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What is Escrow, and why do I need it? [back to top]

As defined in the California Financial Code, Section 17003, escrow involves a transaction developed between three parties, wherein one party trusts their capital or deed to a third party to hold and then deliver to the second party after specific arrangements have been made and conditions met for said transaction. The best example is in purchasing a new home: the buyer (first party) deposits their funds with an escrow company (the third party), which will in turn deposit those funds to the seller (second party) after the sale is complete and all parties involved are satisfied. Escrow allows all parties involved to rest assured that their funds or properties are protected. Escrow will transfer funds or properties only after the specific instructions and conditions are followed and met correctly. As an impartial third party, escrow is obliged to protect and insure funds or deeds until the provisions set forth have reached compliance.

What is the process of escrow? [back to top]

When a transaction requiring escrow takes place, escrow instructions are created, usually in writing, based on the parties involved (buyer, seller and lender). When a broker is participating, he or she provides all necessary information for the escrow officer to prepare the proper documents and create instructions. Escrow closes when the escrow officer processes according to their instructions and all conditions are met. Although the process of escrow is fundamental, each case is unique to the property and transaction involved.

How do I find an Escrow Office? [back to top]

The parties involved customarily agree upon which escrow office to use for their particular transaction. However, when a broker is involved, he or she may suggest a particular person or office to work with, based on established business relationships. In such a situation, the parties do not necessarily have to use a broker's suggested escrow officer. Each party involved has the right to work with someone they feel comfortable with, who is professional and apt.

What are my obligations during escrow? [back to top]

It is important that you are aware of your transaction and understand its process. Take the time to read your escrow instructions and all other documents involved in your sale, purchase, or refinance. Should you find anything unclear or confusing, ask your escrow officer to help clarify or explain. Also, be as available as possible to the other parties involved if you would like to help expedite the closing of escrow. If you will be delivering funds to escrow, find out what method they require, and how your banking institution will be able to prepare it (i.e. a cashier's check, wire transfer, etc.), so you may do so in a timely manner. Don't expect to walk in the day escrow is scheduled to close and whip out your personal checkbook.

Escrow with a new loan. [back to top]

When acquiring a new loan, the escrow and lender representatives will be in communication. The lender will let escrow know what they need to process the loan, and it is up to escrow to comply, providing any documents necessary (escrow instructions, preliminary title reports, and so forth). At the close of escrow, many lenders send the loan documents to escrow for signing. At this point, you have the right to request a representative of your lender to be present at the signing, to explain or clarify the information in the documents. The escrow officer is not to decipher or clarify these documents.

What is a closing statement? [back to top]

Prepared at the close of escrow, a closing statement is a written account of your financial transaction. It includes the purchase price, funds deposited or credited to your account, any payoffs you have, the service charges involved, and the funds you should receive (if any) at the end of escrow. When you receive your closing statement, be sure to peruse it thoroughly and ask any questions while you are still with your escrow officer. You are responsible for keeping these papers for tax purposes. They are necessary for your accountant, or any agency (like the IRS) requiring you to provide information about your transaction Do not throw them away, even if you think you'll never need them again. Don't count on your escrow office to keep copies of them for you, as each office has a designated timeline of how long they will archive the paperwork.

What Fees and Costs will be Charged? [back to top]

Escrow fees vary, as there are no state regulations. They may vary by company or by county; nevertheless they are always congruent with the services provided. Typically each escrow office has a minimum fee schedule which they follow, and by this schedule any extra fees are assessed as necessary based upon the aspects of your unique escrow. Other fees associated with your transaction, such as the lender's fees or recording charges, are not determined by escrow and are usually set figures. You may always request a fee estimate from your escrow officer during the course of your transaction.

What About Cancellations? [back to top]

Many things can happen during escrow which will cause it to be cancelled, even though escrow does not open unless the transaction seems sound. The parties involved may reach a disagreement that can't be reconciled, or perhaps a certain condition just can't be met. When a cancellation occurs, escrow will not disperse deposited funds until they know that all parties agree to the cancellation. It is not up to escrow to decide who is "right" during a disagreement, or who is "at fault" for a cancellation, thus they may need a legal court to make the decision. If a problematic situation evolves wherein escrow does not know whom to disperse funds or property to, they will file an "Interpleader Action", a legal proceeding that grants the court the duty of deciding how to distribute said funds or property. This action may incur gross legal fees, thus the parties involved most likely will try to resolve before filing.

What about Title Insurance? [back to top]

If you purchase property, you will also purchase Title Insurance, which essentially guarantees that you own the property and you lender is insured. There are several types of Title Insurance with varying one-time costs paid when escrow closes. The buyer and seller together will customarily decide who pays this fee.

What About Property Taxes? [back to top]

Property taxes are generated on real property at the close of escrow, based on the conditions of your transaction and escrow. You might see a credit or charge for property taxes on your closing statement (if your escrow requests a proration of taxes), based on whether or not the taxes have already been paid. At the close of escrow, the County Assessor will determine your new property taxes based on the property's worth.

The Perfect Escrow; Does it Exist? [back to top]

Keep in mind during your escrow that the people involved are human, just like you, and are not inherently perfect. Also remember that they are educated, experienced professionals and are doing their best to serve you well. Be available and cooperative.