What is Escrow? Wholesaling Investing for Beginners!

what is escrowWhen learning how to invest in property, one of the least covered topics for most wholesalers or Realtors® who invest is  Title and Escrow; and the power it has for your business.

In my capacity as a Sales Skills Coach with TenMinuteSkill, one of the biggest mistakes I see new investors make is neglecting to utilize the power that the Title and Escrow companies can provide you and you business!  If you are a newer wholesaler, or Investor, it is my hope that I can share a few ideas about the Escrow process that can help make you some money, expand your influence, and give you more control over your deals!

How Does Escrow Work?

While the topic of this post isn’t to necessary point out the intricacies of modern escrow (I’m not qualified, and you’d be bored.) It would help to share a few of the things that a qualified escrow company will do for you during a cash transaction (which is what a majority of your wholesale deals are).

Typically, when you receive your signed A-B contract, or B-C contract (assignment or otherwise), you need to take your contract to your local title and escrow company (unless of course you live in an “Attorney State” in which case the attorney’s will take the place of escrow officers.)  Once there, the escrow process enabling the transfer of real property becomes pretty straightforward.

For The Seller: (A)

The first step will be to order a title search to check for any problems with the title.  Typically, these reports are received within a few days (3-5) and conveyed to both parties of the transaction.  These “preliminary title reports” are an opportunity for the parties to check to see if there are any potential issues that could affect the title.   

Additionally, Title and Escrow (either as a company, or as an attorney) will request any demands on the title, liens, and any taxes and prepare their file for closing.

For the Buyer: (B)

Since this is a wholesale deal, or an assignment in many cases, some wholesalers are reluctant to “open escrow” until they “have an end use buyer.”

This is pretty indefensible for many reasons.  While I could certainly understand if you are in an attorney state, and you would incur some significant legal fees through repetitively opening and canceling escrow (a bad idea anyway) it just doesn’t make much sense.

The benefits of opening escrow are multi-fold.  The first thing that typically happens is you receive an escrow receipt. This is your proof of contract.  While it is not as powerful as a “Memorandum of contract” it is certainly evidence of your contract.   

As a buyer, when you open escrow, it also causes the title and escrow company to act, which causes the Seller to have more confidence in you.  They will first request a copy of the complete signed contract from you. 

Once they confirm the contract with the Seller and get all the contract information, they will request any beneficiary statements, insurance, taxes, and review the terms of the transfer.

Since this is most likely a cash transaction, (as a wholesale deal) there are generally two ways to close.  With your End Use Buyer’s funds (aka “Wet Funding)  or with your own funds (or transactional funding).

If you are using transactional funding, your title officer or attorney will contact the funder in order to arrange the transactional funding and provide any information that they may need to facilitate the transaction.

For the End Use Buyer: (C)    

Depending on the type of transaction (REO, Short Sales, and others may have deed restrictions) the End use buyer will have various levels of involvement. 

For example, in the straight assignment (wholesaling); the end use buyer typically takes the place of the original buyer; not assuming any rights, or conditions with the exception of the original deal failure to close. 

In a “Double Close” then the second contract (b-c) is dependent upon what the parties have agreed to in terms of inspections, repairs, and closing dates.

Typically, what the newer investor will do is at this point, bring their contract (a-b) and then the second contract (b-c) all to the title company at one time and then want to close within 7 days!

As you can imagine, there is a lot of work still to do!

On to Closing!

Once the parties to the transaction have all been “figured out” then its now time to move on to closing.  The Escrow officer will review the file to make sure that all the conditions have been met.  They will also ensure that all the correct documents are present and available for signatures such as septic inspections, fire insurance, bills of sale, contingencies released, tax forms, etc.

Once they have collected all the paperwork, they will request a date to meet with the buyer and the seller either separately or together depending on your location. 

If there is transactional funding involved, they will request the funds from the funder (if they haven’t already been placed); receive the funds, order the recording of the transaction, and then close the file (record).

(See related “How to Buy and Sell Homes Like a Rich Dad!)

Once the transaction has recorded, but that doesn’t mean that the job is over! Once they have recorded, and closed the file, they prepare the final HUD-1 Statements and disburse the funds to the parties.

Once they have done this part, they typically will forward any final documents to the interested parties.  Tax documents to the county, HUD-1 statements to the Buyer, Seller, or lender if applicable.

investing for beginners

Additional Services

Many title companies will help Realtors® and Investors through the use of marketing data (mailing labels, phone lists, etc.); use of facilities for Meetup groups, as well as promotional materials you can use!

By developing relationships and trust with your escrow officers, you will be able to have a long term, mutually profitable relationship.  If you are unsure as to what to actually say to your Title Officer, simply be honest.  Let them know that you are a buyer, and you aren’t certain exactly what you will be doing with the property, but keeping it personally will most likely not be one of them.  Just be honest!

Using The Red Pill Investor Scripts to help guide your conversations with  a Title Officer can help you keep positive control of the sales environment when trying to sell a property with an unfamiliar title officer or one that may not be familiar with the concept of wholesaling or assignments. 

(Learn How to Have an Unfair Advantage with Your Escrow Officer!  Escrow Secrets Revealed! The Red Pill Investor Episode 279)

Your Homework!

If you were in my Business Coaching Program, I would give you homework at this point in order to facilitate the growth of your business.  If you are open to it, my homework to you is to make contact with a Title and Escrow officer of your choosing in your area.  Pick one that you feel comfortable with, and set an appointment to meet an escrow officer to explain the escrow process to you in your state.  It is well worth your time!  Remember, the person who knows the contracts, the rules, and the procedures better wins more often of the time, so know everything you can.

Knowing isn’t enough though! Take action today!  Get something under contract and then write me!  Tell me of your success!

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