Escrow Defined

You may have already heard phrases such as: “the house fell out of escrow,” or “we’re waiting for escrow to close.” So just what is escrow anyway? And what does it mean to a home Buyer or Seller?

 

Simply stated, escrow is the involvement of an impartial third party in a real estate transaction. This neutral third party acts as an intermediary between Buyer and Seller and also collects and remits funds as instructed. Buyer’s funds are deposited with the escrow company, which in turn remits to the Seller on the Buyer’s behalf. The basic concept of escrow is to ensure that both the Buyer and Seller are protected during any real property transaction. Not only is “escrow” the concept of a third party receiving and disbursing funds, it also includes other valuable transaction services. In order to facilitate the transfer of property from one owner to another, the best escrow companies will:

 

  • Prepare, review and/or revise escrow instructions.

  • Determine the legal ownership and status of the property through a title search.

  • Confirm that the Buyer is “qualified” and meets the lender’s requirements.

  • Confirm that the property meets requirements imposed by the Lender and/or the Buyer.

  • Prorate all related financial matter (e.g., taxes, insurance) involved in the ownership transfer.

  • Request a beneficiary’s statement from the Seller’s current lender(s).

  • Ensure all legal documentation is complete, including the recorded deed.

  • Comply with time limits imposed in instructions.

  • “Close” escrow when all instructions (Buyer’s, Seller’s, and Lender’s) have been fulfilled.

  • Disburse funds as instructed, including all related fees (title fees, commissions if any, payoffs, etc.)

  • Prepare the final statement for all concerned parties

 

Escrows in California are performed by banks, savings and loans and title companies as well as independent escrow firms which are licensed by the state of California - their records are open to inspection by the Corporation Commissioner. In addition, escrow companies furnish the state with annual audits of their books, and all escrow funds must be kept in trust accounts. Thus, the state helps ensure that escrow companies are properly managed and truly act as impartial to any real property transaction.

 

Escrow companies are generally held liable if any instructions are violated during the course of an escrow. No changes may be made to any escrow instructions if changing them would be detrimental to any party involved. It is possible to change instructions once a property has “entered escrow,” however, only by mutual agreement. Finally, all escrows have clearly defined time limits. If, for some reason all instructions cannot be carried out by the end of the time limit, all parties involved are entitled to the return of documents, fees, funds and other related materials. Also, they may mutually agree to extend the time period by changing the instructions.

 

The term “escrow” has come to mean “neutral protection” for the Seller, the Lender and the Buyer. All parties involved in the transfer of real property are impartially protected during the transaction, and are serviced by professionals intent on ensuring a smooth, trouble-free sale. Look for an escrow company that clearly defines its services, and which lists all fees and charges “up front.”

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