Reviewed by: Brandon Brown

What does open escrow mean? A verb? A noun? A scrap of poetry? “Open escrow” has detailed and specific meanings when it comes to real estate. Once a potential buyer sends you that love letter of a purchase offer—and you reply with a heartfelt “yes”—the romance begins.

Open escrow can be a frantic period, and tasks, dependencies, and deadlines can come down to hours and days. This process is typically monitored by a neutral party who holds on to earnest money, makes sure that all the T’s are crossed and I’s are dotted, and acts as the only neutral party on this group date between buyer, seller, and their respective agents.

A lot can go wrong during the escrow period—knowing your responsibilities and options to streamline the process can help you avoid wasted time, money, and heartache. That’s the topic of this guide: how to navigate the open escrow process without souring relationships (or sacrificing a payout).

What Does Open Escrow Mean?

Exactly what does open escrow mean when it comes to selling your home? Sometimes a phrase is more than the sum of its words.

Escrow refers to an account set up with and managed by a neutral third party to hold funds or assets during a transaction or dispute between two principals. The escrow company or agent ensures that contractual obligations are fulfilled before dispersing the money or assets per a predetermined plan.

In real estate, the period of time between earnest money being exchanged and a sale being finalized is referred to as open escrow. When used as a verb, to open escrow simply means to initiate this process—to open an escrow account according to the purchase agreement contract which triggers the open escrow period.

The implications for real estate transactions go beyond the exchange of funds with an escrow account. The open escrow period involves multiple parties and steps that ultimately lead up to closing day.

Common Escrow Terms to Know

There are a few key terms that home buyers and sellers need to understand. When it comes to open escrow:

Escrow Agent

An escrow agent is a person or entity identified in the contract that performs the escrow functions. Escrow agents can be:

• Title companies
• Standalone escrow companies
• Attorneys
• Mortgage lenders
• Private individuals

While either party—the buyer or the seller—can put forth a specific escrow agent for the other to approve, it’s most often inserted into the purchase contract by one of the parties’ real estate agents or brokerage companies.¹

Note that you don’t have to stick with this typical process; if you’re a do-it-yourself-er when it comes to financial service providers, you can complete your own due diligence and nominate an escrow agent for the other party to review and approve.

Earnest Money

When potential buyers submit a purchase offer, it usually includes an offer of earnest money to be paid to a designated escrow agent. The amount is typically 1 – 3% of the purchase price, but it can skyrocket up to 10% in competitive markets or during new construction sales.²

If the sale goes through, the escrow money is credited toward the buyer’s purchase. If it falls through, the money can either be kept by the seller or refunded to the buyer depending on why and when the deal failed.

Contingencies

Contingencies in a purchase offer mean that the deal is off and earnest money will be returned to the buyer in certain circumstances. The most common are:

• Financing – Real estate deals depend on buyers securing purchase funds (like a mortgage loan) by a given date—closing day. Depending on state regulations, this contingency may be as detailed as specifying the interest rate, loan type, and loan-to-value (LTV) ratio.
• Inspection – The buyer will hire an inspector to come to the property to try to identify any and all repair needs and underlying issues with the property. This contingency typically means that the seller both allows access for the inspection and understands that the buyer may renegotiate the sale price and/or terms after the inspection depending on what comes to light.
• Appraisal – The buyer or their lender will conduct an independent appraisal, and the sale may be canceled or renegotiated if the resulting valuation is lower than the sale price in the original purchase offer.
• Home sale – If the buyer can’t secure a sale of their current home by a designated date, then the deal is canceled.

How the Escrow Process Works

Real estate transactions are governed at state levels and influenced by local customs. Below are the common steps for the escrow process. We’ve also noted some steps specific to California, one of the most heavily regulated real estate markets in the US.

Step 1: Opening Escrow

Once a buyer submits an offer to the seller, they can either agree immediately or reply with a counteroffer. After successfully completing negotiations, the seller signs and returns the purchase agreement which details the escrow agent selection, earnest money provision, and any contingencies.

This is the official opening of escrow, when both parties have signed the agreement.

Step 2: Depositing Funds

Signing the agreement triggers the buyer to wire earnest money funds to the escrow agent within a time frame identified by the contract (three days in California).³

The earnest money provides proof of the buyer’s commitment and covers the seller’s loss of active time marketing the home if the buyer walks away before completing the deal.

The escrow agent typically sends forms and instructions that detail the terms of the escrow to the principals.

