An escrow is an arrangement in which a neutral third party, called The 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 instructions. People buying and selling real estate often use 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 the 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.
An escrow is convenient for the buyer and seller because both can move forward separately and simultaneously in providing inspections, reports, loan commitments, funds, deeds, and many other items, using the escrow holder as the central depositing point. If the instructions from all parties to an escrow are clearly drafted, fully detailed, and mutually consistent, the escrow holder can take many actions on their behalf without further consultation (this leaves much time and facilitates the closing of the transaction).
Why does escrow exist?
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 “stakeholder”, 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 required.
- Prorating and adjusting insurance, taxes, rents, etc.
- Recording the deed and loan documents.
- Maintaining security and accountability of moneys owed and owing.
Since the escrow holder can only follow the instructions as stated and may not exceed them, it is extremely important that the instructions be stated clearly and be complete in all details.
The Escrow Process
The escrow process can often times feel overwhelming to both first time buyers and those who have bought and sold real estate previously. Given the various stages of escrow, steps involved, and the terminology used, this extremely important process can cause even the most astute individual to feel a bit uneasy.
Obviously having a knowledgeable escrow officer on your team can make the process smooth, but we believe that educating yourself can also be helpful in better understanding what to plan for and expect.
The First Step: Opening Escrow
Opening escrow is the very first phase of the process. This period involves the collection of general information, including details about the parties involved in the transaction, stipulations that are relevant to the escrow and home price information. It is the escrow officer’s responsibility to ensure that all of this information has been collected. Once this is solidified, the escrow officer prepares instructions outlining the escrow moving forward. These directions are crucial to ensuring the escrow successfully closes.
The Second Step: Processing Escrow
Processing the escrow typically involves additional collection of information. The information collected in this phase differs slightly, as it involves details that are more granular and specific to moving the transaction into closing. Obtaining a preliminary Title Report, configuring the funds needed to proceed, and obtaining signatures are all items that are typically executed during this phase.
The Final Step: Closing Escrow
Closing escrow is the step that most homebuyers and sellers eagerly await. A crucial component of this step resides in completed all of the “to-dos” within a set timeframe. Your real estate agent and escrow officer should work closely together to ensure that these deadlines are met. Working with the Title Company, preparing statements, and paying off loans are things that normally take place during this stage. The escrow will successful close and the property will be transferred once all of the outlined instructions have been executed.
Parties involved in the Escrow Process
- Deposits proceeds of the loan to the purchaser.
- Directs the escrow holder on the conditions under which the loan funds may be used.
- Opens the order for title insurance.
- Obtains approvals from the buyer on title insurance report, pest and other inspections. Receives funds from the buyer and/or any lender. Prorates insurance, taxes, rent, etc.
- Disburses funds for title insurance, recordation fees, real estate commissions and lien clearance. 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 of escrow.
- Deposits the executed deed to the buyer with escrow holder.
- Deposits evidence of pest inspection and any required repair work
- Deposits other required documents such as tax receipts, address of mortgage holder, 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, title insurance commitments, etc. called for by the purchase and sale agreements.
- Fulfills any other conditions specified in the escrow instructions.
What is escrow officer impartiality?
An escrow officer must remain completely impartial throughout the entire escrow process. He or she will usually adopt a courteous but rather formal manner when dealing with parties to the escrow, keeping conversations to the matters at hand in escrow. This formal behavior is meant for the benefit of all concerned, since the escrow officer must follow the instructions of both parties without bias.
What are escrow instructions?
Escrow instructions are written documents signed by the parties giving them, which direct the escrow officer in the specific steps to be completed so that the escrow can be closed. Typical instructions would include the following: The method by which The Escrow Holder is to receive and hold the purchase price to be paid by the buyer. The conditions under which a lapse of time or breach of purchase contract provision will terminate the escrow without a closing.
Types of Escrow
A residential escrow is normally the sale or purchase of a single-family residence or condominium.
Types of commercial escrows include Commercial Properties, Industrial Facilities, Developer Site Acquisitions and Tract Sales.
A short sale is a pre-foreclosure residential real estate transaction where the owner of the mortgage loan, the lender or lien holder (hereinafter sometimes “Lender”), agrees to (i) allow the home owner to sell his or her property for less than — or “short” of — the outstanding amount owed on the mortgage loan, and to (ii) release the property from the mortgage.
A bulk sale generally involves the sale of a business and, if properly handled, serves to protect the creditors of the seller of the business and the purchaser of the business.