Escrow, By Definition
What is escrow?
An escrow, in the simplest of terms, is a deposit of funds, a deed or other instrument by one party for the delivery to another party upon completion of a particular condition or event.
According to the California Escrow Law – Section 17003 of the Financial Code – an escrow is “…any transaction wherein one person, for the purpose of effecting the sale, transfer, encumbering, or leasing of real or personal property to another person, delivers any written instrument, money, evidence of title to real or personal property, or other thing of value to a third person to be held by such third person until the happening of a specified event or the performance of a prescribed condition, when it is then to be delivered by such third person to the grantee, grantor, promisee, promisor, obligee, obligor, bailee, bailor, or any agent or employee of any of the latter.”
Escrow: A Necessity
Why do I need escrow?
Whether you are the buyer, seller, lender or borrower, you want the assurance that no funds or property will change hands until ALL of the instructions in the transaction have been followed. The escrow holder has the obligation to safeguard the funds and/or documents while they are in the possession of the escrow holder, and to disburse funds, and/or convey title only when all provisions of the escrow have been complied with.
The Mechanics of Escrow
How does escrow work?
The principals to the escrow – buyer, seller, lender, and borrower – cause escrow instructions to be created, signed and delivered to the escrow officer. If an agent or broker is involved, he or she will normally provide the escrow officer with the information necessary for the preparation of your escrow instructions and documents.
The escrow officer will process the escrow, in accordance with the escrow instructions. When all conditions required in the escrow are met or can be achieved, the escrow can be “closed.” (Recorded and Disbursed) Each escrow, although following a similar pattern, will be different in some respects, as it deals with YOUR property and the transaction at hand.
The duties of an escrow holder include: following the instruction given by the principals and parties to the transaction in a timely manner; handling the funds and/or documents in accordance with instructions; paying all bills as authorized; responding to authorized requests from the principals and their authorized third parties; closing the escrow only when all terms and conditions have been met; distributing the funds in accordance with instructions and providing an accounting for same – the Closing or Settlement Statement.
The Principals of Escrow
Who chooses the escrow?
The selection of the escrow holder is normally done by agreement between the principals – buyer, seller, lender, and borrower. If a real estate broker is involved in the transaction, the broker may recommend an escrow holder. However, it is the right of the principals to use an escrow holder who is competent and who is experienced in handling the type of escrow at hand. There are laws that prohibit the payment of referral fees to an agent, broker or other party that recommends a specific settlement agent. This affords consumers the best possible escrow services without any compromise which may be caused by a person receiving a referral fee.
The Importance of Escrow Instructions
What is required of me while in escrow?
The key to any transaction as important as your sale, purchase, or loan, is to READ and understand your escrow instructions. If you do not understand them, you should ask your escrow officer to explain the instructions. Your escrow officer is not an attorney and cannot practice law; you should consult your lawyer for legal advice. Do not expect your escrow officer to advise you as to whether or not you have a “good deal” or “good rate”. Your escrow officer is a neutral third party, NOT a real estate agent, lender or appraiser. Your escrow officer is likewise not a tax expert, so you should consult your financial advisor or CPA for tax and financial advice. The escrow officer’s primary function is to receive and disburse escrow documents and funds, following the instructions given by the principals in the escrow.
In order to expedite the closing of the escrow, make sure your escrow officer has your contact numbers and addresses. You should check with your escrow officer as to what specific documents and information you could provide to help the process along. Ask the question “What can I provide or do to expedite the closing of this escrow?” Respond quickly to correspondence and requests for information. This will assist in the timely closing of the transaction.
If you are required to deliver funds into the escrow, make sure that you provide “good” funds in the form required by the escrow officer. Company procedures differ in this regard and there are ways that you can help at the time of closing; check with your escrow officer. Do not give the escrow officer a personal check and expect the escrow to close immediately; the escrow can only close on cleared funds, and the processing of a personal check can take days, possibly even a week or more. Additionally, a cashier or teller check can have a stop payment issued on it, so a wire transfer is usually required for immediate close of escrow. Never send an ACH transfer to escrow. It is not an approved form of deposit to an escrow trust account. An ACH transfer is an electronic check, not a wire. It does not have the proper information to route it to your specific escrow number in the trust account, and like a check, ACH transfers can take days to process. If you will be depositing gift funds directly from a third party, notify your escrow officer. This will require a specific escrow instruction to be signed by the depositor and you, in addition to any gift letter your lender may require.
When you are buying or selling a different property at the same time, you should notify the escrow officer and provide information about the other escrow transaction. The escrow officer will need to cooperate with the parties working on the other escrow and may need to transfer to or receive funds from the other transaction, or provide information to lenders, realtors and other third parties toon to help both of your transactions close as smoothly as possible.
Escrow and Loans
What if I am obtaining a new loan?
If you are obtaining a new loan, your escrow officer will be in touch with the lender who will need copies of the escrow instructions, the preliminary title report, estimated fees and any other documents escrow could supply. In the processing and the closing of escrow, the escrow holder is obligated to comply with the lender’s instructions. Make sure your escrow officer has the best phone number to call when loan documents are ready for signing. Work on obtaining a homeowners insurance quote and providing this information to your escrow officer as the insurance information is usually required before loan documents are drawn.
Close of Escrow: The Finishing Touches
What is a closing statement?
