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What is Escrow and How do I Keep Mine Together?

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People often do not realize the importance of the process of “escrow” when buying or selling a home. It is a concept which many people are not familiar with, especially if they have not ever bought or sold real estate in one of the 32 states which 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.

In many areas of the U.S., attorneys are hired to handle the property transfer process. In southern California, however, nearly all transfers are handled by an escrow holder.

What is Escrow, and Why Have It?

An escrow is an arrangement in which a disinterested third party, called an escrow holder, holds legal documents and funds on behalf of a buyer and seller, and distributes them according to the buyer’s and seller’s instructions. People buying and selling real estate usually open an escrow for their protection and convenience.

The buyer can instruct the escrow holder to disburse the purchase price only upon the satisfaction of certain prerequisites and conditions.
The seller can instruct the escrow holder to retain possession of the Deed until the seller’s requirements, including receipt of the purchase price, are met.
Both rely on the escrow holder to carry out faithfully their agreement relating to the transaction and to advise them if any of their instructions are not mutually consistent or cannot be carried out.

An escrow is convenient for the buyer and seller because both can move forward separately but simultaneously in providing inspections, reports, loan commitments and funds, deeds and many other items, using the escrow holder as the central depositing point.

If the instructions from all parties to an escrow are clearly drafted, fully detailed and mutually consistent, the escrow holder can take many actions on their behalf without further consultation. This saves time and facilitates the closing of the transaction.

What are Escrow Holders and What do They Do?

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.

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 the 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 to 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, receive purchase funds from the buyer and signed deed from the seller, and secure removals of all contingencies or conditions as may be involved in that particular escrow.

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 the 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.

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 or 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, homeowners 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.

Who Can Be the Escrow Holder, and Their Impartiality

The escrow holder may be an independent escrow firm, an attorney, or an escrow officer with a bank, savings, and loan, or title insurance company. Real estate transactions require a tremendous amount of technical knowledge and experience in order to proceed smoothly, and the escrow holder is responsible for safeguarding and properly distributing the purchase price.

Hence, escrow officers with established firms generally are trained and experienced in real estate procedures, title insurance, taxes, and deeds. Escrow officers must also remain completely impartial throughout the entire escrow process. They normally will adopt a courteous but formal manner when dealing with parties to the escrow, keeping conversation to the matters at hand in the escrow. This behavior is meant for the benefit of all concerned since the escrow officer must follow the instructions of both parties without bias.

Our Tips to Keep Your Escrow Solid

Anyone can list their home for sale, but getting a top-dollar contract and making it all the way through escrow requires careful attention. Here are several ideas to help ensure success:

Request a pre-qualified buyer – Lenders will provide a letter of pre-qualification free of charge so both a buyer and seller can be comfortable proceeding, knowing that escrow won’t fail midway due to lack of income for the required financing.
Have the lender check the buyer’s credit upfront – A history of late payments, bankruptcy, or foreclosure will almost certainly preclude the buyer from obtaining financing.
Have the buyer provide verification of funds – A seller has the right to know if the buyer has the necessary down payment and funds for closing costs, which can be easily verified.
Request a sizable earnest money deposit – Traditionally, 3% of the price is considered a reasonable deposit. Many buyers and sellers agree on initialing a liquidated damage clause to demonstrate good faith.
Report all disclosures upfront – Make needed repairs before putting the house on the market. Avoid any last-minute surprises for the buyer. Have the Transfer Disclosure Statement and Earthquake Hazard Report signed off within the first 3 days.
Eliminate problematic contingencies – Be certain that all contingencies can be readily satisfied. Avoid open-ended contingencies and those other than title, inspection, and financing.
Stay in touch – Be sure that your agent communicates with all parties regularly and keeps the buyer in a positive frame of mind. Be sure to have all decision-makers for the buyer see the property early on so any disagreements can be handled promptly.
Do your own property pre-inspections such as a general inspection, and perhaps some supplemental inspections (such as chimney, sewer line, roof, etc.) so you will have reports available for prospective buyers to review before they write an offer. Hopefully, you can open an escrow with the buyer agreeing to accept the property in the condition “as is” described in the reports.
Complete fully all required property disclosure reports and have your agent order all necessary public reports about the area before starting the property showings.
Have your agent request that any offers be presented with a lender’s pre-approval letter and verification of available sufficient funds.
Find out exactly who the buyer actually is and who will be getting the loan if it is not an all-cash purchase. Be sure that the lender has pre-approved the credit and other terms under the name of the person(s) getting the loan.
If you have the good fortune to receive more than one offer, try to select the best-qualified buyer. Sellers are often influenced by the highest price alone and may realize later they selected the wrong buyer when the escrow falls apart.
Make the effort to create goodwill during the negotiation process, rather than trying to take every advantage possible. Ill-will from the start can result in difficult escrow challenges.
Be flexible in attitude and schedule during the property investigation contingency period. Do your best to make the house available when inspection requests are made, and maintain the property in show-ready condition at least until all contingencies have been removed.
Ask your agent to make every effort to have a “back-up” contract signed. This will give you added security. You will then have far less delay in the sale process if the first buyer cancels escrow. Also, the first buyer would be aware that they are at risk to lose the property to the back-up buyer if they do not perform and remove contingencies by the dates agreed upon.
Pick the right agent. During your agent selection process, find out how many escrows they have actually closed in the last two years and what percentage of their escrows fall out. Try to determine what skills and systems they have developed to keep escrows intact.
Maintain a positive mental attitude and energy all the way to the closing day! Escrows are not typically easy – hopefully, you will have selected an agent who is a resourceful problem solver, emotional buffer, and maintains a healthy sense of humor regardless of what challenges arise during an escrow.

Michael Edlen was ranked #52 last year in a survey of all agents in the country. By applying the above tips, his escrow “fall-out” ratio has consistently been much lower than the average agents in the Westside.

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