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| What is an Escrow |
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| Buying
a home or a business may be the single biggest investment the purchaser
makes in a lifetime. Ensuring that the transaction is handled properly
is the job of the escrow professional. Through escrow the transaction
can be conducted with safety and in confidence. |
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| WHAT IS AN ESCROW? |
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Escrow is a service that provides the public with a means of protection
in the handling of funds and/or documents. Escrow enables the buyer and
the seller to transact business with each other through a neutral
party, thereby minimizing their risk.
An escrow
is the arrangement in which the neutral third party (the escrow holder)
holds legal documents and funds on behalf of a buyer and seller and
distributes them according to the buyer and seller 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 and 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 close of a transaction. |
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| WHAT TYPE OF TRANSACTIONS GO THROUGH ESCROW? |
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Most contracts that involve the transfer, lease or financing of real or
personal property can be placed in escrow. An escrow is not only
involved with the purchase or sale of a home, but also in the purchase
of a mobile home, the sale of a business or stock transfer.
Prizefighters have even been known to have their purses guaranteed
through an escrow depository. Buyer and seller should demand the
protection of escrow for any transaction that involves a substantial
investment. |
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| WHO MAY HOLD ESCROW? |
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The escrow holder may be any neutral third party (although some states require that certain escrow holders be licensed).
There are two important reasons for selecting an established,
independent escrow firm, an attorney, or an escrow officer with a bank,
S & L or title company. One is that real estate transactions
require a tremendous amount of technical experience and knowledge to
handle smoothly. The other is that the escrow holder will generally be
responsible for safeguarding and properly distributing the purchase
price.
Escrow officers with established firms, like Equity Title, Santa
Barbara, are experienced and trained in real estate procedures, title
insurance, taxes, deeds and insurance.
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| IMPARTIALITY |
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An escrow officer must remain completely impartial throughout the
escrow process. He or she will usually adopt a courteous but rather
formal manner when dealing with parties to the escrow, keeping
conversations to the matters at hand in the escrow. 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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| ESCROW INSTRUCTIONS |
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Escrow instructions are written documents, signed by the parties giving
them, which direct the escrow officer in the specific steps to be
completed so the escrow can be closed. Typical instructions would
include the following: - The method by which the escrow holder is to receive and hold the purchase price to be paid by the buyer.
- The conditions under which a lapse of time or breach of purchase contract provision will terminate the escrow without a closing.
- The
instruction and authorization to the escrow holder to disburse funds
for recording fees, title insurance policy, real estate commissions,
and any other closing costs incurred through escrow.
- Instructions as to the perorations of insurance and taxes.
- Instruction
to the escrow holder on the payment of prior liens and charges against
the property and distribution of the net sale proceeds.
Since the escrow holder can only follow the instructions as stated and
may not exceed them, it is extremely important that the instructions be
stated clearly and be complete in all details. |
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| WHO DOES WHAT IN THE ESCROW PROCESS? |
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The Seller
To be fully prepared when entering the transaction, the seller should
have sufficient information relative to their ownership readily
available. This would include information concerning any loans, taxes,
insurance, homeowners association, and, if appropriate, rental data.
Items that would be the sources of this information are your original
deed or title policy, fire insurance policy and a year-end statement
from the existing lender. During the life of the transaction, the
seller:
Deposits the executed and notarized deed to the buyer with the escrow holder.
Deposits evidence of pest inspection and any required repair work.
Deposits other required documents such as tax receipts, addresses of
mortgage holders, insurance policies, equipment warranties or home
warranty contracts, etc.
The Buyer
When a transaction is contingent upon a new loan, it is the buyers
responsibility to arrange for the loan and also to arrange for any and
all inspections that were conditions of the contract. The real estate
agent can be most helpful in obtaining lenders and third party
inspectors active in the area. During the life of the transaction, the
buyer:
Deposits the funds required, in addition to any borrowed funds, to pay the purchase price with the escrow holder.
Deposits funds sufficient for fire and lenders policy of title insurance.
