Escrow State or Attorney State—What This Means to You as a Real Estate Investor

The important difference, and why it matters to investors.
Seth Kniep
Oct 28, 2021
Real Estate Investing
The best deals aren’t always found close to home. In our case, we prioritize performance over proximity, which has led us to investing in properties all over the country. Though real estate closings tend to follow a similar arc, there are important differences in closing procedures between states. When you decide to invest in a new state for the first time, it’s imperative that you understand the closing procedures for that state.

There are some amazing opportunities for investing in short-term rentals throughout the country, but they’re not always going to be right in your backyard. For example, Joshua Tree, California, Gulf Shores, Alabama, and Gatlinburg, Tennessee all currently offer fantastic returns for investors. Even if you don’t live close to these destinations, that doesn’t mean you can’t successfully invest there. However, you do need to get familiar with whatever state where you're buying in order to achieve success. In particular, familiarity with local closing procedures is essential. If you wait too long to familiarize yourself, your lack of preparedness could cause a delay that loses you the deal.

Luckily, it’s not that hard to do your own research and learn about closing process particulars for any of the fifty states. We’ll help you get started with this three-step gameplan to prepare you for investing in a new state, so that you can show up prepared and win the deal.

First, Know What Kind of State You’re In

Certain states, like Georgia, require the use of an attorney to close real estate transactions. These states are known as “attorney states.” Other states, like California, do not have this requirement and are called “escrow states.” This distinction does not significantly affect the performance of real estate investments, and you’ll find plenty of successful short-term rental entrepreneurs in both types of states. 

In an attorney state, you will work with a law office, or a title company that employs attorneys. In an escrow state, you will probably work with an escrow company, though deals can also be closed by brokers or attorneys if properly licensed. In either state type, title services may be provided in-house or by a separate title company.

Sometimes the buyer and seller may use one provider of closing services; other times, each will elect to use their own provider. When each party uses their own provider, this is known as a “split closing.”

The closing process for each state will have its own particulars, and no two states are exactly alike. If you're using an agent, they'll have local knowledge and will be able to tell you what type of state you’re in. However, if you choose not to use an agent, you'll need to do your own research to figure out what type of state you’re in. Google is helpful for this; you can also call local title companies and ask them. It’s critical that you figure out what type of state you’re in—and plan accordingly—as quickly as possible. We’ll explain more about why this is so time-sensitive later in the blog.

Second, Familiarize Yourself with the Closing Process

After a buyer’s offer is accepted by the seller, the closing process can begin. Closing procedures vary by state but tend to follow a similar pattern. In any state, the goal of closing procedures is the same—to ensure that both parties uphold their contractual obligations, and to provide opportunities for renegotiation or cancellation. A typical real estate closing goes something like this:

  • The buyer’s offer is accepted by the seller. The two agree on a neutral third party to guide the closing.
  • An escrow account is opened by the neutral third party to hold the buyer’s earnest money.
  • A title search reveals any liens, encumbrances, or other title problems. The appropriate action is taken to clear any title problems. Then, title insurance is issued.
  • If the buyer is borrowing money, they will get final approval from the lender, then lock in an interest rate and loan terms.
  • Inspections are completed.
  • Requests for repairs, if any, are made by the buyer. The buyer and seller will then negotiate these requests. The seller may hire contractors and make the requested repairs. Alternatively, the seller may lower the purchase price or provide a credit towards closing costs in lieu of repairs.
  • Contingencies are removed. Common contingencies include the appraisal contingency, inspection contingency, loan contingency, title contingency, and home sale contingency. These contingencies aren’t necessarily removed at the same time, but they must all be removed before the deal can close.
  • The down payment is paid by the buyer into an escrow account held by the neutral third party.
  • Paperwork is signed.
  • The neutral third party disburses funds to the parties to which they are owed (the seller receives the purchase price, the lender receives the down payment, etc.). Title transfers to the buyer, and the deal is complete.

Tip: If some of the vocabulary here is unfamiliar, check out the glossary at the end of this article.

Real estate in the midst of the closing process may be referred to as “in escrow,” “under contract,” “pending,” or “active contingent,” depending upon where you are in the country. All of these terms mean essentially the same thing—a purchase offer has been accepted by the seller, and the closing process has begun.

Third, Find the Right Attorney (Well In Advance)

Whether you are buying in an escrow state or an attorney state, real estate attorneys can be helpful to you in many ways. In addition to their role in supervising the closing process, a real estate attorney can also take the place of a real estate agent. A real estate attorney can help you prepare offer documents and other paperwork, eliminating the need for an agent. This is how Just One Dime prefers to invest— the “JOD Way.” By doing things this way, we avoid incurring a buyer’s agent commission.  A buyer’s agent commission is usually 1.5–3% of the purchase price, which can easily be in the tens of thousands of dollars. A real estate attorney will charge a fraction of this amount to prepare offer documents on your behalf.

