Real Estate Escrow


Real Estate Escrow


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Escrow is like Switzerland – Neutral and with all the money

Escrow Basics


The definition of a real estate escrow is a process where a neutral third party acts as the closing agent for the buyer and the seller.  The escrow officer undertakes the responsibility of handling all the paperwork and disbursement of funds to close out a real estate transaction.


English uses the same word to mean different things. Escrow has another popular real estate usage. The second meaning refers to the mortgage lender requiring the borrower to pay each month 1/12th of the annual estimated property taxes and hazard insurance into an account maintained by the lender. Then when the property tax and insurance bills for the property are due, the lender pays them from the escrow account funds.


The primary escrow issues covered here is the real estate transaction escrow. The legal requirements for a valid escrow have two essential requirements for a valid real estate escrow. First there must be a binding contract between the seller also called grantor and the buyer also called grantee. Second there must be the conditional delivery of transfer instruments and monies to a neutral third party.


The binding contract can be in any legal form, such as a deposit receipt, an agreement of sale in California called residential purchase agreement, an exchange agreement, or mutual instructions from the buyer and the seller. The escrow instructions signed by the buyer and seller supplement the terms of the original purchase agreement and the two contracts are interpreted together. In California the CAR form is called California residential purchase agreement and joint escrow instructions. This form is used as a joint form for the agreement of sale and escrow instructions.


Who chooses which escrow company to use? The selection of an escrow company is negotiated between the buyer and seller. The real estate agent cannot demand which escrow company to use.


The payment of the escrow fee is an item that is negotiable between buyer and seller. They can split the fees or the buyer can pay for all the fees or the seller can pay for all the fees.


The escrow company carefully collects, prepares, and safeguards the instructions, documents, and monies required to close the transaction. Upon receipt of written instructions from all parties the escrow instructions are compared to determine whether the parties are in mutual agreement. The buyer, seller, lender, and real estate agent are all parties to the escrow.


An escrow officer can do no more or no less than the instructions dictate. This is a key aspect of escrow. The escrow officer can take no action other then what the escrow instructions dictate. If other actions are needed, new additional escrow instructions must be agreed by the parties before the escrow holder can act.


What if the escrow officer receives conflicting instructions from the principals? The escrow officer simply refuses to proceed until the parties settle their differences. An escrow officer cannot give legal advice and may bring an action in court forcing the principals in the escrow to litigate their differences. This legal action is called an interpleader action.


When the parties are in agreement and all instruments and monies have been deposited, the escrow officer sees that title is transferred.


Escrow instructions are confidential. The principals and their agents in the transaction are entitled to see the escrow instructions. But only to the extent that as the instructions pertain to mutual items in the transaction. How much the seller is profiting from the sale is no business of the buyer. Equally, the buyer’s financing arrangement with an institutional lender is no business of the seller.


Here is a partial list of some of the services performed by an escrow company. They prepare buyer’s and seller’s escrow instructions, prepare deed and other needed documents, such as promissory notes and deeds of trust as instructed from all parties. They can request  the demand for payoff for the seller’s loan from the lending institution or, in the case of an assumption, request a beneficiary statement from the lending institution.


Escrow companies can collect the structural pest control report and the notice of work completed, if any. They balance the accounting details, including adjustments and prorate of the taxes, interest, insurance, and assessments and rents (if any). They collect the balance of monies required to close the transaction. Escrow companies also verify that the appropriate documents are recorded after transfer has occurred, the escrow file is audited. The escrow officer then disburses the monies, issues itemized closing statements to all parties, and orders the title insurance policy.


All the conditions required by escrow instructions must be performed within the time limit set forth in the escrow agreement. The escrow officer has no authority to enforce or accept the performance after the time limit provided in the instructions. When the time limit provided in the escrow has expired and neither party to the escrow has performed in accordance with the terms, upon receiving mutual written releases, the parties are entitled to the return of their respective papers, documents, and money from the escrow officer.


One of the major roles of escrow is to create the Uniform Settlement Statement called the HUD-1. The HUD-1 itemizes all closing charges. The escrow agent must let the borrower-buyer inspect the Uniform Settlement Statement one day before the close of escrow. The escrow officer must see that all parties receive a copy of the Uniform Settlement Statement after the close of escrow.


The net sheet is used to get an estimate of closing cost.  The net sheet can use estimate numbers unlike the HUD-1 which uses only the actual figures of the transaction.


How do Escrows end? Escrows are usually terminated by completion of the sale or in the case of a refinance upon completion of the loan process. A completed escrow transfers title to the new owner/s and the monies to the parties entitled by the escrow instructions.


But if the transaction is not completed, the escrow may be canceled by mutual agreement of all parties. The escrow company is entitled to receive partial payment of escrow fees for services rendered to date.


The key parts of real estate escrow are done by a neutral third party.  They are agents for the buyer and the seller.  The escrow officer assumes the responsibility of handling all the paperwork and disbursement of funds to close out a real estate transaction.