What is Escrow?
An escrow is an arrangement in which a disinterested third party, called an escrow holder or company, holds legal documents and funds on behalf of a buyer and seller, and distributes them according to the buyer’s and seller’s instructions. In Silicon Valley, that function is done by the title company. (In southern CA, this is often a separate company entirely.)
Think of the escrow company as something like Switzerland. It’s neutral, pushing for neither the buyer nor the seller, but doing what both parties mutually agree upon.
People buying and selling real estate open an escrow for their protection and convenience. The buyer can instruct the escrow holder to disburse the purchase price only upon the satisfaction of certain prerequisites and conditions. The seller can instruct the escrow holder to retain possession of the deed to the buyer until the seller’s requirements, including receipt of the purchase price, are met. Both rely on the escrow holder 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.
The escrow process was developed to help facilitate the sale or purchase of your home. The escrow holder accomplishes this by:
- Acting as the impartial stake-holder, or depository of documents and funds
- Processing and coordinating the flow of documents and funds
- Keeping all parties informed of progress on the escrow
- Responding to the lender’s requirements
- Securing a title insurance policy
- Obtaining approvals of reports and documents from the parties as required
- Prorating and adjusting insurance, taxes, rents, etc.
- Recording the deed and loan documents
- Maintaining security and accountability of monies owed and owing.
By Nancy Closson, President, Westland Escrow
Once an agreement between you and the seller has been finalized, escrow is ready to be opened. Escrow essentially allows for a disinterested third party (escrow holder) to keep all valuables and documents in trust until certain conditions are fulfilled.
Why You Need An Escrow: As the buyer, you want the assurance that no funds will change hands until all of the instructions in the transaction have been followed. This may include completion of all inspections and any repairs that were agreed upon.
How Escrow Works: The escrow holder is obligated to safeguard the funds and/or documents while they are in their possession, and to disburse funds and/or convey title only when all provisions of the escrow have been complied with.
These provisions are written in the escrow instructions, which are drafted from the provisions agreed upon in the purchase agreements by the parties involved in the transaction.
The escrow officer will endeavor to expedite the timely closing by keeping all parties informed, handling documents and paying all bills as authorized, responding to authorized requests from the principals, closing escrow after the terms and conditions are met, distributing funds in accordance with the instructions and providing a written closing statement of all the charges and credits to your account.
Your Responsibilities During Escrow: Your most important role during this time is to read and understand your escrow instructions. Be sure to ask your escrow officer to explain anything you don’t understand, and make sure any legal questions are directed to your attorney.
In order to expedite the closing of escrow you should respond quickly to any correspondence and ensure any funds requested are delivered in the required form – cashiers checks or wired funds are preferable since escrow can only close on cleared funds and most other methods of funds transfer take more time to clear.
When escrow closes you will receive all your paperwork within a few days. As the new owner, you will receive your recorded deed directly from the County Recorder’s office.
Processing the Escrow
- Open escrow
- Review and forward preliminary title report to client and their lender
- Coordinate loan processing with loan officer
- Provide access and info (comparable sales) for appraiser
- As needed, order Pest Control, Roof,
- Property, Geological, etc, inspections
- Arrange access for inspectors
- Review all reports, forwarding them to the client (with interpretations, when needed).
- Order and schedule all repair work
- Review and forward all completion notices to client
- Order and review loan documents
- Review client’s escrow instructions with escrow officer
- Schedule and conduct buyer’s Walkthrough inspection
- Arrange client-escrow officer sign-off meeting
- Coordinate close of escrow and possession
- Arrange for transfer of the keys to the property
And handle any and all problems that arise along the way!
WHAT EACH PARTY DOES IN ESCROW
- Deposits the executed deed to the buyer with the escrow holder.
- Deposits evidence of pest inspection and any required repair work.
- Deposits other required documents such as tax receipts, addresses of mortgage holders, insurance policies, equipment warranties or home warranty contracts, etc.
- Deposits the funds required, in addition to any borrowed funds, to pay the purchase price with the escrow holder.
- Deposits funds sufficient for home and title insurance.
- Arranges for any borrowed funds to be delivered to the escrow holder.
- Deposits any deed of trust or mortgages necessary to secure loans.
- Approves any inspection reports, the Preliminary Report for title insurance, etc., called for by the purchase and sale agreements.
- Fulfills any other conditions specified in the escrow instructions.
- Deposits proceeds of the loan to the purchaser.
- Directs the escrow holder on the conditions under which the loan funds may be used.
The Escrow Holder:
- Opens the order for title insurance.
- Obtains approvals from the buyer on the Preliminary Report, pest and other inspections.
- Receives funds from the buyer and/or any lender.
- Prorates insurance, taxes, rents, etc.
- Disburses funds for title insurance, recording fees, real estate commissions, lien clearance, etc.
- Prepares a final statement for each party, indicating amounts to be disbursed for services and any further amounts necessary to close escrow.
- Records deed and loan documents, delivers the deed to the buyer, loan documents to the lender and funds to the seller, closing the escrow.
Closing the Escrow
Once all the terms and conditions of the instructions of both parties have been fulfilled, and all closing conditions satisfied, the escrow is closed and the safe and accurate transfer of property and money has been accomplished.
Division of Charges
The method of dividing the charges for the services performed through escrow or as a result of escrow varies from place to place. The fees and service charges to be divided might include, for example:
- The title insurance policy premium
- Escrow fee
- Any transfer taxes
- Recordation fees
- Costs in connection with any loan being obtained.
Unless there is some special agreement between the buyer and seller as to how these charges are to be paid, local custom will generally be followed in drafting the instructions to the escrow holder as to how they are to be divided.