How Does Escrow Work in a Real Estate Transaction?

Karen Malanga: Thank you for joining me for another episode of House Talk. I’m so fortunate to have this show where I get to interview the best people in the real estate business, and they help simplify the complex world of real estate transactions and home ownership. This helps you come to every transaction informed and prepared.

I’m your host, Karen Malanga, a licensed real estate broker with RE/MAX Key Properties with years of experience get into their dream home, sell a property. And I’m always there to navigate the process.

I’m so excited to welcome Diane Ingersoll Thorp. She’s from Western Title & Escrow. And she is one of our go-to title officers here in Central Oregon. Diane, welcome to the program.

Diane: Thanks Karen. It’s great to be here.

Karen: We’re going to go step by step through the life of an escrow. So for those of you that haven’t purchased a home before, this will be very educational. For those of you that have purchased, a lot of the things that go on during the escrow process are kind of behind-the-scenes. And I’m not quite sure that everyone’s aware of what happens when you’re taking a property from when we give you the sales agreement all the way to the recording of the sale.

Diane: Yes. So, once we get a fully executed sales agreement which would come from you, we at that time would open escrow and title. We get it into our system. We let the Title Department know the property address, the buyers and the sellers. They will then in turn search the property and do a title search. And we’ll get a preliminary title report.

Karen: And what are you looking for on that preliminary title report. What is that doing? Is that establishing ownership? Is it looking for liens? What is it?

Diane: Both. It’s multiple things. It tells us ownership. It tells us any red flags that we might need to be concerned with. So it will tell us any liens, judgments, taxes owed, that kind of thing, on the property that we, as escrow, would need to take care of to ensure that the buyer in the transaction is going to have clear title to that property once we get to closing.

Karen: And that really is the whole point of escrow, correct, to make sure that the buyer and the seller have agreed to sell this property, that the property is free of any encumbrances that you know of? And

Diane: Correct. We are technically an impartial third-party to the transaction. So we handle all the documents, the monies needed to close that transaction and also clearing the title which means ensuring that the buyer is going to have clear possession once they take title.

Karen: …of the property that they thought they were buying.

Diane: Correct, correct. So, we search and make sure that’s the correct property, legal description and anything that would be attached to that property.

Karen: So, after you get that initial preliminary title report, then what happens?

Diane: So then, at that time, we send a copy of that title report out to all parties—buyers, sellers, agents, lenders. They’ll get a copy of that report. We’ll send copies of all exceptions. And by exceptions, I mean anything attached to that property. So that’ll show taxes, judgments, liens, anything along those lines. Those will go out as well, so buyers and sellers can review them.

If there’s any questions at that point, they’ll reach out to us. And me and my team at Western will let them know anything we can in regards to that.

Karen: Again, we’re speaking with Diane Ingersoll Thorp from Western. So can you explain to our listeners, Diane, what’s a typical lien or judgment?

Diane: A typical lien or judgment is going to be a mortgage first off. That’s the most typical. So, somebody that has a mortgage on their home, we look for that. And we’ll get the proper paperwork and demand to pay that off. Other typical judgments are child support, spousal support. Those are the most common ones that we see.

Karen: Negative liens, those might be unpaid property taxes…?

Diane: Correct! So we’ll check that, and we’ll prorate all property taxes at closing as well. And we’ll make sure that they are paid current.

Karen: And what if someone is in bankruptcy while you’re going through title and escrow? What happens?

Diane: If somebody’s in bankruptcy, it depends on the type of bankruptcy. There are several different kinds. So depending on what type it is, there’s steps that we have to take as escrow and title. So, sometimes, that might be a period of time until that bankruptcy closes. And then the judge signs off that they can either sell the property or buy the property depending on who’s in the bankruptcy, the buyer or the seller. So there’s steps that we have to take there to make sure everything is transferred properly at closing.

Karen: You open escrow, then you receive the earnest monies or the first deposits from the buyer. And then, we get the preliminary title report. And then, if there’s anything on it, if I’m understanding correctly, you go ahead and make attempts to clear that off through the proper channels.

Diane: Correct.

Karen: And then, do we get a title report showing that maybe something has come off?

Diane: If we can clear it prior to closing. If not, anything that needs to be clear will come off at final policy. So that will remove anything that needs to be cleared before that buyer takes possession.

Karen: And then, I think sometimes my buyers and sellers don’t understand the timeframes. They think, okay, their loan is approved, and they’ll just rush in and sign with you. But you get the docs from the lender before closing. And then, you have to do something you always say “working them up the documents.”

