After “you’re right,” my next two favorite words are “escrow closed.”
Ask anyone who’s sold a house: The journey between offer accepted and escrow closed is akin to carrying live explosives across a mine field. All can blow up at any step.
A loan falls through. An appraisal falls short. The roof caves in with the inspector on it. A missing person is on the title and has a lien against the house. You discover you’re on an Indian burial ground.
Just as agreements can go sideways between a marriage proposal and the alter, escrows can fall apart after an offer is accepted, sending a home seller back to square one jilted, disillusioned and abandoned.
To prepare themselves, sellers must first understand what the fuzzy, legal-sounding terms “in escrow” or “under contract,” as they say in some states, really mean.
Translation: Buckle up, doll face. Light the prayer candle, put a penny in your shoe, and don’t count your chickens because this here house deal can slide all over the ice pond before it gets to the other shore, if it ever does.
All this is why I waited to write this column until after the 30-day escrow on my parents’ property, which I sold on their behalf April 9, closed (YAY!) and the ink had dried. If I have learned anything the hard way it’s that nothing makes you look like a fool faster than running ahead of yourself on the rope bridge of presumption .
Even in a strong housing market, which, thank the good heavens, we have again, sellers don’t hold all the cards. This – are you listening? – is why sellers need good listing agents. Anyone can snag a buyer. Skill closes the sale.
“Getting an offer is important, but equally important is evaluating the offer so it doesn’t fall apart,” said my agent and friend Bill Wood, of Yorba Linda, Calif., who headed off problems before they could derail the deal.
After our escrow closed, I asked Wood, who has 30 years’ experience buying and selling houses, how many houses fall out of escrow.
As many as one in five, he said. But 80 percent of houses that open escrow close, often with some turbulence.
To get from offer accepted to escrow closes, here are the hurdles sellers must clear, a sampling of what can go wrong, and tips Wood uses to minimize the risk:
• Loan approval. Buyer financing problems are the number one reason houses don’t close, and are behind half of all failed escrows, said Wood. After what the market has gone through, lenders are leery. The five offers we got all came with letters from each buyer’s direct lender saying that the buyer had been preapproved for the loan. That’s pretty standard.
Tip: As added insurance, however, once Wood and I narrowed the offers to three, Wood requested copies of the buyers’ bank statements, credit reports, and employment and income verification.
• Appraisal. In today’s market, getting a home to appraise for the purchase price is a big problem. Housing values are rising faster than appraisals, which rely on past sales, said Wood. Banks base loans off either the purchase price or the appraised value – whichever is less. So if a buyer is taking out an 80 percent loan, the bank will loan 80 percent of lower number. If the house appraisal is lower, the buyer either has to pay more, the seller has to lower his price, or the deal is dead. Low appraisals kill about 40 percent of escrows, said Wood.
Tip: Wood talked to our buyer’s lender, who contacted his appraiser to get a find out whether the house would appraise in the ballpark. Then Wood had the buyer agree that if the house appraised for up to $10,000 less than the purchase price, the buyer would pay the difference. Fortunately, the home appraised at the purchase price.
• Home inspection. Buyers should have an inspection done within a week of opening escrow, so parties can address issues early. Deals rarely fall apart over a home’s physical condition, said Wood, but buyers can use these reports to get sellers to lower the price, make repairs, or both.
Tip: Have the house in good repair before you list. Or, be proactive and have an inspection done before the house is listed. Present that report to buyers saying the home is for sale “as is.” “The buyer can get a second inspection, which won’t likely be too different,” said Wood, “but having the inspection up front protects sellers from buyers who want to nitpick.”
• Termite inspection. This should also be done early in case extermination or dry rot repairs are necessary. Damage found rarely impacts an escrow but can impact net profits.
Tip: Because we expected to find some termite damage in our 50-year-old wood house, our agent got the buyer to agree that for any termite repairs, we would pay the first $1,000, and the buyer would pay the rest. Total charges were $1,245.
• Title clearance. A property’s title lists who owns it and any liens against it, which owners are often unaware of. A house has to be clear of liens to transfer to a new owner, and all owners must agree to sell. Title issues rarely end deals, but can hold them up.
Tip: To head off such issues, Wood looks at a home’s title for problems before he lists.
• Contingencies: Many buyers make offers contingent upon another transaction, such as their house closing escrow.
Tip: “If we have a buyer in escrow on his house, I would take a hard look at how solid that deal was,” said Wood, adding, “Not too many contingent offers are being accepted in the is market. I’m not sure I’d accept one.” What a difference a year makes.