A closing statement is an accounting document, in writing, prepared at the close of escrow which sets forth the charges and credits of your account. The items shown on the statement will reflect the purchase price, the funds deposited or credited to your account, payoffs on existing encumbrances and/or liens, loan fees, the costs for all services and a determination of the funds due to you at the close of the escrow. When you receive your closing papers, review the closing statement; it reflects the financial aspects of YOUR transaction. If anything does not make sense to you, you should ask your escrow officer for an explanation.
When going through your closing papers, examine all of them; there may even be a refund check hiding in there. Cash the check quickly, please. Be sure to have the check properly endorsed. All payees must endorse the check. This will eliminate the check being returned by the issuing bank.
Your closing statement and all other escrow papers should be kept virtually forever for income tax purposes. Your accountant will need the information about the sale or purchase of the property. The IRS and other agencies may require you to prove your costs and/or profit on the sale of any property. The closing statement will assist in this task. You may need your purchase closing statement years later when you sell your property in order to calculate any gain.
Do not rely on your escrow holder always retaining the escrow file so that you can call and get copies of the closing statement. Most escrow holders will destroy the files after the statutory retention period, usually five years.
Escrow Fees and Additional Charges
What fees and costs will I be charged?
Escrow fees are not regulated by the state. Escrow holders, like any other business, will charge fees that are commensurate with the costs of producing the service, the liability undertaken, and the overhead expenses which include a profit factor. Therefore, the fees will vary between companies and from county to county. Normally, the escrow holder will follow its minimum fee schedule, which will provide for extra charges based upon the differing elements of your escrow. On occasions, an additional fee will be charged for unusual expenditures of time on a given transaction. Your escrow holder should provide an estimate for you to sign prior to the close of escrow.
The escrow holder has no control over the costs of the other services that are obtained, such as the title insurance policy, the lender’s charges, insurance, recording charges, etc.
Cancellations in Escrow: Never an Intention, Always a Possibility
How does a cancellation occur and how is it dealt with?
No escrow is opened with the intention that it will cancel, but there are occasions when a contingency cannot be met or when the parties disagree during the pendency of the escrow. Some escrow holders provide for such an event by incorporating an instruction in the typed or printed General Provisions.
Ordinarily, an escrow holder will take the position that no funds on deposit can be refunded until the escrow holder is in receipt of mutual cancellation instructions, signed by the principals. The escrow holder cannot normally make a determination as to who is the “rightful” party in a dispute on a cancellation and therefore will not return the funds or documents until the principals agree; the escrow holder is not a judge.
Sometimes, when a dispute exists, the escrow holder may be forced to allow a court to decide which party is entitled to what documents or funds; this is called an Interpleader Action. Fortunately, most disputes are resolved before the Interpleader is filed, as the costs for such legal actions are extreme. Those costs, incidentally, are normally paid out of the funds on deposit in the escrow.
Ensuring Insurance in Escrow
What about Title Insurance?
Title insurance is usually obtained when real property is purchased, and/or a loan is obtained. The policy of title insurance insures the owner and/or the lender of ownership or lien priority of the property. There are various coverages afforded, but a basic policy insures that the buyer is the owner and that any lender shown on the policy is an “insured” lender. The title policy is written after an extensive examination of the public records is made and the recording of the required documents as called for in the escrow.
The title insurance policy fee is a one-time fee, paid at the close of escrow. The determination of who pays for the policy is not uniform from county to county in California. In some counties, the buyer will pay while in others the seller will pay. In some counties the seller will pay for the owner’s policy and the buyer will pay for the lender’s title policy. But in almost every case, the question of who pays closing costs is a matter of agreement between the parties. Usually this agreement is based on the customary practice in your county or area. In the case of some FHA or VA transactions, the escrow officer must follow the guidelines as required by the lender and/or government.
Escrow: A Taxing Business
What about Property Taxes?
The terms of your transaction and the resultant escrow instructions determine how the property taxes will be handled. If there is no mention of the proration of taxes, your escrow holder will not be concerned with any credits or charges for prorated taxes in escrow. However, if your escrow calls for a proration of taxes, there will be an item in your closing statement that will reflect either a credit or charge to your account. If the taxes are not paid (even though there has been a credit or charge against your account), the buyer is obligated to obtain a tax bill and pay the taxes. If the buyer does not have a tax bill with which to pay the taxes, you can request a bill from the Tax Collector by providing a photocopy of the deed.
Supplemental Property Taxes are another concern of the buyer. Upon transfer of real property, a supplemental tax bill is generated. This is accomplished in cooperation with the County Assessor and the County Tax Collector.
After the close of an escrow involving the conveyance of real property, the County Assessor will request information about the property from the buyer. This information assists the Assessor in determining the value of the property for taxation purposes. Some of the information may have previously been supplied by the escrow holder at the time of the closing of the escrow, via a Preliminary Change of Ownership form that should accompany each deed when it is recorded.
Perfection in Escrow
Does the perfect escrow exist?
Perfection is sometimes difficult to achieve, especially in dealing with the complexities of the escrow, and the desires of the parties and other matters that are often far beyond the control of the escrow officer. It is human nature to err on occasion, but your escrow officer has the background, training, education, support and systems in place necessary in order to accomplish the objectives of the escrow instructions.
In the event you have any problems in the handling of your escrow, you should first contact the escrow officer. If your problem is not resolved, you should next contact the management or owner of the company. If the matter requires additional attention, you can call the proper regulatory agency.
There are a number of different regulatory agencies governing escrow operations. Being an independent escrow company which is not owned by a title insurance company or real estate company, La Mesa Fund Control & Escrow, Inc., is licensed by the California Department of Business Oversight under License #963-2520.