Escrow Red Flags Every Homebuyer and Seller Should Know

In real estate, a “red flag” is more than just a warning sign—it’s a potential deal-breaker. When you’re buying or selling a home, your transaction goes through escrow, a neutral third party that holds funds and ensures all conditions are met before the property officially changes hands. But certain issues, if not addressed early, can delay or even derail your closing.

Whether you're a first-time buyer, seasoned seller, or real estate professional, understanding escrow red flags can help you navigate the process smoothly and avoid last-minute surprises.

What Is an Escrow Red Flag?

A red flag in escrow is any situation that may cause delays, legal complications, or compliance issues before the close of the transaction. Many of these can be spotted early in the preliminary title report, which is typically reviewed by the escrow officer, agents, and the parties involved.

🔴 Common Escrow Red Flags to Watch For

1. Bankruptcies

If either the buyer or seller is in active bankruptcy, escrow cannot close until the property is legally released from those proceedings. Get attorney contact information and clearances early.

2. Divorce

Selling due to divorce? If the divorce isn’t final, both parties may need to sign all documents. Determine who holds title and whether separate checks are required for proceeds.

3. Recent Death of an Owner

When an owner is recently deceased, it often triggers probate or trust proceedings. Escrow cannot close without proper court orders or trustee signatures. Engage your escrow officer early for guidance.

4. Family Trusts or Business Entities

If title is held in a trust, LLC, or corporation, ensure the proper signers are identified. Lenders may also require additional documents.

5. Power of Attorney (POA)

Using a POA? It must be legally binding, recently dated (within two years), and recorded in the appropriate jurisdiction. Provide the POA to your escrow officer as soon as possible.

6. Tax-Deferred Exchange

When selling a property as part of a 1031 exchange, timing and structure are critical. Share contact info for the exchange accommodator early in the process to avoid hiccups.

7. Non-English Speakers

If either party speaks a different language, involve a qualified interpreter and notify your escrow officer to coordinate document signing and communication properly.

8. Out-of-State Sellers

States like California may require withholding taxes when a property is sold by a non-resident. Check with your escrow officer for applicable tax rules.

9. Recent Construction or Improvements

Major work done recently? Check for permits, lien releases, or unpaid contractors. Unresolved construction issues can create title problems.

10. Last-Minute Changes

Changes to the buyer, vesting (how title is held), or title insurance type can delay closing. Communicate early and often to keep everything on track.

🧾 Why These Red Flags Matter

Escrow is the final step before keys are handed over and funds are transferred. Missing documentation, unresolved liens, or uncommunicated legal issues can cause serious delays or even cancel the deal. Identifying potential problems early ensures smoother closings and less stress for all parties involved.

✅ Be Proactive and Stay Informed

Escrow red flags don’t have to derail your home purchase or sale. With proper communication, documentation, and support from your real estate agent and escrow officer, most of these issues can be addressed long before closing day. If you're unsure whether your situation may be a red flag, ask early—it's always better to prepare than to be surprised.

If you're planning to buy or sell, working with experienced professionals who understand the complexities of escrow can help you avoid delays and close with confidence.