The Pros and Cons of a Long Escrow

Today I want to talk about doing a longer escrow period, something I’m seeing happen more and more in today’s market.

Typically the escrow period is 30 days. That’s just about enough time to get everything done that is required in a typical real estate sale. Sometimes you can get it done in 21 to 25 days but that’s really hustling. 30 is standard and sometimes it goes over by a few days just because there is so much to get done.

But what if the seller wants a little bit more time? Well there are two ways of handling that, you can either extend the escrow period or you can offer a sale and leaseback. Remember, when you close escrow, that means that ownership has officially transferred, which is why these two options are very different. In a longer escrow period, the seller continues to own the property and live in it for a period of time.

With a sale and leaseback, the new buyer owns the property and agrees to rent the property back to the seller. This could be for a short period like a few days to a week, or it could be another 30 days or even longer sometimes. Sometimes the seller pays for this rental period, but sometimes, in an effort to strengthen their offer, the buyer will allow the seller a free rent back. It all depends on the needs of both parties and how the negotiation went.

It’s worth noting that you can combine these two scenarios as well, doing a long escrow and a leaseback on top of that.

But today, let’s just stick to a long escrow period and discuss the implications of this. Remember, if you are still in escrow, the seller still owns the property, so in this situation, basically what is happening is a game of hurry up and wait.

If a longer escrow period is agreed upon, almost everything will happen the exact same up to a certain point. The buyer will go in and do their inspections, do their appraisal, finalize their loan, and remove all contingencies. You might think that because there is all this extra time that everything would take longer but no, everything happens just as fast as it normally would because the seller still needs to know that the buyer can and will be able to close on the property in its current condition.

As for the buyer, they proceed as normal, everything happens very quickly, and then you wait. Sometimes you’re waiting just a few weeks but I recently closed a 75 day escrow and let me tell you there is a lot of dead time in there. You might be thinking, what are the risks to a buyer for having a longer escrow?

Great question. There are a few things to keep in mind. The first is your loan, and specifically the rate on your loan. See, mortgage rates fluctuate, and at a certain point you need to do what is called a “rate lock”. This means you lock in your mortgage rate for a period of time so that if mortgage rates go up, you get to keep this particular rate. The risk of this rate lock falls on the lender because if you have locked your rate and interest rates go up, they make less money on your loan. You always pay a certain fee to lock your rate, but as you might imagine, if you want to lock your rate for a longer period of time, the likelihood of fluctuation is higher, and thus, the lender is going to charge you more money to lock that rate to mitigate their risk. Similarly, if you do a short rate lock period, usually about a week in a typical 30 day escrow, it’s a far cheaper fee.

Thus, as a buyer in a long escrow, you have two options: Pay more money to lock your rate for a longer period of time, or wait until the end of the long escrow to lock your rate for a cheaper price, in turn taking on the risk that mortgage rates go up.

That being said, though we can predict the future, I’ve always been able to counsel my buyers on the pros and cons of rate locking and giving my thoughts and opinions as to where the market is going with mortgage rates. Working with a great local lender who is in tune with the market is also incredibly helpful for this.

This really is the only major thing to look out for in a long escrow period. Likely you did it because the seller needs to stay there longer, maybe to find their new house, and so you don’t often run the risk of a property being vacant, something unexpected happening without anyone there to catch it. And if something does happen even after you’ve removed all your contingencies, the purchase contract states that the property must be delivered in the same state it was when the contract was started. Therefore, if major damage happens during a long escrow happens, an additional contingency is created and the buyer can decline to purchase the property and receive their deposit back if the problem isn’t remedied to their satisfaction.

Many times a seller wants a shorter escrow period because its only once escrow closes that they get their money...and who doesn’t want their money sooner rather than later? But, if they need to move or find a new property and don’t want to pay rent on the house they previously owned, a long escrow period may work.

And, if the seller does find their replacement property, you can set up a concurrent close of escrow where the funds from the buyer of the first property are transferred to the seller, who then transfers them to the seller of the property they are buying. It’s tricky, and it takes all hands on deck to make it happen perfectly, but it can definitely be done.

Thank you for watching, I hope you learned something, and if you did be sure to like and subscribe, and if you found this valuable, I’d incredibly appreciate you sharing this video with someone that could benefit by connecting with me.

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