Life of an Escrow

What is escrow?

An escrow is an arrangement in which a disinterested third party, called an escrow holder, holds legal documents and funds on behalf of a buyer and seller, and distributes them according to the buyer’s and seller’s instructions.

People buying and selling real estate often open an escrow for their protection and convenience. The buyer can instruct the escrow holder to disburse the purchase price only upon the satisfaction of certain prerequisites and conditions. The seller can instruct the escrow holder to retain possession of the deed to the buyer until the seller’s requirements, including receipt of the purchase price, are met. Both rely on the escrow holder to carry out faithfully their mutually consistent instructions relating to the transaction and to advise them if any of their instructions are not mutually consistent or cannot be carried out.

An escrow is convenient for the buyer and seller because both can move forward separately but simultaneously in providing inspections, reports, loan commitments and funds, deeds and many other items, using the escrow holder as the central depositing point. If the instructions from all parties to an escrow are clearly drafted, fully detailed and mutually consistent, the escrow holder can take many actions on their behalf without further consultation. This saves time and facilitates the closing of the transaction.

The escrow process was developed to help facilitate the sale or purchase of your home. The escrow holder accomplishes this by:

• Acting as the impartial “stake-holder,” or depository of documents and funds
• Processing and coordinating the flow of documents and funds
• Keeping all parties informed of progress on the escrow
• Responding to the lender’s requirements
• Securing a title insurance policy
• Obtaining approvals of reports and documents from the parties as required
• Prorating and adjusting insurance, taxes, rents, etc.
• Recording the deed and loan documents
• Maintaining security and accountability of monies owed and owing.

The Escrow Process

It all begins with the offer on a home purchase and acceptance  of that offer by a home seller, skillfully negotiated by the real estate agents representing Buyer and Seller.

The Buyer(s):

• Tenders a written offer to purchase  a home, condo or a townhome (or accepts the Seller’s counter-offer).  The home buyers’ offer is written on a California Purchase Agreement (also known as Deposit Receipt) and is usually accompanied by a good faith deposit amount.  In Pasadena, the norm of the earnest money deposit is 3% of purchase price of the home.

• Approves and signs the escrow instructions and other related instruments required to complete the transaction.

• Approves the preliminary report and any property, disclosure or inspection report called by the purchase and sale agreement. (Deposit Receipt)

• Schedules a home inspection including a physical home inspection and other necessary inspections like sewer line, chimney, septic tank, roof, foundation, etc.

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

• Deposits funds necessary to close the escrow. Approves any changes by signing amendments in the escrow instructions.

The Lender (when applicable):

• Accepts the new loan application and other related documents from the Buyer(s) and begins the qualification process.

• Orders and reviews the property appraisal, credit report, verification of employment, verification of deposit(s), preliminary report and other related information.

• Submits the entire package to the loan committee and/or underwriters for approval. When approved, loan conditions and title insurance requirements are established.

• Informs Home Buyer(s) of loan approval terms, commitment expiration date and provides a good faith estimate of the closing costs.

• Deposits the new loan documents and instructions with the escrow holder for Home Buyer’s approval and signature.

• Reviews and approves the executed loan package and coordinates the loan funding with the escrow officer.

The Escrow Officer:

• Receives an order for escrow and title services.

• Orders the preliminary report and examination on the subject property from the Title Company.

• Acts as the impartial “stakeholder” or depository, in a fiduciary capacity, for all documents and monies required to complete the transaction per written instructions of the principals.

• Prepares the escrow instructions and required documents in accordance with terms of the home sale.

• With the authorization from the real estate agent or principal, orders demands on existing deeds of trust and liens or judgments, if any. For assumption or subject to loan, orders the beneficiary’s statement or formal assumption package.

• Reviews documents received in the escrow: preliminary report, payoff or assumption statements, new loan package and other related instruments. Reviews the conditions in the lender’s instructions including the hazard and title insurance requirements.

• Presents the documents, statements, loan package(s), estimated closing statements and other related documents to the principal(s) for approval and signature, and requests the balance of the buyer’s funds.

• Reviews the proceeds of the loan(s) from the lender(s).

• Determines when the transaction will be in the position to close and advises the parties.

• Assisted by title personnel, records the deed, deed of trust and other documents required to complete the transaction with the County Recorder and orders the title insurance policies.

• Closes the escrow by preparing the final settlement statements, disbursing the proceeds to the Seller, paying off the existing encumbrances and other obligations. Delivers the appropriate statements, funds and remaining documents to the principals, agents and/or lenders.

The Home Seller(s):

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

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

• Approves and signs the escrow instructions, grant deed and other related documents required to complete the transaction.

• Orders inspections, receives clearances and approves final reports and/or repairs to the property as required by the terms of the purchase and sale agreement (Deposit Receipt).

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

• Approves any final changes by signing amendments to the escrow instructions or contract.

Title Company:

• Receives an order for title service.

• Examines the public records affecting the real property and issues a preliminary report.

• Determines the requirements and documents needed to complete the transaction and advises the escrow officer and/or agents.

• Reviews and approves the signed documents, releases and the order for title insurance, prior to the closing date.

• When authorized by the escrow officer, Title Company records the signed documents with the County Recorder’s office and prepares to issue the title insurance policies.

Real Estate Agent:

• Coordinates all activities with the escrow company, lender, title company, buyer and seller.

• Oversees all transactional details.

• Ensures that all contractual deadlines are met and appropriate paperwork is submitted and communicated to all parties.

• Negotiates any requests for repairs and assists in obtaining estimates when necessary.