What is Escrow?


Buying or selling a home usually involves the transfer of large sums of money.  It is imperative that the transfer of these funds and related documents from one party to another be handled in a neutral, secure and knowledgeable manner.  For the protection of buyer, seller, and lender, the escrow process was developed.


All funds and documents are deposited by the parties into escrow, a neutral third party, for delivery upon completion of the terms of the escrow instruction.  The word escrow is derived from the French word ‘escroue’ meaning a scroll or roll of writing.


When the parties deliver documents and money to the Escrow Officer to be held for further delivery until certain conditions have been met, we say the documents are held “in escrow”.  We may also say the parties have “opened an escrow”.  Each of the principals of the escrow (seller, buyer, lender) will give to the escrow holder written instructions setting out the conditions under which further delivery is to be made.  These instructions are usually typed by the Escrow Officer, or the Escrow Assistant from oral information supplied by the principals or from a contract signed before they arrive at the escrow office.


The Purpose of an Escrow


The common use of an escrow is to enable the parties in a real estate transaction to deal with each other with less risk, since the escrow holder acts as:


1.      Custodian for funds and documents

2.      A clearing house for payment of all demands

3.      An agency to perform the clerical details for the settlement of the accounts between the parties


Typical Escrow Transaction


Typically, an escrow begins with the Escrow Officer “opening the order for title work”.  Based on the information provided, the escrow company prepares a title report.  There are two basic types of title reports: a preliminary title report and a commitment.  A preliminary title report provides the customer with an analysis of the present status of the property as revealed by the public records filed or recorded in the county in which the property is located.  A commitment (issued in some jurisdictions) additionally specifies the requirements which must be met in order to issue the requested insurance.


Upon receipt of the title report, an analysis is made to determine the necessary action and documents required to complete the transaction:  demands for satisfaction of liens not acceptable to buyer and/or lender; documents for recording; instructions and requirements of the new lender.  In most areas, buyers and sellers instructions are prepared for signature from the information gathered.  When all the title and financial requirements are met, and instructions from all parties can be fully complied with, the closing can take place.  At this time, all outstanding funds are collected and fees, such as title insurance premiums, real estate commissions, termite inspection charges, are paid.  Then the financial settlement takes place, the documents are recorded and the title insurance policies are issued.  Payments of funds at the close of escrow (closing costs) should be in the form of a cashier’s check made payable to the escrow company, since out of town and personal checks can cause days of delay in processing the transaction.


The Escrow Holder Does Not


            1.      Offer legal advise

2.      Negotiate the transaction

3.      Offer Investment advise