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Open Escrow Account
Once the buyer and seller have a contract, escrow is opened. In San Francisco, escrow and title insurance are handle by one company. It is important to understand these two essential roles:
- Escrow: The function of escrow is to act as an independent third party between the seller, the seller’s agent, the buyer, the buyer’s agent, the lender, and other involved parties. Escrow collects, holds, and releases monies. Escrow only acts when it has matching instructions from both sides.
- Title Insurance: Once escrow is opened, the escrow/title company will issue a Preliminary Title Report which contains all publically recorded information regarding the physical description of the property, the current owner and type of ownership, and any encumbrances, encroachments, or easements of record. Before the close of escrow the title company clears financial liens of the seller. The escrow/title company will issue a title policy which insures clear title. Lenders require an additional “supplemental” title insurance policy.
Buyer’s Due Diligence: Contingencies
- Financing: If the buyer had a financing contingency, the buyer must secure a loan at the specified rate and term.
- Structural Pest Control Inspection: The purpose of this contingency is to gain more information about the physical condition of the property. With a pest inspection contingency, the buyer pays for an inspection. Based on the report, the buyer can negotiate with the seller for a credit or to have the work completed. The seller, however, is not obligated to negotiate.
- Inspection by Contractors, Engineers and Architects: The purpose of this contingency is to gain more information about the physical condition of the property. Under this contingency, the buyer can have anyone inspect the property. Based on the reports, the buyer can negotiate with the seller for a credit or to have the work completed. The seller, however, is not obligated to negotiate.
- Appraisal: The purchase can be contingent on the property appraising (by an independent appraiser) at no less than the purchase price.
The buyer must remove each contingency in compliance with the purchase contract. The buyer can remove a contingency “subject to” certain new terms being met, but that becomes a new negotiating point to which the seller must agree. If the seller does not agree, the contract and escrow are in jeopardy. Once all contingencies have been removed, the buyer will increase to purchase deposit, usually to 3% of the purchase price.