June 6, 2013

You Ask – We Answer: What is Escrow?

In the real estate business, you hear all kind of terminology being thrown around, but what does it really mean? One question we got for our You Ask – We Answer series was “What is Escrow?”

Escrow is a process that provides for a fair and equitable transfer of one property to another. Essentially, escrow opens when the buyer and seller sign a sales contract, commonly known as a real estate purchase agreement. The contract, along with any additional instructions, serves as instructions for the escrow officer.

Escrow ensures that the lender releases the home purchase funds at or about the same time that the deed is recorded to reflect new ownership. Escrow includes depositing, with a neutral third party, funds, documents and instructions necessary to complete the transfer. You want to make sure that all the instructions of the transaction are being followed before money is disbursed.

Even though every escrow transaction can be different depending on the property, your escrow officer will begin escrow by assigning you an escrow account number and collecting the contract and other instructions, the buyer’s deposit and perhaps additional proceeds or documents. Deposits are either applied to the purchase price, or returned should the deal fall through.

The buyer orders title insurance, to protect him or her against blemishes on the title, and he or she orders a preliminary title search to determine if there are any claims against the title.

The contract and escrow instructions likely contain contingencies for home insurance, flood insurance, home inspections, financing, repairs and other tasks before the transaction can progress. Each time a contingency is met, the buyer or seller signs off with a contingency release form, or letter copied to all parties, including the escrow officer.

At some point, parties will receive a preliminary title report, which summarizes the condition of the title, including easements and liens, claims and encumbrances against the property. The seller must resolve any claims against the title, or they could stall the deal.

The title company may check once again and produce a report to be sure existing claims have been removed and that no claims have been filed since escrow opened.

Once the loan is funded, contingencies are release, the title is cleared, the buyer inspects the property and decides how to take title, only a few loose ends must be tied before close of escrow.

Remaining paperwork to sign a few days before close include the buyer’s grant deed, any final escrow instructions, the settlement sheet of disbursements, title reports, the deed of trust lender forms, inspection reports, tax statements – and a rental agreement if the seller will live in the home for some time after escrow closes.

Escrow closes and the deal is sealed when the escrow office records a new deed in the buyer’s name, the seller gets paid for the home, and all other monies are disbursed.

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*Excerpted from realtor.com