The Functions of Escrow
Buying
or selling a home (or other piece of real property) usually involves the
transfer of large sums of money. It is imperative that the transfer of these
funds and related documents from one party to another be handled in a neutral,
secure and knowledgeable manner. For the protection of buyer, seller and
lender, the escrow process was developed.
As
a buyer or seller you want to be certain all conditions of sale have been met
before property and money exchange hands. The technical 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.
Simply
stated, 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
completions of the escrow.
The
escrow 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
the buyer’s 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 the 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, 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
transactions.
The
escrow holder serves as the neutral “stakeholder” and
the communications link to all parties in the transaction;
prepares escrow instructions; requests a
preliminary title search to determine the present condition of title to the
property; requests a beneficiary’s statement if debt or obligation is to be
taken over by the buyer; complies with lender’s requirements specified in the
escrow agreement; receives purchase funds from the buyer; prepares or secures
the deed or other documents related to escrow; prorates taxes, interest,
insurance and rents according to the instructions; secures releases of all
contingences or other conditions as imposed on any particular escrow; records
deeds and any other documents as instructed; requests insurance of the title
insurance policy; closes escrow when all the instructions of buyer and seller
have been carried out; disburses funds as authorized by instructions, including
charges for title insurance, recording fees, 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, or offer
investment advice.
I
hope this helps you understand escrow’s responsibilities as it relates to real
estate transactions.
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