As a buyer or seller, you want to be certain all conditions of a sales contract have been met before property and money change hands. The definition of an escrow is a transaction where one party engaged in the sale, transfer or lease of real or personal property with another person delivers a written instrument, money or other items of value to a neutral third person, called an escrow agent or escrow holder. This third person holds the money or items for disbursement upon the happening of a specified event or the performance of a specified condition.

In other words, the escrow holder impartially carries out the written instructions given by the principals. This includes receiving funds and documents necessary to comply with those instructions, completing or obtaining required forms and handling final delivery of all items to the proper parties upon the successful completion of the escrow.

The escrow holder must be provided with the necessary information to close the transaction. This may include loan documents, tax statements, fire and other insurance policies, title insurance policies, terms of sale and any seller-assisted financing, and requests for payment for various services to be paid out of escrow funds.

If the transaction is dependent on arranging new financing, it is the buyer’s or his agent’s responsibility to make the necessary arrangements. Documentation of the new loan agreement must be in the hands of the escrow holder before the transfer of property can take place. A real estate agent can help identify appropriate lending institutions.

When all instructions in the escrow have been carried out, the closing can take place. At this time, all outstanding funds are collected and fees – such as title insurance premiums, real estate commissions, and termite inspection charges – are paid. Title to the property is then transferred under the terms of the escrow instructions and appropriate title insurance is issued.

Payment of funds at the close of escrow should be in the form acceptable to the escrow, since out-of-town and personal checks can cause days of delay in processing the transaction.

The following items represent a typical list of what an escrow holder does and does not do:

The escrow holder:

  • Serves as the neutral third party and the communications link to all parties in the transaction.
  • Prepares escrow documents.
  • Requests a preliminary title search to determine the present condition of title to the property.
  • Requests an assumption statement if debt or obligation is to be taken over by the buyer.
  • Complies with lender’s requirements.
  • Receives purchase funds from the buyer.
  • Prepares or secures the deed or other documents related to escrow.
  • Prorates taxes according to instructions.
  • Requests payoff statements from current lien holder.
  • Assists in clearing up any title defects.
  • Records deeds and any other documents as instructed.
  • Requests issuance of the title insurance policy.
  • Closes escrow when all of the instructions of buyer and seller have been carried out.
  • Disburses funds as authorized by instructions, including charges for title insurance, recording fees, and real estate commissions and loan payoffs.
  • Prepares final statements for the parties accounting for the disposition of all funds deposited in escrow. (These are useful in the preparation of tax returns).

The escrow holder does not:

  • Offer legal advice.
  • Negotiate the transaction.
  • Offer investment advice.