The Escrow

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 the buyer and seller, and also collects and remits funds as instructed. Buyer’s funds are deposited with the escrow company which then remits to the seller on the buyers 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, but 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.”
  • Request a beneficiary’s statement if a debt is to be assumed by the buyer.
  • Confirm that the buyer is “qualified” and meets the lender’s requirements.
  • Confirm property meets requirements imposed by lender and/or buyer.
  • Prorate all related financial matters (e.g., taxes, insurance) involved in the ownership transfer.
  • Ensure all legal documentation is complete including recording 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, commission if any, payoffs, etc.)
  • Prepare final statement for all concerned parties.

Escrows in California are generally performed by title companies as well as independent escrow firms which are licensed by the state of California. 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 parties 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. They also may mutually agree to extend the time period by changing the instructions.