What is Escrow?

"Escrow” is an arrangement where an independent trusted third-party receives and disburses money and/or documents for two or more transacting parties, with the timing of such disbursement by the third-party dependent on the performance by the parties of agreed-upon contractual provisions.

Because the real estate transaction involves large sums of money and reams of documentation, escrow is not always a predestined, step-by-step process, but can become a confusing end game of details, nit picking and overlapping procedures. It requires preparation, attention to detail, and desire from both sides to close the deal.

Why Do I Need Escrow?

Whether you are the buyer, seller, lender, or borrower, you want the assurance that no funds or property will change hands until ALL of the instructions in the transaction have been followed. The escrow holder has the obligation to safeguard the funds and/or documents while they are in the possession of the escrow holder, and to disburse funds and/or convey title only when all provisions of the escrow have been complied with.

How Does it Work?

The principals to the escrow – buyer and seller – cause escrow instructions (as part of the Purchase Agreement and Joint Escrow Instructions) to be created, signed and delivered to the escrow officer. If a broker or agent is involved, he will normally provide the escrow officer with the information necessary for the preparation of your escrow instructions and documents.

The escrow officer will process the escrow, in accordance with the escrow instructions, and when all conditions required in the escrow can be met, the escrow will be "closed." Each escrow, although following a similar pattern, will be different in some respects, as it deals with YOUR property and the transaction at hand.

The duties of an escrow holder include: following the instructions given by the principals and parties to the transaction in a timely manner; handling the funds and/or documents in accordance with instructions; paying all bills as authorized; responding to authorized requests from the principals; closing the escrow only when all terms and conditions have been met; and, distributing the funds in accordance with instructions and providing an accounting for the same with a Closing (also known as “Settlement”) Statement.

Who Chooses Escrow?

The selection of the escrow holder is normally done by agreement between the principals. If a real estate broker is involved in the transaction, the broker may recommend an escrow holder. However, it is the right of the principals to use an escrow holder who is competent and who is experienced in handling the type of escrow at hand. There is an option on the Purchase Agreement that allows the parties to agree upon the Escrow Company that will be used.

When is an Escrow "Open"?

Escrow opens when the buyer and seller sign a sales contract, commonly called a real estate purchase agreement and receipt of deposit. The contract, along with any additional instructions, serves as instructions for the escrow officer.

Your escrow officer opens escrow by assigning your escrow an account number and collecting the contract and other instructions, the buyer's deposit and perhaps additional proceeds or documents related to the transaction. Deposits are either applied to the purchase price, or returned should the deal fall through.

What Do I Have To Do While in Escrow?

In order to expedite the closing of the escrow, you should check with your escrow officer as to what specific items you could do to assist. Ask the question "What can I do to expedite the closing of the escrow?

Respond quickly to correspondence. This will assist in the timely closing of this escrow.

If you are required to deliver funds into the escrow, make sure that you provide good funds in the form required by the Escrow Office. Company procedures differ in this regard, and there are ways that you can help at the time of closing; check with your escrow officer. Do not give the escrow officer a personal check and expect the escrow to close immediately; the escrow can only close on cleared funds, and the processing of a personal check can take days, possibly even a week, or more. The best way to remit funds into escrow is via “Certified Funds” such as a Cashier’s Check or Wire Transfer.

When the escrow officer closes the escrow, you may want the closing papers, checks, title policies, statements, etc. made available immediately. There are many aspects to the closing of the escrow, and some of these cannot be processed on the day of the closing; they may take several days. If your clients have a special need, for example a cashier’s check on the day of closing, you should communicate that need to the escrow officer early in the processing of the escrow.

What is a Closing Statement?

A closing statement is an accounting, in writing, prepared at the close of escrow which sets forth the charges and credits of the account. The items shown on the statement will reflect the purchase price, the funds deposited or credited to the account, payoffs on existing encumbrances and/or liens, the costs for all services and determination of the funds your clients are entitled to at the close of escrow. When you receive your closing papers, review the closing statement; it comes itemized, and reflects the financial aspects of the transaction. If anything does not make sense to you, you should ask your escrow officer for an explanation.

