An escrow is an arrangement in which a disinterested third party, called an escrow holder, 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 holder to disburse the purchase price only upon the satisfaction of certain prerequisites and conditions. The seller can instruct the escrow holder 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 holder 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 holder as the central depositing point. If the instructions from all parties to an escrow are clearly drafted, fully detailed and mutually consistent, the escrow holder can take many actions on their behalf without further consultation. This saves much time and facilitates the closing of the transaction.
The escrow holder may be any disinterested third party (although some states require that certain escrow holders be licensed.)
There are two important reasons for selecting an establishment, independent escrow firm, an attorney, or an escrow officer with a bank, Savings & Loan or title insurance company. One is that the real estate transaction requires a tremendous amount of technical experience and knowledge to handle smoothly. The other is that the escrow holder will generally be responsible for safeguarding and properly distributing the purchase price.
Escrow officers with established firms are experienced and trained in real estate procedures, title insurance, taxes, deeds and insurance.
An escrow officer must remain completely impartial throughout the entire escrow process. He or she will normally adopt a courteous, but rather formal 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 officer must follow the instructions of both parties without bias.
Escrow instructions are written documents, signed by the parties giving them, which direct the escrow officer in the specific steps to be completed so the escrow can be closed.
Typical instructions would include the following:
Since the escrow holder 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 all details.
The Lender (If Applicable)
The Escrow Holder
While every transaction can have individual conditions, there are certain things which the buyer and seller have traditionally paid for.
The seller can generally expect to pay for:
The buyer can generally expect to pay for:
Once all the terms and conditions of 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.
The method of dividing the charges for the services performed through escrow or as a result of escrow varies. The fees and service charges to be divided might include, for example, the title insurance policy premium, escrow fee, any transfertaxes, recording 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 holder as to how they are to be divided.