At its essence, escrow is the process whereby parties to the transfer or financing of real estate deposit documents, funds, or other things of value with a neutral and disinterested third party (the escrow agent), which are held in trust until a specific event or condition takes place according to specific, mutual written instructions from the parties. Escrow is essentially a clearinghouse for the receipt, exchange, and distribution of the items needed to transfer or finance real estate. When the event occurs or the condition is satisfied, a distribution or transfer takes place. When all of the elements necessary to consummate the real estate transaction have occurred, the escrow is “closed”. Section 17003(a) of the California Financial Code defines escrow as “…any transaction in which 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 that third person until the happening of a specified event or the performance of a prescribed condition, when it is then to be delivered by that third person to a grantee, grantor, promisee, promisor, obligee, obligor, bailee, bailor, or any agent or employee of any of the latter”. For your reference, the California Escrow Law (“Escrow Law”) is contained in Division 6 of the Financial Code, commencing with Section 17000, and Subchapter 9, Title 10 of the California Code of Regulations, commencing with Section 1700. In addition to its elusive nature, escrow transactions can be unpredictable and stressful for the participants. It is safe to say that you cannot fully understand and appreciate how escrow works and what to expect until you have personally been involved in an escrow transaction. A successful escrow is usually the product of an experienced team of real estate, title, and escrow professionals working together to guide you through this short lived, yet very important, arrangement.

Whether you are the buyer, seller, lender or borrower, you want the assurance that no funds or property will change hands until ALL of the instructions in the transaction have been followed. The escrow holder has the obligation to safeguard the funds and/or documents while they are in the possession of the escrow holder, and to disburse funds and/or convey title only when all provisions of the escrow have been complied with.

The principals to the escrow – buyer, seller, lender, borrower – cause an escrow to be created. If a broker is involved, he or she will normally provide the escrow officer with the information necessary for the preparation of your escrow instructions. The escrow officer will process the escrow, in accordance with the escrow instructions, and when all conditions required in the escrow are met or achieved, the escrow will be “closed.” Each escrow, although following a similar pattern, will be different in some respects, as it deals with YOUR property and the transaction at hand. The duties of an escrow holder include: following the instructions given by the principals and parties to the transaction in a timely manner; handling the funds and/or documents in accordance with instructions; paying all bills as authorized; responding to authorized requests from the principals; closing the escrow only when all terms and conditions have been met; and distributing the funds in accordance with instructions and provide an accounting for same – the Closing or Settlement Statement

A clause in an installment note or trust deed permitting the payee or beneficiary to declare the entire unpaid balance immediately due and payable upon the occurrence of a stated event, such as the failure to pay an installment when due.The selection of the escrow holder is normally done by agreement between 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 who is experienced in handling the type of escrow at hand.

Buyers and sellers have different responsibilities in an escrow transaction. For buyers, if the transaction is contingent upon a loan, they must arrange the loan directly with a lender of their choice or choose to work with a mortgage broker to arrange the necessary loan for them. A buyer or his or her real estate agent or broker must provide the escrow officer with the contact information of the mortgage broker and/or lender because part of the escrow officer’s duties is to follow-up on the progress, approval, processing, and funding of the buyer’s loan. Also, when a lender is involved, a buyer will have to obtain a new hazard insurance policy on the property that is acceptable to the lender. This information will also be requested by the escrow officer and the buyer will be expected to provide it to the escrow. Lastly, buyers are responsible for instructing the escrow officer about the way in which they will take title to the property. Title vesting options and decisions should be taken seriously, fully researched by the buyer, and a licensed attorney and/or tax professional should be consulted if questions arise. Sellers must provide escrow officers with different types of information. If the property is mortgaged, the seller will have to provide the escrow officer with the name of their mortgage lender, loan number, and contact information. Additionally, sellers have to provide information related to their property taxes, homeowner’s insurance, rental data in the case of investment property, and homeowner association information in the event of a condominium. If title to the property is in trust, the seller may have to provide a copy of the trust and/or certificate of trust to both the escrow and title company. The requirements placed and imposed on the parties to an escrow vary depending on the nature of the transaction and may change due to unexpected circumstances. In an effort to fully understand what will or may be expected of you, it is important to communicate with your escrow officer about these items in advance.

Respond quickly to 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 of a wire transfer or cashier

The escrow holder is the agent and depositary (as an impartial/neutral third party) having and holding possession of money, written instruments, documents, personal property, or other things of value to be held until the happening of specified events or the performance of described conditions. Once these events occur or the conditions are met and performed (satisfied or waived) in strict compliance with the escrow instructions, the escrow holder (performing as the “escrow agent”) has accomplished its primary duty of faithfully executing the instructions given to it by the principals to the escrow (e.g., the buyer and the seller in a real estate sale escrow). The escrow holder is the agent and fiduciary of the principals to the escrow, and is defined to be a person who is lawfully engaged in the business of receiving escrows for deposit in behalf of or for delivery to the designated principal(s). As a fiduciary in performing its duties, the escrow holder must at all times exercise reasonable care, loyalty, and good faith towards the principals of the escrow. An escrow holder’s fiduciary duty is generally limited to the faithful performance/execution of the instructions given by the principals to the escrow. The escrow holder acts to ensure that all principals to the transaction comply with the terms and conditions of the contract/agreement as set forth in the escrow instructions. The escrow holder may (within the course and scope of the escrow instructions) coordinate the activities of the professional service providers involved in the transaction, such as the activities of the lender(s), the title company (if distinguishable from the escrow holder), the title insurance company, as well as those among the buyer, seller and real estate broker.

In a real estate transaction, it is customary that the escrow fee be split between the buyer and seller, although, as noted above, the northern and southern regions of California have different customs. Ultimately, however, the buyer and seller may negotiate and agree to any arrangement. This agreement should be reflected in writing in the purchase contract. With a real property refinance, the borrower is usually responsible for the escrow fee.

Closing costs refer to and include a variety of costs incurred by either a buyer or seller in excess of the selling price of a property. They are largely determined by the terms and conditions of the contract, the type of transaction, and where the property is located. Having said that, there are certain fees and charges that are expected regardless of the above factors. For example, in a real estate transaction, it is customary that there would be fees in connection with obtaining a new loan, paying off an old loan, fees for escrow and title, recording documents, documentary transfer taxes, real estate commissions, prepaid property taxes, home warranties, and insurance premiums. If applicable, there may also be several recurring costs or fees, or prepaid items that are prorated through escrow. Again, all of these fees and charges will be reflected on the escrow’s closing statement.