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Escrow

An escrow is an arrangement in which a disinterested or neutral third party, called an escrow holder, holds legal documents and funds on behalf of a buyer and seller, and distributes them according to the buyer’s and seller’s written instructions. Normally that means at the close of the sale, the buyer gets the  home and the seller gets the money from the sale of the home.

In northern California, this job is usually done by a title company. It’s legal in CA for a real estate brokerage to also act as an escrow holder, but that is uncommon here (however, it’s not uncommon in southern CA).

The individual in charge of your file is the escrow officer. If you think that buying and selling real estate involves a lot of paperwork, you should see what this person’s paperwork load is like! There is a lot of coordinating of both the papers, the people, and the money! Luckily, there’s usually a team to back him or her up, or at minimum, one assistant.

Buyers and sellers both benefit from having a neutral third party manage the funds and paperwork. At the end of the sale pending period, the title company gets the deeds recorded in favor of the buyer (and likely also the buyer’s lender) and the seller gets the proceeds of the sale. Both rely on the neutral third party to carry out faithfully their mutually consistent instructions relating to the transaction and to advise them if any of their instructions are not mutually consistent or cannot be carried out.

Duties of the escrow holder

The process was developed to help facilitate the sale or purchase of your home. The escrow holder accomplishes this by:

  1. Acting as the impartial third parties that handles the funds
  2. Obtaining necessary paperwork and signatures to effect the sale
  3. Receiving the loan documents, if any, obtaining signatures and delivering the signed docs back to the bank or lender
  4. Providing a title insurance policy (and likely a lender’s policy of title insurance)
  5. Managing the sign off, where buyers and sellers separately sign their respective paperwork
    • during the pandemic, the title company is arranging for mobile notaries to meet with buyers and sellers at their homes or office rather than to have customers visit the title company in person
  6. Prorating income taxes and any other items, such as HOA fees, paid through escrow
  7. Paying stagers or other vendors at close of escrow from the proceeds if agreed ahead of time
  8. Paying the home warranty, the natural hazard report, and similar items when the sale is complete
  9. Paying transfer taxes to the county and city, where applicable (and in San Jose, also the Measure E additional conveyance tax on homes over $2 million)
  10. Recording the deed and deed of trust (mortgage) documents
  11. Maintaining security and accountability of monies owed and owing
  12. Providing a closing statement at the end with all fees and money accounted for

Escrow officer at work

Who pays the fees?

In Santa Clara County the custom is for the seller to pay the escrow fee and the owner’s policy of title insurance. For that reason, the seller normally chooses the title company (or more practically, the listing agent does so). In some counties,  referred to as “buyer pay counties”, the buyer picks the title company and the buyer pays for the escrow fee.

Title companies have published rates for both their escrow costs and their title insurance costs. It can be a bit of a pain to ferret them out but you can find them if you go to the title company’s website, choose Santa Clara County (or whichever county you are buying or selling in), and then search for the fees for title and escrow. Or you can ask your real estate agent to call a few of them and see how the fees compared.

That said, I would not advise picking a title company based on the cheapest fees. Often the company which has a relationship with your Realtor will work very hard to get the future business of that person. If you have a one-off transaction, you may not have the same result. That said, if you check 3 – 5 companies and find out that one of them is significantly more expensive than everyone else, you might want to suggest that your agent develop rapport with a more modestly priced company. (Oh and don’t forget to check both buyer and seller fees.)

Escrow concerns

Wire fraud is a real danger, and when it’s time to wire funds to escrow, it’s absolutely imperative to use extreme caution so that the money goes where you intend it to go. The preliminary title report is your best source for the email addresses and phone numbers for reaching your escrow officer.