Here are the 19 most common issues in title and escrow that can go wrong and how to avoid them.
A lot can go wrong when buying or selling real estate, so it’s important to protect yourself. The escrow process gives you time to inspect the property, read all disclosures, perform a title search, understand encumbrances and remedy any issues that may arise. Once your escrow account is opened, here are the 19 most common things that can go wrong and how to avoid them.
1. Lending problems:
Issues that crop up in the underwriting process are probably the most common reason escrows fail to close. For example, if the buyer makes a big credit purchase before closing, discovers additional debt, encounters difficulty providing required documents due to self-employment, or if interest rates increase and the borrower no longer qualifies, the deal may fall apart.
To avoid unexpected lending issues, work with reputable title agents, escrow officers, and lending professionals. Heed their advice, and do not make any major financial changes or purchases during escrow.
2. Property inspection defects and/or final walkthrough:
Another common escrow risk is the home inspection. If the seller hasn’t done these prior to listing the house, and especially if they’ve lived there for many years, a home inspection may turn up all kinds of trouble, from termite damage to mold to rats living under the house. If the seller refuses to remedy these, the buyers might walk away.
To avoid surprises and delays with escrow, it’s best for sellers to have home inspections done and major repairs addressed prior to listing the house. Buyers also need to do their own inspections and be prepared for anything.
3. Hazard disclosure surprises:
During the escrow process, buyers get an opportunity to view all known disclosures about a property, including potential hazards nearby. Once they discover risks like being under a commercial flight path, two blocks from a Superfund site or in an avalanche hazard zone, they may fall out of escrow.
Disclosure surprises can’t always be avoided, but if you familiarize yourself with your state’s property disclosure laws, you’ll know what questions to ask your real estate agent about a property before going into escrow.
4. Bank delays:
This one often takes people by surprise. Bank wires sometimes take longer than expected to complete, but more commonly, banks impose transfer limits when moving large sums of money. Don’t assume it’s an easy, one-step process to move your $90,000 in savings from the bank to your escrow account. You may have a $10,000 per day transfer limit and not know it.
To avoid these issues, contact your bank early in the escrow process to discuss how to transfer your down payment, so you don’t miss any escrow deadlines.
5. Personal property:
Escrows fall through over disputes about what gets transferred with the sale. For example, the buyer thinks the pool table is included, but the seller disagrees. Although this varies somewhat by state, anything not permanently affixed is considered personal property and therefore not included in the sale unless itemized in the purchase agreement.
To avoid misunderstandings, if you’re buying a property and want the tractor, armoire, washer, dryer and refrigerator to convey at closing, call them out specifically in the purchase agreement. Check with your title agent and real estate agent for any clarifications.
6. Errors in public records:
From a property title perspective, this is probably the most common issue. People sometimes make clerical errors—misspelling names, inverting address numbers, entering inaccurate square footage or getting the lot size wrong can all lead to property title and tax assessment issues down the road.
Both buyers and sellers should purchase title insurance to protect themselves against these issues, which can become big problems without protection. Make sure to check with your real estate and title agent on this.
7. Unknown liens:
Whether you’re buying or selling, you may not know that some disgruntled contractor put a lien on the property in question, now causing a defective title. Or if it’s a foreclosure property, there may be a third lien on the home from a private lender or some other party that nobody knew about.
A title search during escrow can reveal any issues that need to be resolved, and title insurance can protect both buyer and seller against future claims. Finding a detail-oriented title agent can help.
8. Undiscovered encumbrances:
An encumbrance means any legal thing that burdens or restricts usage or transfer of the property. An encumbrance can be a mortgage, a lien, an easement (a right to cross someones land) or a more bespoke restriction. As a buyer in escrow purchasing your dream property, you may not realize that your next-door neighbor has the right to keep his goats in your pasture in perpetuity as payment for debt to a previous owner. This is an example of an encumbrance.
A comprehensive title search should reveal all encumbrances that come with the property, and it’s up to the buyer to decide if they can live with those or ask the seller to remedy the situation. Contact your title agent for more information.
