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Step 4

What is and what happens in Escrow

&
What is a Loan Appraisal?


Once the contract is ratified, that is all of the negotiation points are agreed upon and both you sign the final contract and the seller and copies delivered, itís on to escrow.

The escrow companyís job is to act as a neutral third party for both you and the seller. They hold all of the money that you provide and the clear title that the seller effectively provides by signing the contract. They make sure that all of the terms of the contract are met and that everyone gets paid what they are due. This includes the pest inspection company, the appraiser, lender fees, any inspectors, title insurance, us as your agent, the seller's agent if any, etc., with the balance of the funds going to the seller as payment for the transfer of the deed.

One of the key activities that take place in escrow is the researching of the title. The Title Insurance Company does this, which here is most often the Escrow Company as well. The purpose is to prove to you and the lender that the seller has clear title to the property and that is not encumbered by any liens nor has other problems that cloud the title. If the title is clear, the Title Company commits to insure both the Lender and you should any covered problems be discovered after settlement.

Both rely on the Title Company to carry out faithfully their mutually consistent instructions relating to the transaction and to advice them if any of their instructions are not consistent or cannot be carried out. Very simply defined, an escrow is a deposit of funds, a deed or other instrument by one party for the delivery to another party upon completion of a particular condition or event.

An escrow is important in that both can move forward separately but simultaneously in providing inspections, reports, loan commitments and funds, deeds and many other items, using the Title Company as the central depositing entity.

If the instructions from all parties to an escrow are clearly drafted, fully detailed and mutually consistent, the Title Company can take many actions on their behalf without further consultation. This saves time and facilitates the closing transaction.

One of the final, but critical tasks for you to accomplish before closing is to arrange for homeowner's hazard insurance and flood insurance if required. Before closing you will need to provide to the Escrow Officer evidence that you have obtained this insurance .I will provide you a list of various insurers if you wish.

Typical instructions to the Title Company

  • The method by which the Title Company is to receive and hold the purchase price to be paid by the buyer.
  • The conditions under which a lapse or breach of purchase contract provision will terminate the escrow without a closing.
  • The instruction and authorization to the Title Company to disburse funds for recording fees, title insurance policy, real estate commissions, and any other closing costs incurred through escrow.
  • Instructions as to the proration of insurance and taxes.
  • Instructions to the title company on the payment of prior liens and charges against the property and distribution of the net sales proceeds.

The duties of the Title Company

  • Opens the order for title insurance (provided by seller to buyer at closing).
  • Obtains approvals from the buyer on the Preliminary Report, pest and other inspections.
  • Receives funds from the buyer and/or any lender.
  • Prorates insurance, taxes, rents, homeowner association fees, etc.
  • Disburses funds for title insurance, recording fees, real estate commissions, lien clearance, excise tax on home , etc.
  • Prepares a final statement for each party, indicating amounts to be disbursed for services and any further amounts necessary to close escrow.
  • Records deed and loan documents, delivers the deed to the buyer, loan documents to the lender and funds to the seller, closing the escrow.

Escrow and Closing Whether you are a first time home buyer or season buyer you will find useful information here.


WHAT IS AN APPRAISAL?

Appriasal

If you've ever watched "Antiques Road show" on PBS, you're already familiar with the concept of an appraisal. The idea is similar in the realm of real estate valuations. Each property is unique, and the appraiser relies on his or her general expertise and specific research to arrive at an opinion of value. Appraisals are an infrequent experience for most consumers, who consequently tend to have some misconceptions about the process and the results.

An appraisal provides valuable information for the buyer and the seller, but the appraiser's primary mission is to protect the lender. Lenders don't enjoy owning overpriced property any more than they relish lending money to irresponsible borrowers. That's why the appraisal takes place before the lender grants final approval of the buyer's loan.

Again an appraisal is an opinion of value or the act or process of estimating value. Using the three common approaches, all derived from the market derives this opinion or estimate. They are:

  • 1. Cost Approach to value is what it would cost to replace or reproduce the improvements as of the date of the appraisal, less the Physical Deterioration, the Functional Obsolescence and the Economic Obsolescence. The remainder is added to the Land Value.
  • 2. Comparison Approach to value makes use of other "bench mark" properties of similar size, quality and location that have recently sold. A comparison is made to the subject property.
  • 3. Income Approach to value is of primary importance in ascertaining the value of income producing properties, has little weight in residential type properties. This approach provides an objective estimate of what a prudent investor would pay based upon the net income the property produces.

When they inspect a home for an appraisal, the inspection is really the "tip of the iceberg" of the work they do. Before they go to the house, they research public records information, get a plat map, check the zoning and flood data, and printout sales and listings of similar homes. During the inspection, they make a drawing of the home and other improvements such as a swimming pool and make notes on physical characteristics such as floor coverings and built in appliances. They check the site boundaries against a plat map. They look at the adjacent properties. After completing the inspection, they select comparable sales and listings and take photos of them. Back at the office, they contact real estate agents for more information on the sales terms, condition of the home, etc., reconcile conflicting information from different data sources, and write up the report. Total time? About 6 to 8 hours, on average where data is computerized and plentiful. Appraisers working in rural areas or with less data availability will take longer to complete an appraisal.

Appraisals of income producing property are much more timed consuming as more research and analysis is required. The time can vary from a few days on a small apartment building to many weeks for a large, complex property.

Then, after thorough analysis of all general and specific data gathered from the market, a final estimate or opinion of value is correlated.

Most important an appraisal isn't a substitute for a professional home inspection. The appraiser formulates an opinion of the property's value for the lender, while the inspector educates the buyer about the condition of the home and its major components.

For a detail process of an Appraisal please look over this feature article , by Calvin W. Moye that takes you step-by-step through the appraisal process.


And now on to our next "step!"


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Ron Kimball "A Internet Realtor"
Serving all of Kitsap Mason & Pierce County, WA
New Visions Reality LLC
1616 Ellis Court | Port Orchard, WA 98367
Direct Line (360) 876-4741 | Fax (360) 876 4843
E-mail: ron@ronkimball.com

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