How to Manage FSBO Escrow when Selling or Buying in Ohio
Escrow in a real estate transaction refers to the period of time between the signing of an agreement and closing. The fsbo escrow process helps to ensure a smooth transaction between the parties by ensuring that funds are not released to either party unless/until all relevant terms and contingencies have been addressed.
1. Executing a Valid Purchase Agreement
The first step in the fsbo escrow process is to make an offer on a property. The offer letter becomes part of the escrow cache of documents and includes any contingencies and the terms of the offer, including the offer price and expiration date. For parties who are not represented by a real estate agent or attorney, standard templates may be available through a local Bar or Realtors association to aid in ensuring that an enforceable contract is achieved once the parties agree on general terms.
Buying a home is typically the single largest asset purchase for an individual. In some cases, unrepresented individuals may be tempted to create an offer from scratch or rely on a contract format suggested by the other party. In such cases, the hundreds of dollars spent on a qualified contract review can help to avoid potential damages that could be in the thousands or tens of thousands of dollars. A professional contract review will ensure that the party is aware of any risks associated with the material terms of the contract, that they have an opportunity to artfully present alternatives that are in line with industry practice, and that the contract is structured in a manner that does not provide an improper advantage to the opposing party.
Once an offer has been finalized, an escrow account can be opened, typically by a title company, a financial institution or an attorney. In an FSBO transaction, it’s not uncommon for the attorney to establish an escrow account to manage documents and funds exchanged during the transaction. If an attorney handles the escrow process, it may also be known as a “settlement” account depending on the legal jurisdiction where the sale occurs.
The escrow or settlement account may include any earnest money or good faith deposit involved with the offer.
2. Lender Ordered Appraisal
In an FSBO transaction, the buyer pays for an appraisal ordered by the financial institution that is underwriting the mortgage. The financial institution often selects the appraisal company to validate the market value of the property and protect their financial interest in the property should it ever foreclose. If the appraisal value is less than the offer price, the bank will base the loan on the lower (appraised) value. In such cases, the seller will need to agree to accept the lower sales price, or the buyer will need to establish funds for the difference between the selling price and the appraised value. The purchase contract remains in place until either the buyer or seller satisfies the lender’s request.
3. Receive and Accept Seller Disclosures
During the selling process, the seller is obligated to specify or disclose, any irregularities with the property that may impede closing or reaching an agreement on the value of the property. That may include zoning violations, failed inspections, non-permissible uses, damages to the property, etc. The seller disclosures are added to the escrow or settlement account.
4. FSBO Buyer Funded Property Inspection
While property inspections are not required to move forward with the purchase of a property, they can be extremely valuable in identifying non-visible conditions that could significantly impact the value of the house. Most property inspections are under $1000 and they help the buyer to identify any (potentially major) problems with the property before the close of the transaction. The buyer can ask the seller to correct any damage or repair the property at the seller’s cost OR request a lower price to allow the buyer to make the repairs before acquiring the property.
Any property that is listed “as is” indicates that the seller is unable or unwilling to make repairs or improvements prior to the close of the property. FSBO properties in Ohio sometimes come with an “as is” contingency because the homeowner is in financial distress or otherwise unable to improve the property.
Other Property Inspections
There are a few other types of inspections to consider before closing on a property:
- Pest Inspections – pests like ants, termites, roaches, rats, squirrels, mice, etc. may have made their way into the property and nested causing unseen damage to walls and even electrical wiring. If there are pest problems present in the property, the buyer may demand that the seller remedy those problems through a pest remediation service or a reduction in the selling price. Some pest problems can lead to structural damages and may cost thousands, or even tens of thousands, of dollars to remedy.
- Environmental Inspections – radon gas, mold, asbestos, coal, oil or gas spills, and other contaminants that may be on the property can pose serious health risks and can involve extensive costs to remediate.
- Natural Disaster Assessments – some properties may be in areas prone to earthquakes, major winter storms, tornadoes, or flooding. Those assessments can identify the future risk of damage to the property that could substantially increase the cost of insuring the property.
All inspections and assessments are documents added to the escrow or settlement account for review before closing.
5. Acquiring Insurance on the Property
Appropriate insurance coverage will be required for any sale in which a financial institution is securing the buyer’s financing with a mortgage. In addition to standard homeowner’s insurance, Lenders may require specific coverage related to hazards such as hurricanes, earthquakes, or floods, depending on the location of the property. Costs for these provisions can be significant and may even exceed the base cost for standard coverage. Insurance rates can also vary dramatically depending on coverage options such as whether claims are paid at declared value or the replacement value. Once insurance coverage is approved and attained, the certificate of insurance is filed in the fsbo escrow or settlement account.
6. Acquiring the Title Report and Title Insurance
A Title Report is a document that indicates if there are any liens or legal claims against the property. Liens can arise from claims of unpaid debt asserted by contractors, financial institutions, or even Homeowners Associations (HOAs) and government entities. The Title Report protects the buyer against future litigation by verifying that the seller is able to sell the property unencumbered. Title insurance is a product that insures you and your financial institution against anything that might appear on the title AFTER the close that was not disclosed during the sale. Any discrepancies in the title are the responsibility of the seller to cure before the closing can be completed. The title report and title insurance are part of the escrow or settlement account.
7. Closing the Escrow Account
In preparation to close, you will receive a HUD1 document that shows the value of the home. This should match the documents you already have in place from the offer. Depending on the arrangement, there may also be a need to complete a final walk-through prior to closing.
The closing process involves signing the mortgage loan paperwork and other documents that transfer the deed and title of the property to the buyer. It’s strongly advised that you have a real estate attorney review your agreements.
The seller will be signing documents indicating the sale of the property, which should address one of the final contingencies for the closure of the fsbo escrow account. The escrow or settlement officer will prepare a new deed that is submitted to the county recorder for publication. Your lender will transfer the mortgage funds to the escrow account. Depending on the settlement structure, the buyer may need to provide separate funds at closing related to the down payment, taxes, fees, etc.
Upon completion of the closing, or as otherwise designated in the purchase contract and related documents, ownership, and possession of the property are officially transferred from seller to buyer.
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