Escrow Failures

California is but one of many states that require the use of escrow services as essentially the final stage in most real estate transactions.  In some cases transactions can “fall out of escrow,” with the homebuyer failing to close on the hoped for purchase transaction.

Though the term “falling out of escrow” may give the impression that the failure to close is the “fault” of the escrow company or officer, the truth of the matter is that most failures involve an assortment of other problems.

Mortgage and Real Estate analyst, Dan Melson, tries to classify the different reasons for escrow failure as being, “failures of qualification, failures of the property itself, and failures of execution.”  Though these are his categorizations, they do help communicate the varied problems that can occur during the escrow process.

Melson states that the failure for the buyer to qualify for financing is the single most common reason for escrow failure.  The buyer’s inability to qualify for financing is a problem that has to be resolved with the buyer’s lender and loan officer, and are not issues that the escrow company or officer can resolve.

As noted above, the second category of reasons escrow fails are “failures of the property.” Failures of the property often have to do with defects or problems that are disclosed during the inspection process.  If the owner is unable, or does not want to correct the problem then the buyer will most likely see the transaction fail.

Issues with the properties title can also fall into this second category.  Melson says, “If the seller can’t deliver clear title, the title company won’t insure it, the lender won’t lend the money, and any rational buyer should want to walk away.”

Failure of execution simply means that someone didn’t do their job.  This failure could include the seller, buyer, real estate agent, loan officer or anyone else with a responsibility to fulfill some detail or contingency of the escrow instructions.  It’s vital that all responsible parties take quick action of their specific tasks to insure timely and exact fulfillment of each escrow instruction.