What Is Escrow And Why It Is Needed

By: Lance T. Denha, Esq.

Escrow is a service which provides the public with a means of protection in the handling of funds and documents. Buyers, Sellers, Lenders and Borrowers (“Principals”) can conduct business with each other and minimize their risk by using a neutral party, the “Escrow Holder.”

In escrow, the principals give their mutual written instructions to the escrow holder, whose duty is to assure that no funds or documents will change hands until all requirements shown in the instructions 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 requirements of the escrow have been completed.

The principals to the escrow (buyer, seller, lender or borrower) or the real estate agents, if any, will provide the escrow officer with the information necessary for the escrow officer to prepare “escrow instructions.” Generally, a party holding real estate escrow funds requires the buyer and seller sign an escrow agreement. Escrow agreements state what happens to escrow funds if the buyer and seller have a dispute. The money cannot be released to either the buyer or seller contrary to the agreement.

The escrow instructions will tell the escrow officer what specific requirements (‘contingencies’) are to be completed so that the escrow can be closed. After the principals have carefully reviewed the instructions to be sure they reflect their total agreement between each other, they are to be signed by the principals. Upon mutual execution of the instructions the escrow holder will process the escrow in accordance with the instructions. When all contingencies of the escrow instructions have been met or achieved, the escrow will be “closed.” Every escrow follows this basic pattern but will vary considerably due to the different contingencies of your specific transaction.

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. It has become a practice of many lenders to forward their loan documents to the escrow office for you to sign. You should be aware that these papers are the lender’s documents and you may need to contact your lender to explain or interpret them. You have the option of requesting a representative from the lender’s office to be present while signing loan documents, or arrange to meet with your lender to sign the documents in their office.

Once all the terms and contingencies of the instructions of all principals have been fulfilled, and all closing conditions satisfied (including the deposit of all outstanding funds required to close), the escrow officer authorizes the title company to record all documents and to issue their policy of title insurance. When the title company confirms with the escrow officer that the County Recorder has recorded all documents, the escrow is deemed “closed.” There are many aspects to the closing of the escrow, and some of these cannot be processed immediately. Upon Escrow Holder’s receipt of closing information from the title company, the Escrow Holder will prepare final closing statements and closing packages. If you have special needs, please let your escrow officer know prior to close of escrow.

Title Companies Offer Escrow Services

Title companies often serve as escrow agents when real estate agents are not involved in property sales. An earnest money deposit check can be made payable directly to a title company for deposit into its escrow account. If the title company is also providing title work and handling closing documents there typically is no extra charge for escrow services. You may also retain a title company exclusively for its escrow services. Escrow fees vary between title companies.

Attorneys Act as Escrow Agents

Most attorneys have lawyers’ trust accounts. A lawyer may hold an earnest money deposit in his trust account for a real estate transaction. If a buyer and seller both have lawyers they must agree on which attorney holds the deposit. A deposit is generally safe in either lawyer’s trust account since it may only be released under specific circumstances. Lawyers may charge separate fees for escrow services or they may include them in comprehensive closing service packages.

A final closing statement will be prepared after the close of escrow and will give you an itemization of all charges and credits to your account. The statement will reflect the purchase price, credits and debits to your account, payoff of existing loans, the cost for all services and the amount of the funds you are entitled to at closing. When you receive this statement, please review it carefully. If a check is enclosed with it, please cash it promptly to avoid delays and costs in replacing stale dated or misplaced checks. If you have any questions regarding your closing statement or check, please call your escrow officer for an explanation.