So, at that point, everything is ready. Title has been cleared. We’re ready to get loan documents. Loan documents come in to me, and I work up all the figures. So I take the lender’s figures, any real estate figures, our title and escrow fees. And I work them up on a document called a closing disclosure. And that gets sent to the lender to balance the file and the numbers for both parties of the transaction.

Okay. And then, they approve that. And then I’m set. I get the go ahead to go ahead and set up signing appointments. And so at that point, I will talk to their realtors and buyers and sellers and set up signing appointments.

So, at that point, the property pretty much has the green light to be sold?

Diane: Correct.

Karen: As long as the funds come in properly.

Diane: Yes.

Karen: Well, it’s a long process, isn’t it?

Diane: It is a long process. Some can be shorter than others. Some can take a couple of days; some can take a couple of months. It just really depends on the terms of the sales contract and the title to the property.

Karen: Well, we’re going to be right back with Diane Ingersoll Thorp from Western Title. I’m Karen Malanga with RE/MAX Key Properties. And you’re listening to House Talk!

When we come back, we’re going to go over some of the bumps that happen in escrow. Thanks for listening.

Karen: Hi, this is Karen Malanga with House Talk. And we’re back with Diane Ingersoll Thorp from Western Title.

So Diane, during the break, we were talking about some of the bumps I’ve experienced during escrow and title. And then, you mentioned a few of yours.  What  we were discussing is how important it is to know who the seller is and where they live if they’re out of state because that affects Oregon withholding.

Diane: It’s important for escrow to know seller contact information, number one, because that’s where we get all of our information and authorization to contact any parties that might have a lien on the property.

And we also need to know if they’re a resident of the state of Oregon. That’s really important because we have to monitor if any funds need to be sent to the state. So if you are not a resident of the state of Oregon, then that’s going to impact your transaction. We need to get some additional documentation to move forward with that closing.

Karen: And then, what happens in the sad situation where someone does pass?

Diane: So, if you’re in a process of an escrow, and someone passes away—which is unfortunate—we would have to go through several processes. So depending on how title is held, if it’s that person as an individual, then at that point, depending on the sales price and the monies involved—I think it’s $275,000 or less—the family could either chose to do a small estate or they could go through a full probate which could take several months. And a lot of times, that involves attorneys. So they need to know that that’s going to be additional expense. And the heirs  to the person that passed away are going to have to start going down those channels.

Karen: The sale was considered null and void in that particular instance.

Diane: And that can be depending on how the heirs want to move forward because, obviously, at that point, it’s the heirs’ decision.

Karen: Well, if there aren’t any heirs, and there isn’t a will, then the state has the right to take the property.

Diane: Yeah. So the state will come in at that point, and they’ll appoint what’s called a personal representative of the estate. And that person will then move forward with signing of documents and handling anything going forward if that escrow was  still to close.

Karen: I know it’s very important in how people choose to take title when they sit down with you. Are they going to be tenants in common? Are they going to be tenants by the entirety? Can you kind of go over the differences of the different types of tenancy that we have here in Oregon?

Diane: Yes. So the most common for married couples is tenants by the entirety. And that means that once you’re legally married, and you take title to your property in tenants by the entirety, then if something were to happen to the other spouse, then the surviving spouse would automatically get full 100% interest in that property. So that’s the most common way we see for married couples.

And Oregon is not a community property state. And that means even if you are married, and you take title to that property as your sole, separate property, your spouse does not have any legal right to that property unless they are in title with you. So you can take title solely as your separate property.

Karen: I think what people need to know is that, in Oregon, tenancy is different than they may be used to in another state.

Diane: Correct. State by state, everything is different. So the way you hold property in California would be different than how you would hold title in Oregon.

Karen: Diane Ingersoll Thorp from Western Title. And again, Diane, we’re so excited and happy to have you here today. It’s nice having an escrow expert here on House Talk.

Diane: I’m glad to be here!

Karen: What happens with the tenants in common?

Diane: Tenants in common is typical if two parties to a transaction want to take undivided interest to the property. So say somebody wants 50%, the other person wants 50%, we would vest them that way as tenants in common. And then, if something were to happen to either party, then their heirs at that point would get the interest in the property of the person that passed away if  that was the case.

Karen: So, if I was married, and my husband and I chose to do tenants in common, and I passed away, my children would get possession of half of that property?

Diane: Correct, your interest in that property, that’s correct.

Karen: That could get a little muddled.

Diane: it could.

Karen: Yup, definitely.

Diane: So then, at that point, you’d have to go through the probate, how we spoke about earlier, something along those lines, to see who would sign on behalf of your estate. And then, you could move forward to either selling the property or transferring it into their heirs’ names.

