Understanding Escrows

Commercial escrows are different from what you may be used to in buying a house.  From the time you sign the contract until you close escrow, you have a lot of details to manage, numerous deadlines to meet and a pile of paperwork to deal with.  Your escrow will demand a lot of your time and attention. 

If you have not purchased many commercial properties before, you must understand this important thing.   Commercial escrows have critical deadlines that may not be flexible.  We suggest you mark each deadline on your calendar and review them regularly.

Your purchase requires the work of many professionals: escrow officers, title officers, real estate brokers, mortgage broker, lenders, appraisers, environmental consultants, building inspectors, etc.  If your purchase involves construction, this list may include space planners, architects, engineers, contractors, developers and city planners.  

Since obtaining financing plays such a central role in the process, Rozelle Financial steps up to coordinate all these professionals.  We track each deadline and check up on the work of each person you are relying on.

Escrow Stages

Transactions differ from one to another, but most escrows include the following stages.  If you understand what must happen in each one, the process will go much smoother.

Loan Application

You are strongly encouraged to start the loan application process well before you open escrow.  It takes most borrowers at least a week to fill out forms, prepare and collect financial reports and deliver it to us.  We, in turn, need some time to analyze the information.  Ideally, the execution of the purchase agreement completes the application process, rather than begins it.

Contingency Period

The moment the purchase agreement is executed “the clock starts” on your contingency period.  You can cancel escrow and get your deposit back at any time during this period, but not after it expires.  You have a huge amount of work before you put your money at risk.  You will check out the property’s physical condition, condition of title, zoning, etc.  But for our discussion here, you have to be certain you have a loan. 

Lender Selection

Don’t overlook the time this step will take!  Having analyzed your package, we may need time to discuss it with lenders before we present you with options. Then you need time to think them over and perhaps to discuss them with your partners, spouse or CPA.  If you have a tough loan to place, we may need a couple weeks to find the right lender.

Loan Approval

Lenders follow one of two different timelines leading to their approval.  Some lenders approve loans first and then order the appraisal and environmental reports.  Others wait for the appraisal and environmental to be done, and then make their decision.  Either way, you should not consider your financing contingency satisfied until you have these three things: a written loan approval, an acceptable appraisal and a clean environmental report. 

Lenders need at least two weeks to approve a loan.  Lately, appraisers have needed from two to four weeks to finish the appraisal.  A ten day environmental report can be finished concurrently.  Consequently, your contingency period typically needs five to seven weeks after the time you choose a lender.

Satisfying Closing Conditions. The lender's approval letter will list things you need to do before closing.  Get to work on this list as soon as it arrives.  For example, you must provide property insurance.  Buyers often forget about this item until the last minute.  We encourage you to contact your insurance agent early in the escrow process.  The lender will tell you what coverage will be required.  Have your agent send an insurance binder to escrow well before closing.  If your loan will be financing construction, you have lots of work during this stage getting your drawings, contracts and permits in hand.  Rozelle Financial will help you manage this process.

Document Preparation.  About three days before closing, when all the closing conditions have been satisfied, the lender will draft loan documents.  Normally you will see these documents for the first time at escrow where you will be expected to sign them on the spot.  If you want your legal counsel to review them before you sign, let us know ahead of time.  We will ask the lender to draft them early.

Closing.  Several things take place in rapid succession at closing.  The lender will send “lenders instructions” to escrow summarizing their fees and outlining what must be collected before closing.  The escrow officer will prepare an estimated closing statement which outlines all the charges and tells you how much money you need to close.  Make sure we review this statement, since there are often errors that cost you money.  You will then go to escrow, sign loan documents and wire your money into escrow.  When your money is in escrow and all the lender’s conditions have been met, the lender will wire the loan funds.  The escrow officer then checks the file and submits it for recording with county. 

Within a week you should receive a refund from escrow for the extra, padded funds they collected.

Note:  Don't forget to ask the lender for a copy of the appraisal.  They are normally happy to provide it after the close of escrow, but most will not offer it unless you ask.