Step 3: Escrow Duties

The escrow agent is responsible for several functions during open escrow. These include:

• Accepting funds and holding them securely
• Handling and reviewing documents
• Ensuring the contract requirements, including title clearance, have been met
• Dispersing funds according to predetermined contract instructions

Depending on state law, they may also be responsible for direct involvement in unfulfilled seller responsibilities, such as scheduling certain inspections and providing the resulting reports to all parties.

Step 4: Closing Escrow

Closing day for a real estate sale includes meeting to exchange keys and sign forms after a final walk-through of the house. However, closing escrow can occur either at that time or shortly prior to closing day.

The escrow account is closed when all documents have been signed, requirements met, and wire transfers completed.

Why Escrow Is Important

Home buying and selling are among the largest monetary exchanges that most families are ever involved in. Thousands of dollars—or even tens or hundreds of thousands—can be affected not just by whether a sale goes through, but by its timing.

Security for Both Parties

A neutral third party helps ensure a fair and transparent transaction at all stages and professional governance over funds that could otherwise be lost to fraud or mismanagement. Regardless of which party nominates them, escrow agents are contractually required to retain their neutrality.

Managing Disputes

Escrow agents can also assist in resolving issues between sellers and potential buyers. Their fulfillment of duties and dispersal of monies will be governed by legal contracts and professional ethics, not by convenience or personal preference.

How FlipSplit Simplifies Escrow

For homeowners in Southern California, FlipSplit can simplify all the variables of open escrow in The Golden State.

Streamlined Escrow Process

FlipSplit is a cash buyer specializing in houses that need a little attention or a lot of work. What this means for you is a much shorter escrow process, without the risk of delays or costs due to:

• Financing contingencies—there are no lenders involved on our side, just 100% cash
• Amateur buyers who waste time on lowball offers, missed dates, or real estate confusion
• Post-inspection negotiations asking for repairs or other work that cost you time
• Failed lender appraisal contingencies under strict LTV requirements
• Home sale contingencies from private buyers who can’t sell their house in time

Instead, you’ll deal with experienced professionals who understand the process and requirements of residential real estate in Southern California.

Faster Closings

The open escrow period takes an average of 44 days, and California days on market (from listing to offer) averages another 49 days, for more than three months of wait time to sell.^4,5

You can bring three months down to as few as three days with FlipSplit. No house prep and staging, no listing or showings, and a closing day at your convenience—we typically close between three and 90 days. Our familiarity with the escrow process and ability to take on tasks and responsibilities usually left to the seller means you can sell in a lot less time (and with much less stress) than you would with a traditional sale.

Selling Made Easy with FlipSplit

Escrow refers to both a stage of a property sale—between acceptance of a purchase offer and transfer of deed—as well as the financial arrangement of engaging a third party to hold and distribute funds during that time. For traditional listing sales, there are a lot of moving parts to manage during this period, including inspections, contingencies, and renewed sale price negotiations.

With FlipSplit, you can streamline the process by eliminating the contingencies and unknowns of an individual buyer. Find out more today about how to get to the heart of the deal with a no-obligation cash offer.

Reviewed by: Brandon Brown

As a long-time Asset Manager, Investor, Real Estate Agent, and Broker/Owner of BayBrook Realty in Orange County, Brandon Brown is one of FlipSplit’s lead Real Estate experts. Having worked on over 2,000+ real estate transactions, Brandon brings a depth of knowledge that ensures clients are appropriately treated with honesty and integrity. His insights and advice have been published in numerous blogs beyond FlipSplit, and he keeps a close eye on market trends and statistics, which are updated weekly on his social media pages. Outside work, you can find him participating and serving at church, cycling, mountain biking, surfing around Orange County and beyond, and enjoying time with his wife and two daughters.

Sources:

1. Equity Legal LLP. Choosing An Escrow Agent. https://www.equitylegalllp.com/choosing-an-escrow-agent/
2. Credible. What is Earnest Money? Here’s How Much You’ll Need. https://www.credible.com/mortgage/earnest-money
3. California Department of Real Estate. Surviving the Real Estate Escrow Process in California: Important Things and Tips You Should Know, and Mistakes to Avoid. http://www.dre.ca.gov/files/pdf/escrow_info_consumers.pdf
4. Bankrate. How long does it take to close on a house? https://www.bankrate.com/real-estate/how-long-to-close-on-house/
5. Fox 11 Los Angeles. This Is How Long It Takes to Sell a House in California. https://www.foxla.com/news/california-real-estate-sell-house-how-long