Karen: We’re going to have to take another break. And when we get back, we’re going to have some more interesting facts about escrow and title. Thanks so much, Diane, for being here on House Talk.

Diane: Yes!

Karen: Hi, this is Karen Malanga back with House Talk and Diane Ingersoll Thorp from Western Title. Diane, the next topic that I would love to have you speak to is something that none of my out of state clients understand when it comes to the state of Oregon. And that’s our property taxes. It’s like July 1st, but it’s due November 15th.

Can you explain our property tax system? I don’t know if you know why it is this way, but you might as well just…

Diane: I don’t know why it is the way it is. But it is not a calendar year. So they do it on a fiscal year. And that runs July 1st to July 1st. They’re assessed in October and payable in November.

Karen: So, what does that mean? Does that mean that your taxes really start in October or does that mean that’s when the bill goes out?

Diane: So, your taxes actually start July 1st. It’s the start of that property tax year. But you don’t have to pay those taxes  until November 15th. And once you pay those taxes, then they’re paid through July 1st of the following year.

Karen: So, when someone buys a property say in November, and the taxes are being prorated, then you want to make sure that the seller paid them…

Diane: …up until that point.

Karen: And part of them are in the rears, and part of them are in the future.

Diane: Correct, correct. So it can be confusing. And I would say that’s probably one of the most confusing things when I go over closing statements with my buyers and sellers.

Karen: Is our property taxes done?

Diane: Correct, yup.

Karen: So, how do  you go about doing these prorations then in escrow?

Diane: So, we prorate off the tax amount that we currently have—so whether the previous year or the year that we are in depending on what time of year the closing is. We’ll prorate from the data of closing through the end of the tax year or from the beginning of the tax year through the date of closing. So, depending on what if we’re paying prior to or after November 15th.

Karen: Yeah. And you have to kind of explain this to everybody.

Diane: Correct, yeah. And we can explain it sometimes, and it can get confusing. But I feel like I do it enough, and I feel like I can explain it fairly well to most buyers and sellers.

Karen: I guess I’ve never understood why they start in July 1st, but we’re not billed then. We’re not billed until November.

Diane: Right! And I honestly don’t know the answer as to why they start them on July 1st and they don’t assess until October which is when the assessor assesses all the property taxes for the six months prior and the six months later. And then they’re due on November.

Karen: It is confusing. But it’s good that we have title and escrow and that you guys know what you’re doing with regards to our property taxes.

Diane: Right. Yeah, yup!

Karen: So, another question that I get a lot from clients is: “What is title insurance? And what does it cover?”

Diane: So, title insurance, the difference between title insurance for a piece of property and say like your auto insurance, your auto insurance protects you for any future accidents, what title insurance covers is anything that happened in the past prior to you taking possession of that property. So we’re insuring, through our title search, our ownership search, that you’re going to have clear title to that property.

So, we’re going to ensure that if anything comes up after you take possessions, and somebody says, “Hey, I have an interest  to this property and something was done incorrectly. The seller didn’t have the right to sell the property,” we’re going to insure that for that buyer.

Karen: Okay. And then, are there extended title insurance policies?
Diane: There is. So lenders, a lot of time, want an extended title insurance policy if the buyer is getting a loan. The lenders want the insurance policy because they want insurance that they’re going to have the lien position on that property and that their borrower actually is going to be the owner of that property.

So, we’re insuring that we’re going to put that buyer in title. And the lender is going to have that lien position which means that they’re going to be the first one to be able to go in and have the rights to that property if something were to happen and the borrower stop making payments.

Karen: And then, there’s also insurance when you find out that someone has done remodeling recently.

Diane: Yes. So that’s known as early issue. So that goes for remodel or new construction. An early issue title insurance covers any subcontractor, supplier liens that might go into such of a project as new construction or remodel.

So there’s an additional policy that’s provided by title companies that will cover for that early issue title insurance.

Karen: Diane, it’s been wonderful having you here. I hope you’ll come back to House Talk.

Diane: Yes, I would love to!

Karen: It’s Diane Ingersoll Thorp with Western Title. I’m Karen Malanga with RE/MAX Key Properties. This is House Talk.

I want to leave you with another trivia question this week. On the seller’s closing statement, would the sales price be a credit or a debit?

You can find the answer to that at NestBed.com. And tune in next week when we have Dan Williams back. And he’s going to be going through a mortgage step by step.

Thanks so much for listening. And we’ll see you next week.

Podcast: Play in new window | Download

Subscribe: Apple Podcasts | RSS