• What is escrow and why is it needed?
• Who may hold an escrow?
• Why is the escrow holder impartial?
• What are the escrow instructions?
• What do the parties do in the escrow process?

• How is the escrow closed?
• What are the costs for an escrow?
• Summary of the escrow process.
• It's not always easy.
  
  
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What is escrow and why is it needed?

An escrow is an arrangement whereby a disinterested third party, called an escrow holder, holds funds and legal documents on behalf of a buyer and seller. The escrow holder distributes the funds and legal documents when all terms of the transaction have been met according to the buyer's and seller's instructions.

People buying and selling real estate often 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 to the buyer until the seller's requirements, including receipt of the purchase price, are met. Both rely on the escrow holder to carry out faithfully their mutually consistent instructions 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 much time and facilitates the closing of the transaction.

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Who may hold an escrow?

The escrow holder could be any disinterested, third party, although some states require that certain escrow holders be licensed. Due to the technical nature of the transaction and because the escrow holder will be handling your money, it is advisable to select an established, independent escrow firm, an attorney or an escrow officer with a title insurance company. Generally, the escrow officer is trained in real estate procedures, title insurance, taxes, deeds, and insurance.

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Why is the escrow holder impartial?

An escrow officer (a usual title of an escrow holder) must remain completely impartial throughout the entire escrow process. The escrow officer is usually licensed by the state and has no financial interest in the transaction.

He or she will normally adopt a courteous and rather formal manner while dealing with parties to the escrow and will limit comments to the business at hand. This formal behavior is meant for the benefit of all concerned, since the escrow officer must follow the instructions of both parties without bias.

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What are the escrow instructions?

Escrow instructions are written documents, signed by both parties, which direct the escrow officer in the specific steps to be completed in order that the escrow can be closed.

Typical instructions would include the following:

• The method by which the buyer will pay for the property.

• The time limit set by the seller and buyer to complete the purchase.

• The instruction and authorization to the escrow officer to disburse funds for recording fees, title insurance policy, real estate commissions, and any other costs incurred through escrow.

• Instructions as to the proration of insurance and taxes

• The instruction to the escrow holder to receive the balance of the purchase money prior to close of escrow.

Since the escrow holder can only follow the instructions as stated, and may not exceed them, it is extremely important that they be stated clearly and be complete in all details. Once the instructions are completed and signed, the escrow process has begun.

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What do the parties do in the escrow process?

The parties in an escrow (buyer, seller, lender, and escrow holder) have differing responsibilities. Each must fulfill their obligations according to the escrow instructions before the escrow officer can conclude the escrow and distribute funds and legal documents. The responsibilities of each party include:

The Buyer

The buyer's escrow process obligations are to:

• Deposit the funds required, in addition to any borrowed funds, to pay the purchase price with the escrow holder.

• Deposit funds sufficient for home and title insurance with the escrow holder.

• Arrange for any borrowed funds to be delivered to the escrow holder.

• Deposit any deed of trust or mortgage necessary to secure loans.

• Approve any inspection report and title insurance commitments called for by the purchase and sale agreement.

• Fulfill any other conditions specified in the escrow instructions.

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The Seller

The seller's escrow process obligations are to:

• Deposit the executed deed to the buyer with the escrow holder.

• Deposit evidence of pest inspection and any required repair work.

• Deposit other required documents such as tax receipts, addresses of mortgage holders, insurance policies, equipment warranties, home warranties, etc.

The Lender (if applicable)

The lender's escrow process obligations are to:

• Deposit proceeds of the loan to the purchaser with the escrow holder.

• Direct the escrow holder on the conditions under which the loan funds may be used.

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The Escrow Holder

The escrow holder's escrow process obligations are to:

• Open the order for title insurance.

• Keep the parties informed of the progress.

• Obtain approvals from the buyer on the title insurance report, pest inspection, and any other inspections called for in the purchase agreement.

• Receive funds from the buyer and/or any lender.

• Prorate insurance, taxes, rents, etc.

• Disburse funds for title insurance, recording fees, real estate commissions, lien clearance, etc.

• Prepare a final statement for each party indicating amounts to be disbursed for services and any further amounts necessary to close the escrow.

• Record the deed and loan documents and deliver the deed to the buyer, loan documents to the lender, and funds to the seller, thereby closing the escrow.

How is the escrow closed?

Once all of the terms and conditions of the instructions of all parties have been fulfilled, and all closing conditions satisfied, the escrow can be closed. In many cases, the closing will depend on an instruction by one or the other of the parties which specifically indicates at what point and under what conditions the escrow holder may consider escrow closed. For example the seller may instruct that upon receipt of monies, escrow may be closed. When these events have occurred, the escrow officer must complete the closing procedures of recording the documents and settling the accounts.

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What are the costs for an escrow?

The method of dividing the charges for escrow services varies from county to county in California. The fees and service charges to be divided might include, for example, title insurance policy premium, escrow fee, any transfer taxes, recordation fees, and all costs in connection with any loan being obtained. Local practice will dictate to the escrow holder how these charges are to be divided, unless the buyer and seller make a special agreement as to who will pay what. You can see the normal Sonoma County practices by clicking here.

Summary of the escrow process.

The escrow process was developed to help you facilitate the sale or purchase of your home. The escrow holder accomplishes this by:

• Acting as an impartial "stake holder".

• Processing and coordinating the flow of documents and funds.

• Responding to the lender's demands.

• Securing a title insurance policy.

• Obtaining approvals of reports and documents from parties to the transaction as required.

• Prorating and adjusting any fire insurance, taxes, rents, or other such items.

• Recording the deed and any loan documents.

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It's not always easy.

These examples and explanations described here are designed to acquaint you with the escrow process and are based on relatively straightforward escrows. Every escrow is unique and many are more complex than explained here.

As your realtor I will be with you every step of the way through the escrow process. I will communicate with your escrow officer frequently and keep you informed of the status and any issues that need you attention.

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