Escrow is the process by which two or more parties transfer or finance real estate deposit documents, funds and other things of value with an independent, neutral third party (the escrow agent), who has the authority to receive and disburse money and documents and hold these items in trust until specific events or conditions take place according to specific written instructions from the parties.
Successful escrow requires an experienced team of title, real estate and escrow professionals who work together throughout the process.
Escrow is important because it protects the public in general and reduces potential risks associated with real estate transactions. With a neutral third party in possession of legal documents and funds, lenders, borrowers, buyers and sellers may safely interact with the knowledge that no legal documents will be recorded and no money released until every condition of the contract has been met.
Real estate transactions involve large amounts of money and a great deal of documentation. This means that escrow is not always a straight forward, step-by-step process and it can get complex. This is why these transactions are best handled by professionals who know the ins and outs and how to avoid delays in closing.
The decision of which escrow agent to use is typically agreed upon by the parties, and written into the purchase contract. While a seller may choose Company A and the buyer may choose Company B, both must agree, as they do with all other terms of the sale.
The escrow officer plays a vital role in any real estate transaction and manages the escrow and handles funds and documents from beginning to end according to the escrow instructions. These instructions provide a detailed outline of the officer's duties.
When all conditions of escrow are met and achieved, escrow will be closed. While every escrow follows a similar plan, every escrow is different in some way, and some escrow transactions are more complicated than others.
The escrow holder has many duties, including:
- Following all instructions provided in a timely manner,
- Handling funds and documents in accordance with the escrow instructions,
- Paying any bills as authorized,
- Responding to requests from the principals of the transaction, and
- Closing the escrow only when all terms are in accordance with the escrow instructions.
In California, escrow is closed on the day the grant deed is recorded with the County Recorder's office, not the day the buyer signs loan documents or the lender funds the mortgage, despite common misconception. From the moment the broker forwards the final purchase agreement to the escrow officer until the grant deed is time-stamped by the county clerk, the escrow process is in effect.