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What is Escrow?
An Escrow is an arrangement in which a disinterested Third Party, an Escrow
Holder, holds legal documents and funds on behalf of sellers, buyers, and often
times lenders. These instruments and funds are later distributed according to
written instructions from all parties. These escrows provide protection and
convenience for all parties involved in the transaction. By written
instruction, the buyer directs the escrow holder to disburse purchase price
funds only upon satisfaction of detailed contractual conditions. Also by
written instruction, sellers direct the escrow holder to retain possession of
the deed until contractual obligations are met. The same applies for the
lender; they will only fund a loan and allow release of said funds upon
satisfaction of their written instructions. All parties rely on the escrow
holder to strictly adhere to their mutually agreed upon instructions relating
to the transaction, and to advise all parties if there are inconsistencies or
issues which will delay/stop the progress.
Some geographic areas perform escrow closings; others due to differences in
time-honored practices, perform closings in a roundtable format instead.
Funding disbursements occur differently, and the closing appointments with
buyers and sellers are handled somewhat differently, but the Escrow Holder
remains legally obligated to perform the escrow services per written
instructions from the parties to the transaction, regardless of the nature of
the process.
An Escrow provides convenience, allowing both sides of the transactions for
buyers and sellers to move forward separately and simultaneously. Contractual
obligations for inspections, appraisals, loan commitments, deeds and various
other items can be accomplished using the escrow as the central depository. If
written instructions are clear and concise, and mutually agreed upon by all
parties, the escrow holder can proceed on their behalf without further
consultation, saving considerable time and efforts for all.
Who May Hold Escrows?
The escrow holder may be any disinterested third party, although some states
require that certain escrow holders be licensed. Though there are many
important reasons for selecting an established independent title insurance
company or escrow firm where required, or an attorney, or an escrow officer
working in a lending institution, following are the two primary reasons. First,
the real estate transaction requires considerable technical experience and
knowledge to ensure a smooth process. Second, the escrow holder will be held
responsible for safeguarding and properly distributing funds for the purchase
price, existing mortgage payoff's, etc. Escrow officers/processors are
experienced and trained in real estate procedures, title insurance, tax
prorations, deeds and more.
Impartiality
It is important to remember an escrow officer/processor is a disinterested
third party, working equally for the benefit of all parties to the transaction,
serving their needs entirely without bias.
Escrow Instructions
Escrow instructions are written, signed documents that direct the escrow
officer in the specific steps to be completed so the escrow can be closed.
Typical instructions would include the following:
- The method by which the escrow holder is to receive and hold the purchase
price to be paid by the buyer.
- The conditions under which a lapse of time or breach of purchase contract
provisions will terminate the escrow without a closing.
- The instruction and authorization to the escrow holder to disburse funds for
recording fees, title insurance policy, real estate commissions and any other
closing costs incurred through escrow.
- Instructions as to the proration of insurance and taxes.
- Instructions to the escrow holder on the payment of prior liens and charges
against the property and distribution of the net sale proceeds.
Closing the Escrow
Once all written instructions, terms and conditions of all parties have been
satisfied, the escrow is closed, property is transferred, and funds are
disbursed appropriately.
In Summary
The long-ago established escrow process, whether accomplished in a true
"escrow" or "roundtable" closing format, was developed to protect all parties
of a real estate transaction and facilitate the legal transfer of the property.
Though processes can be different depending on the geographic area, the
steadfast foundation of escrow remains true: the escrow holder has the legal
responsibility to ensure every written detail is strictly adhered to, and all
parties of a real estate transaction are protected and satisfied at the time of
closing.
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