Escrow 101

Escrow 101

Okay, What is Escrow?

Escrow is a deposit of funds, a deed, or legal property from one party to another party upon completion of some condition or event. The California Escrow Law: Section 17003 of the Financial Code provides the full legal definition.

Why the Need for an Escrow?

It doesn’t matter if you’re a buyer, seller, borrower or lender — it’s important to have a guarantee that property or funds will not exchange hands until all instructions in a given transaction have been completed. The escrow holder is an unbiased third party who operates by instructions mutually agreed upon by the parties to the transaction. The escrow holder is under obligation to safeguard all documents and funds and to disburse those funds when all escrow provisions have been complied with.

How Does Escrow Work?

The escrow principals — buyer, seller, lender, borrower — cause escrow instructions to be drafted, signed, and delivered to the escrow officer. If a broker is involved, they will provide the escrow officer with the information necessary for the preparation of your escrow instructions and documents.

The escrow officer will process said escrow, in accordance with the escrow instructions, and when all conditions are met, the escrow will be “closed.”

Escrow holder duties include: following instructions given by the principals and parties to the transaction in a timely manner; handling documents and funds in accordance with the instruction; paying all bills as authorized; responding to authorized requests from the principals; closing the escrow only when all required payments are made in accordance with instructions and provide an accounting for same: the Closing or Settlement Statement.

Who Chooses the Escrow?

The selection of the escrow holder is normally agreed upon by the principals. If a real estate broker is involved in the transaction, the broker may recommend an escrow holder. However, it is the right of the principals to use an escrow holder who is competent and experienced. Laws prohibit payment of referral fees which affords the consumer the best possible escrow services without compromise caused by a person receiving an illegal “kickback”.

What Do I have to do while in Escrow?

The key to any transaction is to read and understand your escrow instructions. If you are confused by any of the documentation, consult your escrow officer for an explanation.

Your escrow officer is not an attorney and cannot provide legal advice. If you have questions or concerns about your escrow, consult your attorney. Your escrow officer will not advise you on whether or not you have a “good deal” or are doing things the right way.  His or her obligation is to follow the instructions given by the principals in the escrow.

To expedite closing, check with your escrow officer to see if there are specific items you can do to assist in closing faster.

Quickly respond to any 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 many ways you can help at the time of closing. 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 delay closing.

Escrow and Your New Loan

If you are obtaining a new loan, your escrow officer will communicate with the lender who will need copies of the escrow instructions, the preliminary title report, and any other documents. In the processing and closing of the escrow, the escrow holder is obligated to comply with the lender’s instructions.

It has become a practice of some lenders to forward their loan documents to escrow for signing. You should be aware that these papers are lender’s documents and cannot be explained or interpreted by the escrow officer. You have the option of requesting a representative from the lender’s office to be present for explanation, or arrange to meet with your lender to sign the documents in their office.

Escrow: What is a Closing Statement?

A closing statement is an accounting, in writing, 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 you are entitled to at the close of the escrow. When you receive your closing papers, review the closing statement; it is extremely logical and reflects the financial aspects of your transaction. If anything does not make sense to you, you should ask your escrow officer for an explanation.

Review your closing papers carefully for accuracy (there may even be a refund check hiding in there.) Your closing statement and all other escrow papers should be kept for income tax purposes. In addition, your accountant will need the information about the sale or purchase of the property. IRS and other agencies may require you to prove your costs and/or profit on the sale of any property. The closing statement will assist in this task.

Do not rely on your escrow holder retaining the escrow file so that you can “always call and get copies of the closing statement.” Some escrow holders may destroy files after the statutory retention period, usually five years, because maintaining and storing the closed files is costly. A nominal fee may be charged by your escrow holder for the retrieval of a file from storage, photocopying the requested documents and returning the file to storage.

What Fees and Costs will be Charged?

Escrow fees are not regulated by the State. Escrow holder will charge fees that are commensurate with the costs of producing the service, the liability undertaken, and the overhead expenses which include a profit. 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.

The escrow holder has no control over the costs of other services that are obtained, such as the title insurance policy, the lender’s charges, insurance, recording charges, etc. Your escrow officer can provide you with an estimate of escrow and third party fees and costs.

What About Cancellations?

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 prior to closing. Some escrow holders provide for such an event by incorporating an instruction in the typed or printed General Provisions.

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.

Some escrow companies charge a cancellation fee for professional services rendered. These fees can vary from company to company depending upon their policies.

If a dispute exists between the principals, the escrow holder may be forced to allow a court to decide which party is entitled to what documents or funds; this is called an Interpleader Action. Fortunately, most disputes are resolved before the Interpleader is filed, as the costs for such legal actions are extreme and are normally paid out of the funds on deposit in the escrow.

What about Title Insurance?

Title Insurance is usually obtained when real property is purchased. The policy of title insurance insures the owner and/or the lender of ownership of the 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 lender to afford them additional protection under the title insurance policy. The title policy is written after an extensive examination of the public record 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 that’s paid at the close of escrow. The determination of who pays for the policy is not uniform from county to county in California. In some counties, the buyer will pay while in others the seller will pay. In other counties the seller will pay for the lender’s title policy. But in almost every case, the question of who pays closing costs is a matter of agreement between the parties. Usually this agreement is based on the customary practice in your county or area. In the case of some FHA or VA transactions, the escrow officer must follow the guidelines as required by the lender and/or government.

What About Property Taxes?

The terms of your transaction and the resultant escrow instructions 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, you can request a bill from the Tax Collector; send a photocopy of the deed.

Supplemental Property Taxes is another concern of the buyer. Upon transfer of real property, a supplemental tax bill is generated through cooperation with the County Assessor and the County Tax Collector.

Shortly after the close of an escrow involving the conveyance of real property, the County Assessor will request information about the property from the buyer. This information assists the Assessor in determining the value of the property for taxation purposes. The escrow holder may have previously supplied some of the information at the time of the closing of the escrow, via Preliminary Change of Ownership form that should accompany each deed when it is recorded.

The Perfect Escrow: Does it Exist?

Perfection is sometimes difficult to achieve, especially in dealing with the complexities of the escrow. Desires, conditions, and other matters are sometimes far beyond the control of the escrow officer. It is human nature to err on occasion, but your escrow officer has the background, training, education, support, and systems in place necessary in order to accomplish the objectives of the escrow instructions.

In case you have any problems with the handling of your escrow, you should contact the escrow officer first. If your problem is not resolved, contact the management or owner of the escrow company, and if the matter requires additional attention, call the proper regulatory agency.