What is escrow?
Very simply defined, an escrow is a deposit of funds, a deed or other instrument by one party for the delivery to another party upon completion of a particular condition or event. A third person or party holds some funds in trust for you . . . until the completion of a transaction. For our purposes here, the transaction is the buying or selling of a home.
What comprises escrow? There are two elements:
- A binding contract between buyer and seller; and
- The conditional delivery of transfer documents to a third party.
The binding contract can be: a deposit receipt, an agreement of sale, an exchange agreement, an option or mutual escrow instructions.
Why Do I Need an 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.
Escrow : How Does it Work?
The principals to the escrow : buyer, seller, lender, borrower : cause escrow instructions, most usually in writing, to be created, signed and delivered to the escrow officer. If a broker 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 or achieved, 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 the instruction; paying all bills as authorized; responding to authorized requests from the principals; closing the escrow only when all terms funds in accordance with instructions and provide an accounting for same: the Closing or Settlement Statement.
Who Chooses the 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 are laws that prohibit the payment of referral fees; this affords the consumer the best possible escrow services without any compromise caused by a person receiving a referral fee.
What is an escrow “holder” or agent?
That’s the impartial third person that holds possession of funds, written documents or personal property... until designated, agreed-upon actions are taken. In the case of the purchase of a home, the agent holds the buyer’s funds on deposit until it’s time to deliver them to the seller.
The escrow holder ensures that all parties to a real-estate transaction comply with the terms and conditions of the agreement. The terms are described in the escrow instructions, which you’ll receive whether you’re buying or selling. He or she may also coordinate activities of all parties involved:
- The lending institution; and
- The title company.
What are the escrow steps? California escrow process has 10 steps:
1. Prepare Escrow Instructions.
These are done onthe escrow holder’s printed forms. All principals – the buyer and seller -- sign the instructions, which set forth the parties’ understanding of the transaction. An initial deposit usually accompanies the instructions. For a home purchase, the instructions must include:
2. Order Title Search.
- Purchase price and terms;
- Agreement as to mortgages;
- How buyer’s title is to appear (called “vesting”);
- Matters of record subject to which buyer is to acquire title;
- Inspection reports to be delivered into escrow;
- Proration adjustments (involves taxes and insurance);
- Date of buyer’s possession of the property;
- Documents to be signed by the parties, delivered into escrow, and recorded;
- Disbursements to be made, costs and charges and who pays for them; and
- Date of closing.
This title search is performed on the subject property, resulting in a “Preliminary Report” from a title company. The escrow holder examines this report for items not contemplated in the instructions. For example, is there a lien (or additional loan) on the property that wasn’t reported? The seller must clear any such item or it must be brought to the attention of the buyer.
3. Request Demands and/or Beneficiary Statements.
This request for information goes to any lenders of record. The document will be either:
4. Accept Structural Pest Control Report and Other Reports.
- a “Demand for Pay-off,” if the seller’s existing loan is to be paid in full through escrow; or
- a “Beneficiary Statement,” if buyer is purchasing the property “subject to” or assuming a loan.
These reports might include plumbing or roofing reports. They all pertain to the property’s condition, and are kept in escrow. The escrow holder might also obtain any necessary approvals from the seller or buyer due to information in a report. For example, whether the home needs to be sprayed for insects. The reports are delivered at close of escrow.
5. Accept New Loan Instructions and Documents.
This happens ifthe buyer is obtaining new financing for the home. The escrow holder also obtains the buyer’s approval/execution of the documents. The escrow agent must also satisfy all lender’s instructions before using the lender’s funds to complete the transaction.
6. Accept Fire Insurance Policies and Complete Settlement.
By this step, it’s almost time to close the transaction. Here, following the buyer’s and seller’s instructions, the escrow holder:
7. Request Closing Funds.
- accepts and delivers any fire insurance policy and transfers the insurance;
- makes all payments on property taxes and insurance (called “prorations”);
- completes the accounting (settlement) details; and
- informs the principals that escrow is ready to proceed.
The escrow holder cannot disburse any funds until all items, such as checks or drafts, have cleared and become available for withdrawal.
8. Audit File in Preparation for Closing.
In this step, the escrow holder:
9. Order Recording.
- accounts for all funds and documents; and
- determines that the parties have complied with all escrow instructions.
At this point, the escrow holder authorizes the title company to run the seller’s title and to record the necessary documents. This can happen provided no change has occurred in the seller’s title since the preliminary title report was issued.
10. Close Escrow.
This is what you’ve been waiting for! Closing the deal. The escrow holder can “close escrow” after confirming recording, by:
- preparing settlement statements for buyer and seller;
- disbursing all funds; and
- delivering documents to the party or parties involved.