What is Escrow?

The Escrow Process

There often seems to be some confusion as to what and Escrow is and how it functions in regard to the sale of a property. What follows is a brief description of the Escrow Process and how it works.

In short, an Escrow is the process in which a Buyer and Seller use a neutral third party for the delivery, safekeeping, and disbursement of documents, and funds. This third-party intermediary acts under agreed written instructions from both parties (not just one party), and will not act until the necessary conditions have been satisfied.

Escrow Defined:

California Financial Code Section 17003 states that “Escrow means any transaction wherein one person, for the purpose of effecting the sale, transfer, encumbering or leasing of real or personal property to another person, delivers any written instrument, money, evidence of title to real or personal property, or other thing of value to a third person to be held by such third person until the happening of a specified event or the performance of a prescribed condition, when it is then to be delivered by such third person to a grantee, grantor, promisee, promisor, obligee, obligor, bailee, bailor, or any agent or employee of any of the latter.”

All escrow agencies in California are licensed and regulated by the State. The State offers oversight to ensure they are acting both impartially and lawfully. Although most states use attorneys for this process, the primary benefit in California is cost and efficiency. Notwithstanding, if all parties agree, a real estate broker may also provide escrow services in respect to a real estate transaction in which such broker is directly involved with a fiduciary duty.

Opening Escrow:

Once a sale/purchase contract has been negotiated and executed by all of the parties on a real property, it is delivered to an Escrow Agent along with the earnest money deposit from the purchaser the Escrow is “opened.” Shortly thereafter, the Escrow Agent prepares an opening package of documents which contains the then known necessary documents to proceed towards “closing.” These documents will include, but are not limited to: i) a deposit receipt; ii) Original Escrow instructions, and possibly multiple Supplemental Escrow Instructions; iii) Preliminary Report (Title Report); iv) loan pay-off demands, when applicable: v) necessary governmental forms, as applicable; vi) and necessary Closing Documents.

Escrow Instructions:

Documents prepared by the Escrow Agent and signed by both the Buyer and Seller granting the Escrow Agent certain authorities. In other words, the Escrow Agent can only act based on the instructions they are given by both parties. In most cases, in order for an Escrow Agent to act, prior conditions must be satisfied by one or both parties. Including the releasing of the deed for recording and the closing funds for appropriate distribution.

Escrow Agents will not advise you regarding your purchase agreement. In addition, neither escrow nor a typical real estate agent can answer legal questions or direction. If your real estate agent doesn’t know the answer, or is unsure, you should immediately consult an appropriate attorney.

Title Insurance:

The purpose of a Preliminary Report is to make sure that you are made fully aware of any defect, or cloud on title to the property. This report will include items such as liens or easements effecting the land. The Title Officer will assist in correcting any errors or deficiencies to ensure that you receive clear and marketable title.

The primary purpose of a Title Insurance Policy is to protect a claim made against your ownership of the property. Think of it a car insurance that protects you against any claims that may arise from prior accidents that the insurance provider has been made fully aware of. The title insurance provider will generally defend your title to the property by either settling a claim or bearing the cost of going to court. Subject of coarse to the terms and conditions covered in the final Policy of Title Insurance.

Closing Escrow:

Once the Escrow Agents has audited the file to ensure that all of the conditions called for in the purchase agreement and Escrow Instructions have been completed or waived, the escrow is deemed completed, or closed. In addition, the Title Officer, to double check the Seller’s title, to ensure that there are no new encumbrances against the property since the Preliminary Report was first issued.

That this point, the deed to transfer title to the Buyer will be released for recording with the County Recorder’s Office where the property is located. Once the recording of the deed has been confirmed, the Escrow Agent will provide the parties with their respective closing statements which itemized the funds received and paid out. At this time, the Escrow Agent will also release the proceeds of the sale to the Seller and pay any secured loans, liens or judgements, demands or expenses, including real estate commissions then due, as authorized.

Preparing for Escrow:

As part of the process briefly described above, there are several acts both the Buyer and Seller will need to make along the way. Escrow will need to be provided with not only your contact information, but that of the lender as well, if applicable. The Buyer will need to know how legal title is going to be held in the property, (i.e. Joint Tenants, Tenants in Common, Community Property etc.), all of which has its own meaning. If the property is being sold or purchased through a Living Trust, they will need to be provided with the trust documents or certifications of such when acceptable. A Corporation or a Limited Liability Company (LLC) will need to supply a certificate of good standing issued by the California Secretary of State, for a corporation a certified copy of a resolution of the Board of Directors authorizing the transaction and designating which corporate officers shall have the power to execute on behalf of the corporation, and its bylaws; for an LLC its authorized operating details and signatories.

You will need to read and understand all of the documents you are given prior to signing. Again, if you are unsure about a document, consult an appropriate attorney. Do not assume that because you have been presented with a document, official looking or otherwise, it is correctly stated to serve your intended purposes, and in your best interest.

 

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Disclaimer: Every situation is different and particular facts may vary thereby changing or altering a possible course of action or conclusion. The information contained herein is intended to be general in nature as laws vary between federal, state, counties, and municipalities and therefore may not apply to any given matter. This information is not intended to be legal advice or relied upon as a legal opinion, course of action, accounting, tax or other professional service. You should consult the proper legal or professional advisor knowledgeable in the area that pertains to your particular situation.

 

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