What is Escrow?

Very simply defined, an escrow is a depository fund for documents or other instruments by one party for the delivery to another party upon the completion of a certain condition or event. The California Financial Code § 17003 provides the legal definition.

We’re here to help you understand Escrow.

Escrow companies are critical to the preservation of justice in real estate transactions, yet few people know what escrow is or how escrow companies help them. To help out the curious learner, contact us for a list of links to useful articles and websites.

The Escrow Cycle

Escrow is in the CENTER of your Real Estate transaction.


History of Escrow

there is a reason for escrow

Escrow is a legal process designed to protect the interests of both parties to a change in ownership, or title.

An intermediary exists, commonly referred to as an “Escrow Agent,” who is trusted to assure that all parties to a transaction are performing as required. The performance requirements are a composite of demands each party to the transaction has placed upon the other in order to achieve the desired outcome – commonly an exchange of ownership (title) for “consideration.”

Thus, a traditional escrow officer will accept money (or “consideration”) from a buyer – and then insure that the property being purchased from the seller meets the expectation of the buyer… as well as the claims of the seller.

Conversely, the escrow officer will also make sure no transfer of title occurs until the buyer has tendered all payment(s) into the escrow account. At the close of escrow, the escrow company manages the title transfer and remits funds to all parties that sold the property.

Escrows were originally institutionalized in the United States as “mortgage payment escrows” during the Great Depression (1930’s) as a vehicle to protect the interest of homeowners.

Many homeowners were losing their homes when it was time to pay property taxes each year. Because it was hard to save a large sum of money for annual property taxes in those days, lenders agreed to collect 1/12th of the anticipated taxes due, along with the mortgage payment, each month.

This “forced savings” spread the total tax payment into smaller, more easily digested amounts over a period of twelve months.

The accounts into which these amounts were deposited were the forerunners of modern day mortgage escrow accounts. Then, in 1934, the Federal Government mandated that lenders manage escrows on all FHA insured mortgages. Eventually, this became the standard practice for every real estate transaction.
The word “escrow” is derived from the Middle English word “escrowl” – meaning “scroll.” Other variants include the Anglo-Norman term “escrowe”… or the French term “escrowe.” All terms translate to “scroll” which, essentially, infers a checklist.

It is a matter of record that throughout history, buyers and sellers have employed “trusted third parties” to hold title and payments until such time as all parties had fulfilled their obligations. So the escrow concept is nothing new to the world of commerce.

It is also a matter of record that in many cases the “trusted third parties” turned out to be, decidedly, NOT trustworthy. As a result, today’s escrow officer must fulfill a number of steps to be licensed for escrow. They must have significant escrow experience (5 years in California) and a track record, undergo substantial investigation, have assets that comply with state escrow laws, post bond, and carry insurance to fulfill the role of Trusted Third Party and be awarded a license to practice Escrow or obtain an Escrow Agent or Escrow Officer certification.

Forms of Ownership

selecting the right form of ownership

Since the escrow process manages the transfer of ownership, or Title, from one entity to another – it behooves one to consider the manner of ownership they want their new property to take. Your decision will establish the permanent and legal ramifications of your title. Since each form of ownership brings a different set of rights and obligations, here are some thoughts on each of the more popular forms.

Sole Ownership

This is the simplest form of ownership in which a single entity owns the entire interest in the property. In most cases the Sole Ownership is selected by an unmarried person. They have right to convey the property to someone else without any other consent. If the sole owner is married, title may be vested in them as a married individual with “sole and separate property.” In the event the owner is married and wishes to convey an interest in the property to someone else – the title insurance firm may require that the spouse sign a release to any right or interest them may have in that property.

Community Property

This form of ownership gives a husband or wife the right to transfer or dispose of one half of the property either by sale or by will. Community property is distinguished from Separate Property that was acquired in most manners prior to the marriage. Community Property ownership is only recognized in Arizona, California, Idaho, Nevada, New Mexico, Texas, Washington, and Wisconsin.

Tenancy in Common

This form of ownership gives all of the owners in a property rights in the entire property, even though they may only own a fractional interest. They are free to sell, or transfer – via will – their ownership interest in the property. They may not, however, convey the property itself… only their interest. Although a common form of ownership, Tenancy in Common can cause serious problems if written instructions outlining operating procedures and disposition do not exist.

Joint Tenancy Survivorship

Joint Tenancy with Right of Survivorship is where two or more people, married or unmarried, own the property together. When one of the owners passes away, their share automatically goes to the surviving owners. The last surviving owner ends up being the sole owner of the property. Property you own in Joint Tenancy with Right of Survivorship cannot be left to someone in your will. At the moment of your death, all interest in the property goes to the surviving members. To create Joint Tenancy Survivorship, title must have been acquired at the same time and with the same conveyance that includes a clause expressly stating the intention to create a Joint Tenancy title.

Tenancy by Entirety

This is similar to Joint Tenancy Survivorship but applies only to married couples. When either the husband or wife die, the entire interest in the property goes to the surviving spouse. Not all states recognize this form of ownership – and of those that do, some only recognize it for real estate and not stocks and other assets.

Consumer Safety

In California, only Department of Corporation licensed, independent escrow companies (whose sole business is doing escrows) are required by law to: Safeguard trust account funds against theft or embezzlement. This includes your buyer’s deposits and seller’s proceeds!

All Escrow Companies Are Not Created Equal In California!

– Maintain minimum liquidity and net worth requirements.
– Obtain certificates for each employee (which requires extensive background checks).
– Conduct annual, independent audits of general and trust fund accounts.
– Have an onsite manager with a minimum of five years escrow experience.
– When recommending escrow services, select the company that not only offers a high level of expertise in their sole source of business- escrow – but also provides to you and your client the peace of mind that comes from knowing their funds are protected.

The Contract Sets The Terms

The Contract Sets The Terms Of The Escrow. The purchase contract provides the terms of the purchase and the instruction to the escrow holder. Once the fully executed purchase contract and the earnest money deposit is delivered to the escrow holder an escrow number will be assigned and your escrow officer will be begin the escrow process. The earnest money deposit is immediately deposited into the escrow trust account. Additional instructions will be prepared and information regarding Buyer’s lender, Seller’s lender and other miscellaneous information regarding the property will be requested.

Customarily the contract will require that the Buyer be provided with a policy of title insurance. This policy insures against any claims on the Buyer’s ownership/title to the property after the close of escrow. The escrow officer will order a commitment from the insuring title company. The title company will complete a search of the public records and provide a title commitment to the escrow officer. The title commitment will tell the escrow officer if there are any issues that must be cleared before the title insurance company will provide insurance to the Buyer. Once the title commitment is received the escrow officer will deliver the commitment to the Buyer for approval and begin working on any issues that must be addressed before a title policy can be issued to the Buyer. The escrow officer will draw documents as required to meet the terms of the contract, such as deeds and releases, notes, deeds of trust and reconveyance. The escrow officer will also tend to and secure the requirements for the transfer of homeowner associations as requested.

Drum Roll…

Once your escrow officer has confirmed the terms of your purchase contract (as they pertain to the escrow) and the terms have been met, the closing of the escrow is scheduled. The escrow officer then confirms that the title company is in a position to issue the title policy and the documents are recorded. The disbursement of funds customarily includes in part the payment of any existing liens and encumbrances, bills for reports, insurance premiums, and commissions. The escrow officer prepares and delivers to you or your agent a closing statement which provides you with the final financial details of your transaction.

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