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.
Whether you are the buyer, seller, lender or borrower, you want the assurance that no funds or property will change hands until ALL of the instructions in the transaction have been followed. The escrow holder has the obligation to safeguard the funds and/or documents while they are in the possession of the escrow holder, and to disburse funds and/or convey title only when all provisions of the escrow have been completed.
The principals to the escrow – buyer, seller, lender, borrower – cause escrow instructions to be created, signed and delivered to the escrow officer. If a real estate professional is involved, they will normally provide the escrow officer with the information necessary for the preparation of your escrow instructions and documents.
The escrow officer will process the escrow in accordance with the escrow instructions, and when all conditions required in the escrow have been met, the escrow will be “closed.” Each escrow, although following a similar pattern, will be different in some respects as it deals with YOUR property and the transaction at hand.
The duties of an escrow holder include:
Following the instructions given by the principals and parties to the transaction in a timely manner.
Handling the funds and/or documents in accordance with instructions.
Paying all bills as authorized.
Responding to authorized requests from the principals.
Closing the escrow only when all terms and conditions have been met.
Distributing the funds in accordance with instructions and provide an accounting for same – the Closing or Settlement Statement.
The selection of the escrow holder is by agreement between the principals. If a real estate professional is involved in the transaction, the real estate professional may recommend an escrow holder. However, it is the right of the principals to select an escrow holder who is competent and who is experienced in handling the type of escrow at hand.
There are laws that prohibit the payment of referral fees; this affords the consumer the best possible escrow services without any compromise caused by a person receiving a referral fee.
The key to any transaction as important as your sale, purchase or loan, is to READ and understand your escrow instructions. If you do not understand them, you should ask your escrow officer to explain the instructions.
Your escrow officer is not an attorney and cannot practice law; you should consult your lawyer for legal advice. Do not expect your escrow officer to advise you as to whether or not you have a “good deal” or are doing things the right way. The escrow officer is there to follow the instructions given by the principals in the escrow.
In order to expedite the closing of the escrow, you should check with your escrow officer as to what specific items are needed from you. Ask the question – “What can I do to expedite the closing of this escrow?”
Respond quickly to correspondence. This will assist in the timely closing of the transaction.
If you are required to deliver funds into the escrow, make sure that you provide “good” funds in the form required by the escrow officer. Company procedures differ in this regard and there are ways that you can help at the time of closing; check with your escrow officer. Do not give the escrow officer a personal check and expect the escrow to close immediately; the escrow can only close on cleared funds, and the processing of a personal check can take days, possibly even a week or more.
When the escrow closes you may need the closing papers, checks, title policies, and/or statements made available immediately. There are many aspects to the closing of the escrow, and some of these cannot be processed on the day of the closing. If you have a special need, for example a cashier’s check on the day of closing, you should communicate that need to the escrow officer early in the processing of the escrow.
If you are obtaining a new loan, your escrow officer will be in touch with the lender who will need copies of the escrow instructions, the preliminary title report and other documents provided by the escrow holder. In the processing and the closing of the escrow, the escrow holder is obligated to comply with the lender’s instructions.
A closing statement is a written accounting prepared at the close of escrow which sets forth the charges, and credits of your account. The items shown on the statement will reflect the purchase price, the funds deposited or credited to your account, payoffs on existing encumbrances and/or liens, the costs for all services and a determination of the funds to which you are entitled. When you receive your closing papers, review the closing statement as it reflects the financial aspects of YOUR transaction. If anything does not make sense to you, you should ask your escrow officer for an explanation.
Escrow fees are not regulated by the State of California. Escrow holders, like any other businesses, will charge fees that are commensurate with the costs of producing the service, the liability undertaken, and the overhead expenses, which include a profit factor. Therefore, the fees will vary between companies and from county to county. Normally, the escrow holder will follow its minimum fee schedule, which will provide for extra charges based upon the differing elements of your escrow. On occasion, an additional fee will be charged for unusual expenditures of time on a given transaction.
The escrow holder has no control over the costs of other services, such as the title insurance, lender’s charges, insurance, recording charges, etc.
Your escrow officer, upon request, can provide you with an estimate of the escrow fees and costs as well as fees charged by others, provided such information is available.
No escrow is opened with the intention that it will cancel, but there are occasions when a contingency cannot be met or when the parties disagree during the pendency of the escrow. Some escrow holders provide for such an event by incorporating an instruction in the typed or printed “General Provisions” of the escrow instructions.
Ordinarily, an escrow holder will take the position that no funds on deposit can be refunded until the escrow holder is in receipt of mutual cancellation instructions signed by the principals. The escrow holder cannot normally make a determination as to who is the “rightful” party in a dispute on a cancellation and therefore will not return the funds or documents until the principals agree.
Do expect to be charged a cancellation fee, as this is a charge for professional services rendered and quite often for several “out of pocket” expenses that have been incurred on the client’s behalf. These fees can vary from company to company depending upon their policies.
Sometimes, when a dispute exists, the escrow holder may be forced to allow a court to decide which party is entitled to particular documents or funds. This is called an Interpleader Action. Fortunately, most disputes are resolved before the interpleader is filed with a court of law, as the costs for such legal actions are extreme. Those costs, incidentally, are normally paid out of the funds on deposit in the escrow.
Title insurance is usually obtained when real property is purchased. The policy of title insurance insures apainst claims arising from the ownership and/or encumbrances of reql property. There are various coverages afforded, but a basic policy insures that the buyer is the owner and that any lender shown on the policy is an “insured” lender. Many different types of extended coverages are available; for example, an ALTA policy is quite often required by institutional lenders to afford them additional protection under the title insurance policy. The title policy is written after an extensive examination of the public records is made and the recording of the required documents as called for in the escrow.
The title insurance policy fee is a one-time fee, paid at the close of escrow. The determination of who pays for the policy is not uniform from county to county in California. In almost every case, the question of who pays closing costs is a matter of agreement between the parties. In the case of some FHA or VA transactions, the escrow officer must follow the guidelines as required by the lender and/or government.
The terms of your transaction determine how the property taxes will be handled. If there is no mention of the proration of taxes, your escrow officer will not deal with any credits or charges for prorated taxes. However, if your escrow calls for a proration of taxes, there will be an item in your closing statement that will reflect either a credit or charge to your account. If the taxes are not paid (even though there has been a credit or charge against your account), the buyer is obligated to obtain a tax bill and pay the taxes. If the buyer does not have a tax bill with which to pay the taxes, a bill can be obtained from the Tax Collector.
Upon transfer of real property, a supplemental tax bill is generated. This is accomplished in cooperation with the County Assessor and the County Tax Collector.