What Happens In Escrow And Why Do I Need It?
An escrow is an arrangement in which a disinterested or neutral third party, called an escrow closer, holds legal documents and funds on behalf of a buyer and seller, and distributes them 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 closer to disburse the purchase price only upon the satisfaction or completion of certain prerequisites and conditions. The seller can instruct the escrow closer 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 closer 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 closer as the central contact point. If the instructions from all parties to an escrow are clearly drafted, fully detailed and mutually consistent, the escrow closer can take many actions on their behalf without further consultation. This saves much time and facilitates the closing of the transaction.
Impartiality
An escrow closer must remain completely impartial throughout the entire escrow process. He or she will normally adopt a courteous manner when dealing with parties to the escrow, keeping conversation to the matters at hand in the escrow. This formal behavior is meant for the benefit of all concerned, since the escrow closer must follow the instructions of both parties without bias.
Escrow Instructions
Escrow instructions are written documents, which direct the escrow closer 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 closer 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 the to the pro-ration of insurance and taxes.
Instructions to the escrow closer on the payment of prior liens and charges against the property and distribution of the net sale proceeds.
Since the escrow closer 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 details.
What each party may do in the escrow process:
The Seller
Deposits the executed deed to the buyer with the escrow closer.
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 Lender (if applicable)
Deposits proceeds of the purchaser’s loan.
Directs the escrow closer on the conditions under which the loan funds may be used.
The Escrow Closer
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.
Closing The Escrow
Once all terms and conditions for the instructions of both parties have been fulfilled, and all closing conditions satisfied, the escrow is closed and the safe and accurate transfer of property and money has been accomplished.
Division of Charges
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, recordation fees, and cost in connection with any loan being 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 closer as to how they are to be divided.
In Summary
The escrow process was developed to help facilitate the sale or purchase of your home. The escrow closer accomplishes this by:
Acting as the impartial “stakeholder”, or depository 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.
It’s Not Always That Simple
The examples and explanations given here are designed to acquaint you with the escrow process and are based on relatively simple escrow. Every escrow is unique and most are more complex than explained here. If you have any questions, please feel free to contact your Baines Title & Escrow Sales Representative.
The real estate closing or settlement marks the end of a real estate sale or loan transaction. The closing brings together all parties to the transaction whereby legal transfer of property takes place. Short-term services involve buy/sell and refinance transactions of which Baines Title serves as a neutral, third party receipt entity. We monitor each transaction to ensure that all parties are represented and protected.
