What Is Escrow and What Is Its Function?

By MICHAEL EDLEN | Special to the Palisadian-Post

People often do not realize the importance of the process of “escrow” when buying or selling a home. It is a concept that many people are not familiar with, especially if they have never bought or sold real estate in one of the 32 states that use an escrow process.

Most of the states along the East Coast are not escrow states, and property sales there are done through attorneys and title companies. Often buyers who are relocating to California find it confusing when they are told that hardly any transaction here is done by an attorney.

This article is not intended to encompass every single action that the escrow holder does or does not do, but it is to give a basic understanding of the process from beginning to end of what the escrow consists.

In general, this process accomplishes the transfer of property between a buyer and a seller as negotiated by their real estate professionals wherein both parties to the transaction deposit legal documents and a variety of funds to the escrow holder.

The responsibility of the escrow holder is to assure that all contract terms and conditions worked through by the parties and their real estate agents are completed before there is a conveyance or exchange of any property or funds. Because the escrow is a neutral third party, both buyer and seller are assured that all mutually agreed upon terms are met before the transaction is completed.

Many escrow holders are affiliated with real estate brokerage firms, while others are independent. In all cases, however, their role is to be unbiased and neutral parties performing their functions with no favoritism to buyer or seller.

Their fees are generally similar, though depending on the price range of the property being transferred, the rate may be somewhat reduced.

The escrow holder is responsible for obtaining all required forms and information to comply with their instructions, and to then deliver all items to the proper parties upon the completion or closing of escrow. Examples of the most typical type of information include title insurance policies, fire and other possible insurance policies, tax statements, loan documents, and requests for payment for various services that are to be paid out of escrow funds.

It is important for all parties to know that the escrow holder does not provide legal advice, finance or investment counseling, or participate in any negotiations for the transaction. What the escrow holder typically does do is prepare the escrow instructions, based on the contract paperwork given to them usually by real estate agents involved in the transaction, and then perform a detailed series of actions on behalf of both parties. These actions involve requesting a preliminary title search from the title company selected by the contracting parties, receiving purchase funds from the buyer and signed deed from the seller, and securing removals of all contingencies or conditions as may be involved in that particular escrow.

Once those initial actions have been completed, the escrow officer prorates property taxes, insurance and interest due, and requests issuance of a policy of title insurance. They are responsible to ensure that all title and lender requirements have been met in order to complete the transaction.

They also will instruct the title company to record all necessary documents at the county recorder’s office, disburse funds as authorized by instructions from both parties, and prepare final statements for the parties accounting for the receipt and disposition of all funds deposited in escrow.

In non-escrow states, the closing process typically occurs in an attorney or title officer conference room, with both parties and their attorneys and real estate agent representatives present while all of the documents are signed and title is then conveyed.

In California, the closing can be done without any such meeting at all. In fact, many people are surprised to discover that they can even be out of the country and have their purchase or sale be completed.

What the closing does require is that the seller has deposited a notarized deed with the escrow holder, and that the buyer has signed and notarized loan documents and wired the balance of their down payment to escrow.

If the buyer will be obtaining financing for the purchase, the buyer will receive an estimated closing statement that includes all loan fees. Both parties have the opportunity to ask questions of the escrow officer if any clarification of fees or costs is required before escrow moves forward to complete the closing.

Each party generally pays the same escrow fee amount. The seller generally pays for an owner’s title insurance policy premium, any real estate commissions due, document preparation fee for the deed, city transfer tax, county documentary transfer tax, all loans in the seller’s name, interest and any prepayment fees due to lenders, any delinquent taxes, tax liens or judgments against the seller, prorated taxes due as of date of transfer, notary fees, homeowner’s transfer fee if applicable, and if any invoices submitted and approved for payment regarding preparation expenses for the sale.

The buyer generally pays for any new loan charges, interest on the new loan for the first month, homeowner’s fire insurance premium, prorated taxes from the date of closing, notary fees, charges for recording documents, and any other costs that may have been agreed to between buyer and seller, and customary escrow fees.

The escrow holder also facilitates the payoff part of the closing process, wherein the title company receives all of the buyer’s funds and disburses funds as due to lenders. This part of the closing process includes a lot of details that the buyer and seller are not directly involved in but are essential and must be completed accurately and timely.

The escrow holder will advise the parties regarding when funds must be received and in what form, and they will make every effort to distribute closing funds to the seller as quickly as possible. Depending on when the county recorder has processed the file on the closing day, disbursal to the seller may be delayed to the next business day.

Michael Edlen has participated in 1,500 escrows, and his team coordinates all of them in-house. He is available for counseling about the escrow or any other aspect of the sale or purchase process, and may be reached at 310-230-7373 or michael@edlenteam.com.