November 6, 2020

Buying a house is often the most important financial transaction of your life, as well as one of the most exciting and stressful. While many aspects of the home-buying process leave buyers confused, the escrow process is often at the top of the list for many. While the escrow process can seem mysterious and convoluted, it is the most commonly used procedure by which real estate is bought, sold, and refinanced in California.

What is Escrow?
According to the California Department of Real Estate (DRE), “escrow” is the process whereby parties to a real estate transfer deposit documents, funds, or other things of value with a neutral third party (known as the escrow holder), which are held in trust until a specific event or condition takes place according to written instructions from the parties. Once the event occurs or the condition is satisfied, the transfer of the funds, documents, etc., takes place. After that, the escrow is “closed.”

Escrow is important because it minimizes the risks involved in a real estate transaction. With the funds and legal documents in the hands of a neutral third party, the buyer and seller can rest assured that no funds will be released and no legal documents will be recorded until all the conditions of the real estate agreement have been completed.

Who can Provide Escrow Services?
All escrow holders in California must be either “licensed” or “controlled” escrow companies. A “licensed” escrow company is licensed by the California Department of Business Oversight (DBO), after satisfying licensing requirements. A “controlled” escrow company is not licensed by the DBO, but instead may be owned and operated by an attorney, real estate broker, or title insurance company, among others.

Choosing an Escrow Holder
The parties to a real estate contract must agree upon an escrow holder (also called an escrow officer or escrow agent), and the choice is normally reflected in the real estate purchase agreement. Real estate brokers often recommend an escrow company, since many brokers normally do business with a particular company for real estate transactions. However, the parties to the agreement have the ultimate say.

Duties of an Escrow Holder
An escrow holder is a neutral third party, and does not represent any party to the transaction. Escrow holders process the escrow and handle the funds and documents from start to finish, in accordance with the escrow instructions. They prepare and process paperwork for the transaction (such as the escrow instructions, grant deeds and quitclaim deeds, and the estimated and final closing statements), pay bills as authorized, and close escrow when all terms of the escrow instructions have been met.

What Transactions can go through Escrow?
Escrows are most common when real property is sold, bought, or refinanced, but they can also be used when buying or selling business interests and/or mobile homes, as well as other types of transfers.

Not everything is part of escrow though. Many aspects of a real estate transaction are not handled by escrow holders, such as agreements between the buyer and seller regarding contingency removals, liquidated damages, and dispute resolution.

How does the Escrow Process Work?
Escrow usually “opens” when the executed real estate purchase agreement is delivered to the escrow holder, sometimes with the deposit or down payment.

After escrow opens, the escrow holder will have a property title search performed with the designated title company (if it hasn’t already been done), and will prepare escrow instructions for the parties’ signatures. The escrow instructions give the escrow holder the authority to act, telling the escrow holder what to do and when to do it. They indicate all of the specific steps to be completed (and conditions that must be satisfied) before the escrow is complete. An escrow holder can only act in accordance with the escrow instructions – without signed instructions, the escrow holder cannot proceed. It is therefore important that they be clear, and accurately reflect both the parties’ intentions and the escrow holder’s duties.

Escrow instructions normally identify the escrow holder’s contact information and escrow number, license number, important dates including the date escrow opened, as well as the date it is scheduled to close, the names of the parties to the escrow, the property address and legal description, purchase price and terms, how the buyer’s title is to vest, proration adjustments, matters of record to which the buyer is subject when acquiring title, disbursements to be made, fees and charges and who is responsible for payment, documents to be signed, delivered, and recorded, and the process and roadmap that must be followed by the escrow holder in handling the escrow.

Escrow instructions also reflect the parties’ agreements regarding escrow and the escrow holder’s duties, such as ordering a title search, requesting payoff demands and beneficiary statements, facilitating the receipt and approval of reports, making prorations and adjustments, paying bills, obtaining the buyer’s or borrower’s approval and signature on loan documents, requesting closing funds and authorizing recording, closing the escrow after confirmation of recording, preparing final closing statements, disbursing funds, and delivering documents to the appropriate parties.

Once all conditions in the escrow instructions have been satisfied, the escrow is complete, and it “closes.” When escrow closes, the escrow holder releases the funds and documents, pays authorized bills, and prepares and delivers a final closing statement to the parties (basically an itemized accounting of the escrow which reflects the closing costs, credits, and debits), all in accordance with the escrow instructions.

Need more information?
ESKRIDGE LAW may be contacted by phone (310/303-3951), by fax (310/303-3952) or by email (geskridge@eskridgelaw.net). Please visit our website at eskridge.hv-dev.com.

This article is based on the law as of the date posted at the top of the article. This article does not constitute the provision of legal advice, and does not by itself create an attorney-client relationship with Eskridge Law.