instances, there may be a need for additional experts to assist with a follow-up of issues noticed by the home inspector. Information concerning home inspectors can be found with the American Society of Home Inspectors, and the International Association of Certified Home Inspectors.

Since buying a home is usually a person’s largest investment in their lifetime, home inspections can help assure a buyer that they will not be surprised with any unexpected expensive repairs after they move in, as well as providing peace of mind that they are purchasing a safe and solid home.

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