Understanding the Escrow Process – Part 2: Documentation and Preparation

Welcome back to our comprehensive guide on the escrow process. In Part 1, we covered the critical initial steps of opening an escrow and the due diligence review phase. Now that the foundation has been set and contingencies have been addressed, we move into what many consider the heart of the escrow process: documentation, preparation, and coordination among all parties.

This phase requires meticulous attention to detail and clear communication between buyers, sellers, lenders, and the escrow holder. Let’s dive into the essential steps that bring your transaction closer to closing.

Documentation and Demands: Getting Everything in Order

After the due diligence phase concludes successfully, the seller and buyer must complete and return all requested paperwork to the escrow holder. This paperwork forms the backbone of the transaction and includes various disclosures, affidavits, and other documents necessary to complete the sale.

The types of documentation typically required include:

• Property disclosures – detailed information about the property’s condition, history, and any known issues
• Financial affidavits – statements regarding the financial aspects of the transaction
• Corporate resolutions – if entities are involved, documentation showing authorization to complete the transaction
• Various certifications and warranties – depending on the specific transaction requirements

Payoff Demands and Association Statements

One of the critical tasks during this phase is requesting payoff demands. These are statements detailing the exact amounts needed to pay off any existing loans or liens on the property. Obtaining accurate payoff information is essential because these amounts can change daily due to interest accrual and fees.

If the property is part of a homeowner’s association or commercial association, association statements are also requested. These statements ensure that any dues, fees, or special assessments are properly accounted for in the transaction. The escrow holder needs this information to calculate accurate prorations and ensure all obligations are properly transferred or satisfied.

Lender Involvement and Loan Processing

Meanwhile, if the buyer is obtaining financing, their lender contacts the escrow holder to begin processing the loan. This step involves a complex coordination between multiple parties and includes:

• Gathering financial information from the buyer to satisfy loan conditions
• Ordering appraisals and other required inspections
• Coordinating with underwriters to ensure all loan requirements are met
• Preparing loan documentation for the buyer’s signature

The seller also provides information for prorations during this phase. Prorations are calculations that determine how expenses like property taxes, insurance, rent, and utilities are divided between buyer and seller based on the closing date. These are typically calculated based on a 30-day month unless specified otherwise in the Purchase and Sale Agreement.

Preparation and Signing: Bringing It All Together

As the escrow progresses toward closing, the necessary documents are prepared and circulated for signatures. These documents are often exhibits to the PSA and include various agreements and disclosures required for the transaction.

This preparation phase involves several critical steps:

Loan Document Preparation

The buyer’s lender submits loan documents to the escrow holder for the buyer’s signature. These loan documents can be extensive and typically include:

• Promissory notes – the buyer’s promise to repay the loan
• Deeds of trust or mortgages – securing the loan with the property
• Various disclosures – required by federal and state lending laws
• Closing cost worksheets – detailing all fees and expenses

Closing Statement Preparation

The escrow holder prepares the buyer’s closing statement, which serves as a comprehensive financial summary of the transaction. This statement outlines all financial aspects, including:

• Purchase price and loan amounts
• Closing costs and fees
• Prorations and adjustments
• Total amount due from buyer at closing

This document is crucial because it shows exactly where every dollar in the transaction is going and ensures transparency for all parties.

Document Review and Signing

Once the documents are ready, the buyer signs the loan documents and arranges for their equity contribution (down payment and closing costs) to be sent to escrow. This is typically done through wire transfer to ensure the funds are available when needed.

The escrow holder then packages these signed documents for the lender’s review. During this review, the lender identifies any remaining conditions that must be satisfied before they will fund the loan. These might include:

• Final verification of employment
• Updated financial statements
• Satisfaction of any outstanding loan conditions
• Confirmation that all required insurance is in place

The Importance of Coordination

Proper documentation and clear communication between all parties are vital at this stage to keep the transaction on track. The escrow holder serves as the central coordination point, ensuring that:

• All required documents are properly executed
• Funds are received and verified
• Lender conditions are satisfied
• All parties are informed of the transaction’s progress

Any delays or missing information during this phase can postpone the closing, which is why attention to detail and proactive communication are so important.

Preparing for the Final Phase

With all documentation in place, loan conditions satisfied, and funds secured, the transaction is ready to move into its final phase: pre-closing and closing. The groundwork laid during this documentation and preparation phase makes the closing process much smoother and more predictable.

In Part 3 of our series, we’ll explore the final steps of the escrow process, including the closing and recording procedures, special situations like 1031 exchanges, and how confidentiality and dispute resolution work within the escrow framework.

The meticulous work done during this documentation and preparation phase cannot be overstated. It’s where potential problems are identified and resolved, ensuring that when closing day arrives, everything proceeds smoothly and efficiently.

Our team at the Seibold Group understands the complexity of this phase and works diligently to keep all parties informed and the process moving forward. Whether your deal is complex or straightforward, large or small, local or national, you have a partner with the Seibold Group.

Have questions about your commercial escrow transaction? Email us at michele@seiboldgroup.com to see how we can help navigate the documentation and preparation phase of your transaction.