Arranges for the borrowed funds to be delivered to the escrow holder
and deposits any deeds of trust or mortgages required to secure the
borrowed funds.
Approves any inspection reports, title insurance commitments, etc. called for by the purchase and sale agreements.
Fulfills any other conditions specified in the escrow instructions.
The Lender
Deposits proceeds of the loan to the purchaser.
Directs the escrow holder on the conditions under which the loan funds may be used.
The Escrow Holder
Opens the order for title insurance.
Obtains approvals from the buyer on title insurance report, pest and other inspections.
Receives funds from the buyer and/or any lender.
Prorates insurance, taxes, rents, etc.
Disburses funds for title insurance, recordation fees, real estate commissions, lien clearance, etc.
Prepares a final statement for each party, indicating amounts to be
disbursed for services and any further amounts necessary to close
escrow.
Records deed and loan documents, delivers the deed to
the buyer, loan documents to the lender and funds to the seller,
closing the escrow.
Serves as the communications link to all parties in the transaction.
Prepares additional instructions to escrow according to the terms and conditions of the real estate contract.
Sends notice of Cal-FIRPTA to all parties; assists Sellers in complying with FIRPTA and Cal-FIRPTA laws.
Requests a preliminary title report to determine the present
condition of title to the property; sends copy of the preliminary
report to the Buyer for approval.
Coordinates activities required to clear title
in accordance with instructions, including ordering payoff statements
from existing lenders, lien and judgment holders.
Complies with new/existing lender requirements.
Prepares deed and/or other documents as required to satisfy conditions of contract, lender and Title Company.
Secures releases/satisfactions of all contingencies or other conditions as applicable.
Prepares amendments for any changes/corrections to original contract and/or escrow instructions.
Coordinates closing with lender: orders new/existing loan documents;
figures file for closing based on all bills, reports, loans, title and
escrow fees; prorates taxes, interest, dues and rents according to
instructions; orders new insurance per lenders requirements.
Receives purchase funds from Buyer and assists Buyer in signing loan documents.
UPON CONFIRMATION FROM TITLE THAT ALL DOCUMENTS HAVE BEEN RECORDED:
Disburses funds per instructions, including charges for title
insurance, real estate commissions, recording, escrow and lender s
fees, and approved bills. Prepares closing/settlement statements for
all parties, accounting for disposition of all funds deposited in
escrow.
COMMUNICATES WITH AGENTS AND PRINCIPALS AS TO PROGRESS OF ESCROW.
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| CLOSING THE ESCROW |
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Once all the terms and conditions of the instructions of both parties
have been fulfilled, and all closing conditions satisfied, the escrow
is closed. The safe and accurate transfer of property and money has
been accomplished |
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| DIVISION OF CHARGES |
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The method of dividing the charges for the services performed through
escrow or as a result of escrow varies from place to place. The fees
and service charges to be divided might include, for example, the title
insurance policy premium, escrow fee, any transfer taxes, recording
fees, and cost in connection with any loan obtained. Unless there is
some special agreement between the buyer and seller as to how these
charges are to be paid, local custom will generally be followed in
drafting the instructions to the escrow holder as to how they are to be
divided. |
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| IN SUMMARY |
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The escrow process was developed to help facilitate the sale or purchase of your home. The escrow holder accomplishes this by:
Acting as the impartial "stakeholder", or repository of documents and funds.
Processing and coordinating the flow of documents and funds.
Keeping all parties informed of progress on the escrow.
Responding to the lender's requirements.
Securing a title insurance policy.
Obtaining approvals of reports and documents from the parties as required.
Prorating and adjusting insurance, taxes, rents, etc.
Recording the deed and loan documents.
Maintaining security and accountability of monies owed and owing. |
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| IT'S NOT ALWAYS SIMPLE |
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The examples and explanations given here are designed to acquaint you
with the escrow process and are based on relatively simple escrows.
Every escrow is unique and most are more complex than explained here.
If you have questions about the escrow process, we suggest you contact
us at 310-301-2302 to obtain further information. |
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