The Life of An Escrow

That’s it, you’ve done it. Your Realtor® has skillfully negotiated an agreement for you to buy or sell a property, and your Realtor® tells you that it’s time to “open escrow”.  But what is this mysterious thing called escrow? How does an escrow work?

When you put money “into escrow” it is held by a neutral third party (called an escrow officer) who works for the lender(s), the seller and the buyer/borrower. The escrow officer’s role is to carry out the instructions agreed upon by all parties. The money is released when all the terms of the agreement are met.

There are many occurrences in the life of an escrow, and each one is unique unto itself, because each escrow involves a totally unique set of circumstances and individuals.  This is a description of the life of a typical escrow in California.

Escrow is both a state of being in time, and a physical place.  Escrow is one of the last stages in the purchase or sale of a real property. When someone says that they are “in escrow”, it means that they have either accepted an offer on the sale of their property, or their offer to purchase a property has been accepted. The place where the work of escrow occurs is with an escrow officer, at their offices.  An escrow officer is a neutral third party who carries out the tasks of the escrow for all parties, as directed by the purchase agreement.  Think of the escrow officer as the conductor, and all of the parties to the transaction as the orchestra.  The music is beautiful when each member does their part at the proper time.  The escrow officer assures this.

The purchase agreement, or deposit receipt, is the instrument that is first signed by all parties before they “go to escrow”, and it becomes the backbone of your escrow instructions.  The officer scours it for contingencies and removal dates, and any terms or conditions that should be noted to the parties.  They attach this new document, and this becomes the instructions for the escrow.

Escrow instructions are prepared along with other pertinent documents, and signatures are obtained. These instuctions form the basis by which all parties are directed on what tasks must be completed before title is transferred.  They specify  the dates by which those tasks myst be completed by the parties, and what notifcations need to be made.

Immediately, a title search is ordered, and a preliminary title report is received and sent out for review and approval by all parties. Upon approval, a policy of title insurance is ordered for both the buyer and the new lender.  This is directed by the escrow officer, but completed by the title officer.  Demands for payoff are ordered on existing money liens, and clarification requested on tax liens and other liens.  These actions assure that clear title will be passed to the buyer upon successful closing of escrow.

While the escrow officer is processing the file, the lender for the buyer is also processing the loan application. (If the buyer is assuming an existing loan, the escrow officer requests a beneficiary statement , forwards to buyer for review and approval, and requests loan documents for transfer or for the new loan.)  Near the scheduled closing date, the escrow officer will make sure that the lender has ordered loan documents, which spell out the terms and conditions of the buyer’s new loan.  The loan documents are then sent from the lender to the escrow officer. An appointment will be made for the new buyer to come in and review and sign their loan documents, for which a notary must be present.

Once documents are received, the file is audited and reviewed to determine that all conditions have been met, and all documents have been properly prepared. Funds are obtained from the buyer, signatures on loan documents are obtained, and the documents are returned to the lender for final verification. The loan funds are then requested from the lender and received into escrow, where, along with the balance of the buyer’s down payment, they make up the proceeds to the seller.

Last of all, closing net statements areprepared for both buyer and seller, and recording is ordered from title company.  That’s it, with final verification of recording from the title company, the escrow is closed.

The Buyer’s Tasks

Tender a written offer to purchase (and accepts any Seller counter-offers) accompanied by a good faith deposit amount.

Approve and sign the escrow instructions and other related instruments required to complete the transaction. Approve any changes by signing amendments in the escrow instructions.

Order any necessary inspections, receives clearances and approves final reports and/or repairs to the property as required by the terms of the Purchase Agreement (Deposit Receipt).

Complete all contingencies and sign the required releases.

Obtain a new homeowner’s insurance policy.

Approve the preliminary report or title commitment and any property disclosure or inspection report required in the purchase and sale agreement.

Approve and sign new loan documents and fulfills any remaining conditions contained in the contract, lender’s instructions and/or the escrow instructions.

Deposit funds necessary to close the escrow.

The Seller’s  Tasks

Accept Buyer’s Offer to Purchase and initial good faith deposit to open escrow.

Submit documents and information to escrow holder, such as: addresses of lien holders, trust documents, tax receipts, equipment warranties, home warranty contracts, any leases and/or rental agreements.

Approve and signs the escrow instructions, grant deed and other related documents required to complete the transaction. Approve any changes by signing amendments to the escrow instructions or contract.

Order any necessary inspections, receives clearances and approvs final reports and/or repairs to the property as required by the terms of the Purchase Agreement (Deposit Receipt).

Fulfill any remaining conditions specified in the contract and/or escrow instructions; approve the pay off demands and/or beneficiary’s statements.