What is an Escrow?

In terms of a real property transaction, "escrow" is the delivery by the buyer and seller of legal instruments and money to a third person who completes the transaction in strict accordance with the instructions of the parties. It is the neutral third party that facilitates the payoffs of any outstanding liens, encumbrances, mortgages and unpaid taxes.

Why Use an Escrow?

Escrow provides a mechanism to assure safety and convenience in carrying out the provisions of the earnest money agreement or contract. It also assures that the strict body of rules for real property transactions are carefully observed. An escrow placed with a title company provides:

• A financially responsible and neutral third party who holds the funds and documents and makes concurrent delivery of the deed to the buyer and purchase money to the seller at the moment when the terms and conditions of the transaction have been performed.
• A clearing house for the payment of all liens and other encumbrances
• A trained escrow agent (or "officer") who performs all details in prorating and adjusting accounts between the parties.

What service does an escrow agent perform?

An escrow agent prepares the necessary instructions from the buyer and seller and receives the necessary documents and funds. They prorate rents, taxes, and interest on liens to be assumed, and obtain endorsements of existing fire insurance policies. Escrow agents also clear drafts deposited by the purchaser, obtain title insurance for protection of the buyer, and pay liens and costs authorized by the parties. They are responsible for the recording of all legal documents and disbursements of funds at the closing of the transaction. And they are responsible for furnishing each party a closing statement showing the disposition of funds.

Who pays escrow fees?

The escrow fee is usually split between the buyer and the seller. This can always be changed by an agreement between the parties.

How do the parties benefit from an escrow?

Both parties are assured that the transaction will be properly and promptly closed. The seller will see that title will not pass to the buyer until the purchase price is fully paid, or the seller's provision as to security for unpaid balances is fulfilled. If the seller intends to use part of the purchase price to satisfy liens, the escrow provides a satisfactory arrangement for paying off the lienholder. The buyer is assured that the funds will not be paid to the seller until the transaction is properly completed. If the buyer needs to use the land as security for a loan to pay part of the purchase price, the escrow guarantees the lender that title is exactly as required, and provides a safe method for delivery of loan proceeds or security documents.

How much are escrow fees?

Escrow fees are on a graduated rate schedule based on the full sales price. For an idea of what escrow fees are for your transaction, check with your Realtor or escrow officer.

What's the difference between "signing," "closing," and "possession?"

"Signing" usually takes place a day or two or more before the close of escrow. Signing usually takes place in the escrow company's offices under the supervision of an escrow agent, but signings can also be done by express mail under the supervision of a licensed notary public. Closing can't take place without both parties having signed. If the buyer is making a purchase with funds from outside sources, such as mortgage financing, the buyer's singed documents generally have to be returned to the lender for final review and approval before the lender authorizes the close of escrow. "Closing" or "closing date" is the date when the deed or purchase contract is recorded in the county where the property is located and funds are available for the seller. "Possession," or the new owner's right to take occupancy of the property, is generally granted on the closing date or the following day, but this is a frequently-negotiated aspect of the sales agreement.