Happy Sandwich Day (and a some stuff about the escrow process)

lunch sandwich
Creative Commons License photo credit: TheTruthAbout…

The one issue with silly, seasonal posts is that they need to get buried quickly. So it is that we reluctantly bid adieu to our whimsical Halloween production number and move on to more contemporary issues.

Yesterday was November 3rd, which can only mean one thing. Happy Birthday, Kate Capshaw!

More importantly (well, maybe not to Kate, but to the rest of us), November 3rd was National Sandwich Day. And before we all retreat to our left-over po-boys and tuna melts, it seemed like a good time to reflect on the sandwich.

In California real estate, we call the sandwich “escrow.”

Escrow is a deposit of funds, a deed or other instrument by one party for the delivery to another party upon completion of a particular condition or event. For those of you still awake, think of the deposit as the money and title which changes hands as the grand finale of the transaction.

Even on Sandwich Day, I would challenge you to find one out of one-hundred buyers or sellers who would get really excited about this meat in the middle – the escrow process.

Buyers tend to see the home buying process this way:

  1. Find someone with a real estate license, a lockbox, and a car.
  2. See lots of homes, pick one, and write an offer.
  3. Pack the Tupperware, and move in.

Sellers see things a little differently:

  1. Find several people, each with a real estate license, a lockbox and a car, and ask them to visit your home for an “interview.” (Ideally, the interview should conflict with another important appointment to which the agent had long ago committed, like a liver transplant or Kate Capshaw’s birthday party. They will show up anyway, because they need the work. ) The agent will give an opinion of value, at which point you will quit listening while they continue on with a detailed two-hour presentation on their marketing prowess, their experience and their unsurpassed success rate in delighting clients. Pick the guy who says your home is worth the most.
  2. Let lots of people see your home, and accept an offer.
  3. Pack the Tupperware, and move out.

These checklists are just duckie; they are duckie, that is, until the meat in the middle starts to sour. That’s when it matters most who you have working on your behalf. When things start to go bad, the agent with the cutest shoes, the biggest bus bench ad, or the glossiest brochures (keeping in mind that mine are pretty darned glossy) may in fact be up to the task. On the other hand, they may not. Are you sure which one you hired?

Then there is the escrow company. They are that third-party entity charged with ensuring that conditions of the purchase contract are met and that the transaction closes. Now, I am aware that the whole subject of escrow is about as thrilling as a trip to the car wash, but the escrow company you select to orchestrate your closure does matter.

And herein is the problem, a problem we are unfortunately seeing all too often. Buyers and sellers tend to ignore the stuff in the middle. It’s not as sexy, and it’s far less exciting than other some of the other stages of the process, like the part where you get to beat the other guy bloody during negotiations and come out on the winning end of the front loading washing machine. The satisfaction of knowing that your Natural Hazard Disclosure report was delivered on time pales in comparison on the ol’ fun scale.

The real work starts when the marketing is a memory and the contract is inked. Everything preceding the momentous opening of escrow, while important, is really just window dressing.

You may sail through escrow with nary a care. If so, you are the blessed anomaly. Stuff happens, and here are just a few of the things that can go wrong.

  • Buyer changes mind
  • Seller changes mind
  • Buyer loses job
  • Seller loses job
  • One agent doesn’t do job
  • Someone gets sick or dead during escrow
  • Someone gets separated or divorced during escrow
  • Interest rates go up or the stock market goes down
  • Appraiser’s opinion of value is less than contract price by a factor of a four
  • Property inspection reveals surprises, like the fact that the home was constructed entirely of Legos and duct tape
  • Appraiser’s opinion of value is less than contract price by a factor of the Gross National Product
  • Lender rejects buyer’s loan
  • Title report reveals that owner of record is actually some guy named Bob who died in 1953
  • Homeowners Association documents reveal that Bob hasn’t paid his association dues since 1956
  • Appraiser’s opinion of value is less than the contract price by a factor of  Rueben Studdard

These are just SparkNotes from the Stuff That Can Go Wrong Almanac, and all of these things have one thing in common — the potential to derail an otherwise respectable transaction. And, when things go south, when cancellation is imminent, you will likely be staring down the barrel of only one issue: Who gets the money?

The typical purchase agreement comes tethered to what is called an “earnest money deposit.” This is the money that the buyer deposits into escrow to indicate their good faith intent to consummate the purchase. And the contract is pretty darn clear on the issue of the deposit. If the buyer cancels contract prior to removing all contingencies in writing, they are entitled to take their money and go home. If they cancel after full contingency removal, the seller is entitled to the money.

But notice the word “entitled.” Purchase agreements are bilateral contracts – it takes two sets of signatures to create the contract and two to change or undo it. One party or the other may be “entitled” to cancel escrow, and one party or the other may be “entitled” to the deposit, but both must sign in order to kill the deal and release the deposit.

Of course, there are mediation and arbitration clauses, liquidated damages clauses, civil penalty advisories, and all sorts of other fun facts in the purchase agreement intended to guide resolution in matters of dispute. The thing to remember here is that the contract is between principals – buyer and seller. In the event of a dispute, your agent can advise you of your options and they can recommend that you consult an attorney, but they cannot file your small claims action or your mediation request. They cannot represent you in court.

Similarly, escrow cannot force a resolution. They cannot cancel the contract or mail the check without mutual signed instructions. That is how neutral third parties roll.

So what good is the agent? Well, first, your agent should possess knowledge and experience as to the possible pitfalls. They should be discussing these things with you at length and early, not just the cool stuff like where the lockbox might look best. Your agent needs to know the contract and explain the contract. And they need to be actively engaged throughout the entire process, not just when it’s time to have the warm and fuzzy final walk-through.

Without the stuff in the middle, your sandwich is just bread. Without a good supporting cast in the middle, your transaction could be just toast.

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