This is the seventh part of the series on Buying a Home in Los Angeles, in which we will go over what is involved in the escrow process.
What is escrow? Simply put, escrow is the handling of the contract by a neutral party which will ensure that the terms of the contract are met by both sides and all monies will be disbursed by them upon satisfactory fulfillment of the contract by both parties.
What happens during the escrow period? Below is an overview of what to expect during the escrow process. There are a number of contingencies that need to be met by both buyer and seller. Default by either can result in cancellation of the contract:
- Part of the offer will include putting down a good faith deposit (GFD) in the amount of 3% of the total purchase price and this amount will need to be in the escrow company’s hands within 3 days of contract signing. The GFD is applied to the full purchase price and will be refunded if the buyer backs out of the contract for a valid reason, before removal of all contingencies. If the buyer is found at fault, then this deposit can be forfeited to the seller.
- Certainly with a 7-day inspection contingency, your Los Angeles Realtor® will get a qualified home inspector out to the home as soon as possible. The inspector will conduct a thorough investigation of the property. Generally the buyer is expected to be present during the inspection, after which the inspector will give them a verbal report. A full report will be sent later that day or the next. Usually they require payment at the time of service. The amount of the inspection varies depending on the size of the home. But you can expect to pay a minimum of around $350 in Los Angeles.
- If they are lucky and there is nothing wrong with the home, then the buyer will remove the inspection contingency, which means they can no longer cancel the contract for physical conditions, unless something really unusual surfaces during the escrow period.
- The inspector almost always suggests that the buyer conduct additional inspections for things like the chimney, foundation, air-conditioning, plumbing, etc if they cannot determine the condition themselves. In this case, the buyer’s Realtor® will order those inspections as quickly as possible. They also will need to be paid upon service.
- The next step will be to put together a Request for Repairs to submit to the seller. Generally these will be the more costly items, not everything on the list, which the buyer would like paid for by the Seller. At this time the clock on the 7 days stops and the ball is in the seller’s court.
- The seller may agree to the terms of the Request for Repair, they may negotiate them, or they may refuse them. At this point if the buyer does not want to continue with the process then they may request cancellation of the contract. Once terms are agreed upon, then they will remove the inspection contingency.
- If the property is a single family home not part of a homeowners’ association, then pretty much all the buyer has left now is the appraisal and the loan approval. The standard for these is 17 days, although in this market the buyer’s Realtor® might have requested a longer period. The lender will help determine this period.
- The appraisal will be conducted by the lender at the buyer’s expense. If the property appraises then there is no problem. If it doesn’t then the buyer has the option to request cancellation of the contract, ask the seller to lower the price, or pay the difference themselves. Without one of these options the buyer is not going to be getting loan approval.
- If all goes well and the loan is approved, the buyer will remove the loan and appraisal contingency together. At this point they basically have bought the home.
- Until the seller has met his or her contingencies, then the buyer can still request cancellation of the contract even if they have met all theirs.
- The seller has 7 days to deliver all the disclosures relevant to the property many of which are standard California Association of Realtors forms. The most important of these will be the Transfer Disclosure Statement and Seller Property Questionnaire (not provided with foreclosures, nor generally with probates and trust sales) which will point out all the facts known by the seller; the Natural Hazards Report, showing anything and everything to do with the property and surrounding area; the Preliminary Title Report, which will show any defects on title if any.
- If the property is a condominium or there is a homeowners association, then the seller is required to request the covenants, conditions and restrictions (CC&Rs) of the community within 3 days from the Board or management company. The buyer reviews these and, should there be something of concern, then the they can opt to request cancellation of the contract.
- The seller is required to comply with several items on the contract: if requested, they must have a termite inspection on the property and if there is infestation and they are required to, then they need to have the pest control company remediate it.
- If requested, the seller must provide a one-year home warranty for the buyer. Usually the buyer’s agent will order this.
- There are certain requirements mandated by the city in which the property is located. Los Angeles has retrofitting requirements such as low-flow toilets, water heating bracing, gas shut-off valves, smoke detectors, and most recently, carbon monoxide detectors.
If one side fails to comply with their part of the contract then the other side can issue a Notice to Perform. Failure to do so can result in a request to cancel the contract. In order to cancel a contract, both sides need to sign.
If you are a cash buyer remember to get your homeowner’s insurance in place. If you are getting a loan it will be a requirement.
If everything goes smoothly, then once the loan has funded and the title company has received the funds, they will go down to the County Recorder’s Office (usually the next day) and record the change of title.
Escrow is closed and the buyer is the proud owner of a new home.
Buying a Los Angeles Home – The Series:
Step 1: Getting ready to buy
Step 2: Why use a Realtor?
Step 3: Define your criteria
Step 4: Start your search
Step 5: Make your offer (about the purchase contract)
Step 6: Be prepared to negotiate
Step 7: Go through the escrow process
Step 9: Prepare for your new home