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What Is Escrow?

Escrow 101

Escrow is the entering of an impartial third party in a real estate transaction.   The word “escrow” comes from the French word “scroll”, and is the procedure whereby a neutral third party collects and processes all the documents necessary to legally transfer ownership of a house or land.  This third party also acts to make sure all parties involved fulfill all the terms of the contract.

Escrows companies, or in some states attorneys, are set up to perform this service.  They are usually tied in with a title company that is responsible for issuing a title insurance policy.  Transferring property is a process that must comply with strict state and federal laws.  In this important process an escrow company will:

  • Collect and remit deposits and funds as instructed on the purchase contract.
  • Prepare, review, and revise escrow instructions.
  • Determine the legal ownership and status of the property through a title search.
  • Issue a title insurance policy guaranteeing that the property will be transfer with no encumbrances.
  • Confirm that the property meets the requirements of the buyer’s lender for title transfer.
  • Prorate property taxes and homeowner’s insurance.
  • Ensure all legal documentation is complete.
  • Comply with the time limits imposed on the escrow instructions and purchase contract.
  • Prepare a HUD-1 statement verifying buyer’s and seller’s closing costs.
  • Record the deed with the County of Kern.
  • Close escrow when all instructions of the seller, buyer, and lenders have been fulfilled.
  • Disburse funds as instructed, including payments to vendors, contractors, and commissions.

Escrow is designed to reduce the potential risk of fraud.   By acting as a trusted third party, an escrow officer collects, holds, and disburses funds only according to the buyer's and seller's instructions.  Funds and documents are placed in the custody of the escrow officer for delivery to a grantee only after conditions in writing are met.

Common Escrow Terms

Open up escrow—to designate an escrow company, or some eligible entity such as an attorney, to act as an impartial agent between the seller and buyer.   The designation usually occurs when an executed purchase contract is submitted to an escrow officer.  The escrow officer will open a transaction file, issue an escrow number, and then begin the process outlined above.

In Escrow—a term used to describe a home that is no longer active for interested buyers to view.  The sellers have come to terms with buyers for the sale of a home.  A purchase contract has been signed and submitted to an escrow company, and an escrow account has been opened up with an escrow officer.

Escrow Instructions—written directions, signed by a buyer and seller, detailing the procedures necessary to close a transaction.   They direct how the escrow officer is to proceed.

Fall out of escrow—when the conditions of the purchase contract are not met, the buyer and seller have the option to cancel the contract.  Documentation is signed by all parties and submitted to escrow, and escrow is cancelled.  Escrow may not be cancelled by either party without the agreement of the other, in writing.  In addition, the escrow officer may not return any funds, deposits, or documents to either party without written agreement from parties to the contract.

Close Escrow—when all requirements of the purchase contract and escrow instructions have been fulfilled the escrow officer will request funding from the buyer’s lender.  If the transaction is a cash purchase, the officer will request funds directly from the buyer.  Once these funds are deposited into the escrow company's account, a request to record the deed is submitted to the county recorder’s office.  Once the deed is recorded the property's title and ownership is transfered, funds are disbursed, and commission and invoices are paid.  The escrow company’s work and file is finally complete. 

More questions about the process of escrow?  Give me a call at (760) 382-1082 and let's talk further about it.  Let's get an escrow opened up with your home!

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