UNDERSTANDING ESCROW

What is Escrow? Escrow is a process that provides for a fair and equitable transfer of property from one person to another. Below we’ve illustrated the steps involved in the escrow process. Please feel free to contact us with any questions.

1. Prepare Escrow Instructions and Pertinent Documents
These are done on the escrow holder’s printed forms. All principals – the buyer and seller — sign the instructions, which set forth the parties’ understanding of the transaction. An initial deposit usually accompanies the instructions. For a home purchase, the instructions must include:

• Purchase price and terms;
• Agreement as to mortgages;
• How buyer’s title is to appear (called “vesting”);
• Matters of record subject to which buyer is to acquire title;
• Inspection reports to be delivered into escrow;
• Proration adjustments (involves taxes and insurance);
• Date of buyer’s possession of the property;
• Documents to be signed by the parties, delivered into escrow, and recorded;
• Disbursements to be made, costs and charges and who pays for them; and
• Date of closing.

2. Order Title Search
This title search is performed on the subject property, resulting in a “Preliminary Report” from a title company. The escrow holder examines this report for items not contemplated in the instructions. For example, is there a lien (or additional loan) on the property that wasn’t reported? The seller must clear any such item or it must be brought to the attention of the buyer.

3. Request Demands and/or Beneficiary Statements
This request for information goes to any lenders of record. The document will be either:

• a “Demand for Pay-off,” if the seller’s existing loan is to be paid in full through escrow; or
• a “Beneficiary Statement,” if buyer is purchasing the property “subject to” or assuming a loan.

4. Accept Structural Pest Control Report and Other Reports
These reports might include plumbing or roofing reports. They all pertain to the property’s condition, and are kept in escrow. The escrow holder might also obtain any necessary approvals from the seller or buyer due to information in a report. For example, whether the home needs to be sprayed for insects. The reports are delivered at close of escrow.

5. Accept New Loan Instructions and Documents
This happens if the buyer is obtaining new financing for the home. The escrow holder also obtains the buyer’s approval/execution of the documents. The escrow agent must also satisfy all lender’s instructions before using the lender’s funds to complete the transaction.

6. Accept Fire Insurance Policies and Complete Settlement
By this step, it’s almost time to close the transaction. Here, following the buyer’s and seller’s instructions, the escrow holder:

• accepts and delivers any fire insurance policy and transfers the insurance;
• makes all payments on property taxes and insurance (called “prorations”);
• completes the accounting (settlement) details; and
• informs the principals that escrow is ready to proceed.

7. Request Closing Funds
The escrow holder cannot disburse any funds until all items, such as checks or drafts, have cleared and become available for withdrawal.

8. Audit File in Preparation for Closing
In this step, the escrow holder:

• accounts for all funds and documents; and
• determines that the parties have complied with all escrow instructions.

9. Order Recording
At this point, the escrow holder authorizes the title company to run the seller’s title and to record the necessary documents. This can happen provided no change has occurred in the seller’s title since the preliminary title report was issued.

10. Close Escrow
This is what you’ve been waiting for! Closing the deal. The escrow holder can “close escrow” after confirming recording, by:

• preparing settlement statements for buyer and seller;
• disbursing all funds; and
• delivering documents to the party or parties involved.