By Kathy McSherry
I often hear about properties “falling out of escrow” before the sale closes. Why does a property fall out of escrow and what can the seller do to protect against this situation?
The term “falling out of escrow” sounds like you need a big net before it hits the floor. However, it’s just a term. An escrow company is a neutral third party that handles all of the terms of the purchase agreement and monies for deposits to the transaction. They ensure that the contract is executed exactly as it is written and everyone gets paid what they are due. This can include any lender fees, appraisals, pest inspections, title insurance, the Realtors to the transaction, etc. with the balance of the funds going to the seller as payment for the transfer of the deed.
When a purchase agreement is signed by both parties, it is time for the escrow process to begin and an escrow account is opened with an assigned number. It has a close of escrow date which would happen after all of the terms of the purchase agreement are met and both parties have signed their closing documents and the home is ready to transfer ownership. During the course of the entire transaction, the deal could fall apart for many different reasons. If this were to happen, the deal would fall out of escrow.
Here are some examples of deals that may fall out of escrow:
- The appraisal value is not met. Once the purchase agreement is signed, if the buyer is not paying cash for a property, he would typically be getting a loan. Banks require the property to be appraised to ensure that it is valued for what the buyer is borrowing. If an appraisal comes in short of the purchase price, the buyer will either have to come up with the difference, as the bank will only lend on the appraised value or less, choose to order another appraisal in hopes of getting a higher value, or a new purchase price can be negotiated. If the buyer cannot come up with the difference, and the seller will not lower the price, then the deal can fall out of escrow.
- The buyer fails to perform and cannot get full loan approval. Perhaps you have an executed purchase agreement and escrow is opened and the buyer was pre-qualified by a lender but not fully loan approved. Pre qualifications can be done over the phone with all of the pertinent information necessary to qualify and pull a credit report. Then the lender starts collecting all of the documentation and suddenly they forgot to disclose a divorce decree that would affect the credit, or during the transaction they go out and purchase a new car and at the very end when the lender goes to pull credit, they no longer qualify. Maybe they change jobs at the last minute or lose a job. All reasons that the buyer will not qualify and the deal falls out of escrow.
- Home inspections. When people buy a home they usually do a visual inspection of the property, but hire a qualified home inspector to thoroughly check for any kind of repair or defect. Examples could be if mold was discovered, pests or termites on the property, or damage to the foundation. If a repair or defect needs attention and the seller does not want to fix this item, the buyer does not have to go through with the purchase and the deal can fall out of escrow.
Tom, sometimes it seems like the stars have to align just right and it has to be a full moon in order for a property not to fall out of escrow. This is because you have more than one person responsible for performing different functions and if one person drops the ball then the deal can fall out of escrow. The best thing a seller can do is prepare your home from the start by addressing any repairs or defects, hire an experienced agent to perform all the due diligence necessary in setting the right price and ensuring that the buyers are indeed qualified, and be timely in submitting all paperwork and disclosures. This will definitely help the sale go smoother and hopefully not fall out of escrow. Hope this helps.
—Kathy McSherry is a Realtor at Coldwell Banker Residential Brokerage. Email your questions to Kathy@kathymcsherry.com or call 702-382-9905.