Our strategy is to deduct the buyer’s agent commission (BAC) from our offer price. For example, if the BAC is 3% and the sale price is $500k, we would offer around $485k or lower, depending on comps and how competitive the list price is. This approach has worked well for us, giving us a leg up in highly competitive markets.  It’s also a great strategy in situations where a property may not appraise. (To “not appraise” means the value as determined by the appraiser comes back too low to satisfy the lender. As a result of this, the lender does not make the loan, and you cannot close your deal.) By reducing the purchase price, the appraisal won’t have to come back as high in order to satisfy the lender.

If you’re investing JOD-style, real estate attorneys are going to serve dual roles for you as contract drafters and closing service providers. For this reason, it is even more important that you find someone who is trustworthy and works quickly—time is of the essence.

In our experience, it can be more challenging to find that right attorney in an escrow state. In attorney states, real estate attorneys are a dime a dozen because they are legally required for closings. In escrow states, real estate attorneys are not legally required for closings and are therefore less in demand. As a result, real estate attorneys in escrow states are more of a niche service than a commonplace commodity.

You’re probably not going to hire an individual attorney. More likely, you will work with a law office or title company that employs attorneys and paralegals that specialize in real estate. You’ll need to search for a highly-rated title company or a law office specializing in real estate closings. The best recommendations will come from fellow real estate investors, inspectors, realtors, and other people in your network with intimate knowledge of the area. After getting several suggestions, you can check online reviews and make a final decision.

Regardless of what type of state you’re in, you should have an attorney, law office, or title company selected well in advance of making any offers. However, this is even more important in escrow states, because it’s tougher to find the right professional.

The Bottom Line

In certain states, you’ll be legally required to involve an attorney in the closing procedures for a real estate purchase. In other states, you aren’t legally required to use an attorney. However, if you’re not using a buyer’s agent, you’ll need an attorney in both types of states. In both attorney states and escrow states, your attorney will prepare your offer documents, but in attorney states, your attorney will also oversee the entire closing process. Time is of the essence when making an offer on real property, and you should select an attorney well in advance so that when you find the perfect property you’re ready to go. It pays to be prepared.

Glossary

Attorney State: A state that does legally require an attorney to oversee the closing process.

Contingency: Contingencies are conditions that must be met for the deal to close. A typical example would be an inspection contingency. If an inspection reveals serious problems, the inspection contingency will give the buyer a way out of the deal. If this contingency was omitted for some reason, a buyer could find themselves trapped in a bad deal.

Due Diligence: A phrase used as a catchall for the buyer’s inspections, title search, and anything else included in their final decision to proceed with the transaction. Can be thought of as the buyer’s “research” or “investigation” into the property’s history and condition. If a buyer’s due diligence turns up any problems, contingencies in their purchase contract will likely allow them to negotiate or walk away from the deal.

Escrow Company: A company that handles the escrow process for a real estate transaction. They have everyone in-house to complete escrow, except that title services may be outsourced.

Escrow State: A state that does not legally require an attorney to oversee the closing process.

In Escrow: A property in an escrow state for which the closing process has begun.

Title: The right to own land. Legally speaking, one owns land by “holding title to the land.” Title proves ownership.

*Some people can get “title” confused with “deed,” but they are not the same thing. A deed is the legal instrument that is used to transfer title from one party to another. Holding title proves that you own real estate, and a deed would be used to transfer that title to someone else.

Title Company: A company that, at the least, handles the title search and issues title insurance. However, many of these companies have a broader scope and can manage the entire closing process for a buyer and seller.

Title Insurance: A title company provides title insurance to guarantee that the buyer receives clean title. If a title dispute arises, title insurance will kick in to cover any legal fees or financial loss associated with handling the dispute.

Title Search: A title company’s investigation of the title’s history and condition. This is done to see if there are any liens, encumbrances, or other problems with the title. These are collectively known as “clouds” on the title. A title search reveals these clouds so that they can be eliminated, ensuring that the buyer receives “clean” title.

Under Contract: Has essentially the same meaning as “in escrow.” May be used in either attorney states or escrow states. “Pending” and “Active Contingent” also have equivalent meanings and are used in various parts of the U.S.

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Seth Kniep

Married a pearl. Fathered 4 miracles. Fired his boss. Turned a single dime into $104,857. Today, a self-made millionaire, Seth and his team of 8 badass coaches teach entrepreneurs how to build passive income on Amazon.

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