The Functions of An Escrow

In a real estate transaction, buyers and sellers need to be certain that all conditions of sale have been met before property and money change hands. Escrow is a process where one party engaged in the sale or transfer of an item of value delivers that item or an instrument representing ownership of the item to a neutral third party, called an escrow agent or escrow holder. The escrow agent in turn holds the item until some specified event, act or condition has been met (such as the collection of payment), according to the instructions of the parties involved in the transfer.

Simply stated, the escrow agent impartially carries out the written instructions of the parties (called the principals) in a transaction. In a real estate transaction, these parties typically are a buyer, a seller and a lender. The escrow agent's responsibilities include receiving funds and documents necessary to comply with instructions, completing or obtaining required forms, and handling final delivery of all items to the proper parties upon the completion, or closing, of the escrow process.

The escrow agent must be provided with the necessary information to close the transaction. This information may include loan documents, tax statements, sale contracts and addenda, casualty insurance policies, title insurance policies and requests for payment for various services to be paid out of escrow funds.

If a transaction is dependent on arranging new financing, it is the buyer's responsibility to make the necessary arrangements for that financing. Documentation for the new loan must be in the hands of the escrow agent before the transfer of property can take place. (A real estate broker can help identify appropriate lending institutions.)

When all instructions in the escrow have been carried out, the closing takes place. All outstanding funds are collected, and fees are paid. Title to the real estate is transferred under the terms of the escrow instructions, and appropriate title insurance is issued.

Payment of funds at the closing of escrow typically must be in the form of a cashier's check or a wire transfer. Local title companies do not accept personal checks, money orders or cash due to concerns over delays in processing and fraud.

Following are typical tasks that an escrow agent does and does not perform as part of the escrow process.

What An Escrow Agent DOES:

• Serves as the neutral "stakeholder" and the communications link to all parties in the transaction;
• Prepares written escrow instructions based on communications from the buyer and seller;
• Obtains a report of a preliminary title search to aid in determining condition of title to the property;
• Obtains a lender's statement if debt or obligation is to be taken over by buyer;
• Complies with new lender's requirements, which are specified in the escrow agreement;
• Receives purchase funds from buyer;
• Prepares or obtains the deed or other documents related to escrow;
• Calculates pro-rated amounts for property taxes, loan interest, homeowner insurance and rents, if any, according to escrow instructions;
• Obtains releases of all contingencies or other conditions as imposed on any particular escrow;
• Records the deed and any other documents, as instructed by the parties;
• Requests issuance of title insurance policy;

• Closes escrow when all the instructions of buyer and seller have been carried out:

1. Disburses funds as authorized by instructions, including charges for title insurance, recording fees, real estate commissions and loan payoffs;

2. Prepares final statements for the parties accounting for the disposition of all funds deposited in escrow. (These statements are also useful in the preparation of tax returns.)

What An Escrow Agent DOES NOT Do:

• Offer legal advice;
• Negotiate any part of the transaction;
• Offer investment, accounting or tax advice.

To learn more about escrow services, click HERE for contact information to a local title company.