Do not rely on your escrow holder retaining the escrow file so that you can "…always call and get copies of the closing statement;" most escrow holders will destroy the files after the statutory retention period, usually five years. Maintaining and storing the closed escrow files is a costly endeavor to the escrow holder. Therefore, a nominal fee may be charged by your escrow holder for the retrieval of a file from storage, photocopying the requested documents and returning the file to storage.

What Fees & Costs Will be Charged?

Escrow fees are not regulated by the state. Escrow holders, like any other businesses, will charge fees that are commensurate with the costs of producing the service, the liability undertaken, and the overhead expenses which include a profit factor. Therefore, the fees will vary between companies and from county to county. Normally, the escrow holder will follow its minimum fee schedule, which will provide for extra charges based upon the differing elements of that specific transaction. On occasion, an additional fee will charged for unusual expenditures of time on a given transaction.

The escrow holder has no control over the costs of other services that are obtained, such as the title insurance policy, the lender’s charges, hazard insurance, recording charges, etc.

Your escrow officer, upon request, can provide you with an estimate of the escrow fees and costs as well as fees charged by others, provided such information is available.

What About Cancellations?

No escrow is opened with the intention that it will be cancelled, but there are occasions when a contingency cannot be met, or when the parties disagree during the period that escrow is open. Some escrow holders provide for such an event by incorporating an instruction in the typed or printed General Provisions.

Ordinarily, and escrow holder will take the position that no funds on deposit can be refunded until the escrow holder is in receipt of mutual cancellation instructions signed by the principals. The escrow holder cannot normally make a determination as to who is the "rightful" party in a dispute on a cancellation until the principals agree; the escrow holder is not a judge.

Do expect that your clients will be charged a cancellation fee, as this is a charge for professional services rendered and quite often for several "out of pocket" expenses that have been incurred on the client’s behalf. These fees can vary from company to company depending upon their policies.

Sometimes, when a dispute exists, the escrow holder may be forced to allow a court to decide which party is entitled to what documents or funds; this is called an Interpleader Action. Fortunately, most disputes are resolved before the Interpleader is filed, as the costs for such legal actions are extreme. Those costs, incidentally, are normally paid out of the funds on deposit in the escrow.

What Does "Title" Do?

At some point, parties will receive a preliminary title report which summarizes the condition of the title, including easements and liens, claims and encumbrances against the property. The seller must resolve any claims against the title, or they could stall the deal.

Title insurance is usually obtained when real property is purchased. The policy of title insurance insures the owner and/or the lender of ownership of the property. There are various coverages afforded, but a basic policy insures that the buyer is the owner and that any lender shown on the policy is an "insured" lender. Many different types of extended coverage are available; for example, an ALTA policy is quite often required by institutional lenders to afford them additional protection under the title insurance policy. The title policy is written after an extensive examination of the public records is made and the recording of the required documents; as called for in the escrow.

The title insurance policy fee is a one-time fee, paid at the close of escrow. The determination of who pays for the policy is not uniform from county to county in California. In some counties, the buyer will pay while in others the seller will pay. In other counties the seller will pay for the owner’s policy and the buyer will pay for the lender’s title policy. But in almost every case, the question of who pays closing costs is a matter of agreement between the parties. Usually this agreement is based on the customary practice in actions; the escrow officer must follow the guidelines as required by the lender and/or government.

What About Property Taxes?

The terms of your transaction and the resultant escrow instructions determine how the property taxes will be handled. If there is no mention of the proration of taxes, your escrow officer will not deal with any credit or charges for prorated taxes, there will be an item in your closing statement that will reflect either a credit or charge to your account. If the taxes are not are paid (even though there has been a credit or charge against your account), the buyer is obligated to obtain a tax bill and pay the taxes. If the buyer does not have a tax bill with which to pay the taxes, you can request a bill from the Tax Collector; send a photocopy of the deed.

Supplemental Property Taxes is another concern of the buyer. Upon transfer of real property, the County Assessor will request information to assist them in determining the value of the property for taxation purposes. Some of the information may have previously been supplied by the escrow holder at the time of the closing of the escrow, via Preliminary Change of Ownership form that should accompany each deed when it recorded.