What is an escrow?

An escrow is a method of closing a real estate transaction. The escrow agent is given the responsibility to oversee and coordinate the closing activities and acting as a neutral third party between the buyers and sellers. The escrow agent may be an attorney, a title company, a trust company, an escrow company or the escrow department of a lending institution. Many states have laws that regulate escrow agents and limits serving in this capacity. Your escrow officer must follow the instructions of both parties (buyers and sellers) involved in the transaction, and will remain unbiased and rather formal when dealing with all of the parties associated with the escrow. 

The Escrow Procedure

Real estate transactions involve a tremendous amount of technical experience and knowledge. Your escrow officer will generally be responsible for properly safeguarding and distributing all monies involved in the transaction. The buyers and sellers come to an agreement that is acceptable to all parties (known as a purchase and sales agreement, or more commonly, an earnest money agreement). Once all parties sign this agreement, your broker or real estate professional will turn over the earnest money agreement to the escrow company. This agreement gives the escrow officer specific steps to be completed in order for the escrow to be closed. 

Opening Escrow

The selection of the escrow holder is normally done by agreement between the parties to a transaction. Typically, the escrow is then opened by the real estate agent. Which agent (the “seller side” or the “buyer side”) will open the escrow is generally determined by local practice.

Escrow may be opened via telephone, email, website form or in person, depending upon the preference of the agent and which options are available through the escrow company. An escrow file number is assigned, and the appropriate information is entered into the computer. Upon issuance of the escrow file number, the escrow officer will order a Preliminary Report from the title company or title department.

The escrow officer will need some basic information in order to open and proceed with the escrow:

• Correct street address, and parcel # if available
• Purchase Agreement, Counteroffer(s), Addendum(s)
• Full names of all parties involved and marital status
• Contact information for all parties
• Lender name, loan number, contact information
• (For refinances) – Existing lender name, loan number, contact information and approximate unpaid balance
• HOA (Homeowner’s association) information, such as address and dues
• HOA management company information (if any)
• Commission amount(s)
• Any additional conditions

In general, the first item to enter the escrow is the buyer’s initial deposit. The escrow file will grow, item by item, until all of the conditions have been met and the escrow is ready to close.

After escrow has been opened – the following will also be required:

• How the buyer(s) wants to take title
• Fire/hazard insurance company information (for refinances: copy of existing policy)

Common Escrow Instructions

• How the escrow officer will receive and hold the buyer's money for the purchase of the property.
• The specific time frame set by the buyers and sellers for the transaction to close.
• Particular requirements or specific actions that are to be performed by either party. The escrow officer cannot close until all agreements made have been satisfied.
• The authorization for the escrow officer to distribute funds for title insurance, real estate commissions, recording fees and other costs that arise.
• Instructions for paying taxes and insurance.
• If the escrow officer's examination of the title report discloses liens against the seller or a lien for which the seller is responsible. The escrow instructions usually provide that a portion of the purchase price can be withheld from the seller and used to pay these liens and clear title so the transaction can be closed.

Escrow Fees

Escrow fees charged by the escrow agent are typically split equally between the buyer and seller. A purchaser under a new VA financing is not allowed to pay any escrow fees, in which case, escrow fees are the sole responsibility of the seller. However, FHA regulations stipulate that the buyer may pay up to one half of the fees charged by the escrow agent. 

What the Seller does in the escrow process

• Deposit the deed that will convey the property to the buyer.
• May provide evidence that a pest inspection has been done and that any work that is required by the purchaser's lender has been completed.
• May provide warranties for equipment or home warranty contracts.
• Will provide current tax bills or receipts.
• Will provide addresses of mortgage holders and the loan account numbers (for payoff).
• Provide any other specific conditions that are to be fulfilled by the seller prior to closing.

What the buyer does in the escrow process

• Inform the escrow officer of the exact name(s) and the manner in which the title is to be held.
• Provide the name, address, and telephone number of the proposed lender.
• Provide the balance of the funds required to complete the transaction.
• Approve any inspection reports, title insurance commitments, HOA documents, etc., per the purchase agreement.
• Provide any other specific conditions that are to be fulfilled by the buyer prior to closing.

What the Escrow Officer does in the escrow process

• The escrow officer opens the order for title insurance and examines the title evidence. The escrow officer prepares to clear title by ordering payoffs for loans, contracts, liens, judgments and taxes due or delinquent.
• Approval will be obtained from the buyer on the title insurance, HOA docs, pest inspections, etc.
• The lender or buyer provides the funds needed to close the transaction to the escrow officer.
• Funds are disbursed for escrow fees, recording fees, title insurance, pest inspections, real estate commissions, etc.
• The escrow officer prorates taxes (and rents, if necessary).
• A final HUD-1 statement is prepared for the buyer and seller by the escrow officer that discloses all funds being disbursed and to whom.
• Documents are usually prepared by the escrow officer and recorded in accordance with lender loan instructions and loan documents.
• The escrow officer will have the Grant Deed recorded for the buyer and deliver the funds to the seller upon the closing of the escrow.

What the lender does in the escrow process

• Provides loan documents to the escrow officer.
• Directs the escrow officer regarding the conditions under which the loan funds may be used (Lender Instructions).
• Funds the loan so that escrow officer can disburse all funds.

Escrow Duties (Details)

The Escrow Officer’s duties typically include the following:

• Receive signed Purchase Agreement; prepare Escrow Instructions.
• Receive and deposit buyer’s earnest money into an escrow account.
• Serve as the neutral agent and liaison/communication link to all parties to the transaction.
• Order Preliminary Report to determine status of title to property.
• Request beneficiary’s statement or pay-off demand related to existing financing.
• Comply with lender’s requirements as specified in the lender’s closing instructions.
• Secure releases of all escrow contingencies or other conditions required.
• Prorate taxes, interest, insurance and rents.
• Prepare or secure the transfer deed or other documents necessary to consummate the transaction.
• Arrange appointments for buyer/seller to sign documents.
• Request and receive purchase funds from the buyer and loan funds from new lender.
• Close escrow pursuant to instructions provided by seller, buyer, and lender.
• Arrange for recording of deeds and any other documents as instructed.
• Request issuance of the title insurance policies.
• Disburse funds as authorized, including charges for title insurance, recording fees, commissions and loan payoffs.
• Disposition of all funds held in escrow account.
• Prepare final accounting statements for the parties.

Communication Tips for Escrow

• When calling the escrow officer, have the escrow number and buyer/seller’s names handy.
• Keep the escrow officer informed on any matters that may affect the transaction.

Direct your questions to the proper representative, such as:

• Real Estate Agent: Physical aspects of property, conflicts, and terms of sale.
• Lender: Loan terms, credit report issues, etc.
• Escrow Officer: Escrow instructions, Escrow Amendments, documents and forms to be filled out.