9. Unknown easements:
An easesment is a right to cross or otherwise use someone else’s land for a specified purpose. A buyer purchasing a home might not realize that the electric company has an easement to use the property’s driveway to access power lines, or that a neighbor has a right to use that same driveway to access his adjacent property.
A comprehensive title search by your title agent during escrow should reveal any easements that owners are bound to respect.
10. Boundary and survey disputes:
These happen more often with raw land and rural properties. But even when purchasing a home, you may not realize that the neighbor built his fence three feet onto the property you’re considering until you’re in escrow and inspecting its plat map, which is an illustration of legal divisions of land including boundary measurements.
Title and escrow companies provide these as part of the due diligence process, which is why it’s essential to work with a reputable title agent.
It’s possible that somewhere in the chain of title for any given property, someone forged a signature or fabricated a document, and placed it in the public record. Discovery of such acts can cloud (invalidate or impair) your title and prevent a sale.
To protect your investment, perform a title search and obtain title insurance when buying or selling real estate.
12. Illegal deeds:
Sometimes deeds are conveyed illegally, for example, by entering into a contract with a minor, an incapacitated person or an undocumented immigrant without authority to sign. Any of these can cloud and cause a defective title.
Once again, do a title search and obtain insurance prior to closing escrow.
13. Missing heirs:
When people pass away, properties are often transferred to heirs. Sometimes heirs are missing at the time of death and turn up later, filing claims against your property years after it was sold.
Good title insurance will protect you from these situations.
14. Missing will:
Sometimes it’s not the heirs that go missing, but the will itself. In this scenario, in the absence of a will, the property is sold through probate by the state. The will turns up perhaps years later, and now the heirs want your property that was legally willed to them.
Comprehensive title insurance protects you from exactly this kind of mess.
15. False impersonation of previous owner:
Identity theft is on the rise, and some thieves will impersonate a property owner and illegally transfer a property title. This happens more often when the owner has a common name and can occuranywhere along the chain of title.
This is another good reason to obtain title insurance.
16. Non-insurable property:
Sometimes if the property has had a major insurance claim against it in the past or if it has an undesirable attribute, like a shake roof in a high-danger fire zone, the property can’t be insured. Such discoveries often cause escrow to fall through because most people purchase using lenders, and lenders demand insurance. But even cash buyers rarely want property that can’t be insured.
When buying a property, check with your insurance company to ensure it can be covered, and consider making insurability a contingency of sale.
17. Seller short on cash to close:
Sometimes, especially in a recession, you’ll find during escrow that the seller owes more to a lender than the house is worth and doesn’t have the cash to close. This can definitely cause escrow to fall through unless the buyer, the seller and the lender can come to an agreement on how to split the difference.
As a buyer, ask your real estate agent to find out from the owner if there are any issues prior to making an offer. You can’t always count on sellers to be forthcoming about this, but it will certainly come up in escrow and can be addressed then.
18. Appraisal short-falls
Also more common during recessions, sometimes the house doesn’t appraise for the agreed-upon price, coming in too low. Since lenders typically only fund a percentage of the appraised value, it’s up to the buyer and seller to decide how to handle the difference.
Ask your real estate agents if they think the home will appraise. Though they can’t know for sure, they often have a good sense of whether or not this is something you need to worry about.
19. Wire fraud:
This is a relatively recent development as thieves become more and more proficient at cybercrime. It usually involves hacking into the email account of a party to the transaction, for example, the real estate agent or mortgage broker, and providing fraudulent wiring instructions that end up in the bank account of the thief.
Wiring instructions usually come from the escrow company. The best way to prevent being robbed of your deposit is to call and confirm any wiring instructions received with the appropriate party.
Purchasing a property is big investment of time and money, so it’s important to take every precaution you can. Work with reputable title agents, escrow officers, and real estate agents. Read and understand all disclosures in escrow, purchase good title insurance and rest easy after escrow closes, knowing that you’re fully protected.
For more information about how Endpoint can work with you to ensure you don’t encounter issues with your home purchase or sale, get in touch firstname.lastname@example.org