I Escrow, You Escrow, We All Escrow

If you're new to the home buying process, I'm sure you've heard the word escrow thrown out a lot, but aren't quite sure what it really means. It's hard to fully understand what escrow entails until you've experienced it firsthand. So let's start from the very beginning, and then, of course, we'll expand.

Define Escrow

Escrow can be defined in a few different ways: as a service, a process and as a financial instrument.

1. Service: Escrow is a service provided by a neutral third party to protect the public by minimizing the risk associated with the transferring of property from one person to another.
2. Process: Escrow is a process that ensures the fair and equitable transfer of property from one person to another.
3. Financial instrument: Something of value, often money, held by a neutral third party with the intent to be used at a later date to fulfill an obligation.

In the home buying process, each of these definitions accurately describes the use of the word escrow. After an offer on a home is made, the escrow agent(service), or the neutral third party, opens escrow(process) and will take care of the legal documents and funds related to the real estate transaction. Through the use of this third party, both the buyer and the seller can safely interact with each other and rest assured that no legal documents or earnest money(escrow as a financial instrument) will be released until all the conditions related to the transaction have been met and both parties have reached an agreement. The escrow agent will oversee the transaction from the initial deposit of earnest money until the loan is funded and the transaction is complete.

Who Chooses the Escrow Agent and Who Pays the Escrow Fees?

The party that chooses the escrow agent, either the buyer or the seller, varies regionally, with differences in how it's done even between northern and southern California. Regional customs also dictate who pays the escrow fees, although often they are split between the buyer and the seller. The buyer and seller can always negotiate the escrow fees, with the final agreement included in the purchase contract. Escrow fees typically range between 1 to 2 percent of the cost of the home, but may increase depending on the complexity and duration of the transaction.

The Escrow Process

The escrow process will begin with the escrow officer assigning your escrow (documents/earnest money) a case number and collecting the other conditions and instructions related to the real estate transaction. The instructions and conditions will likely contain contingencies surrounding home insurance, home inspections, repairs, etc., that must be completed before the transaction can be finalized. As these contingencies and conditions are fulfilled, they buyer and/or the seller will sign a contingency release. Ultimately the earnest money used to open escrow will be applied toward the purchase price of the home, or will be returned should the deal fall through.

The length or term of escrow is determined by the mutual agreement between the buyer and the seller with the target date set forth in the purchase contract. The closing of escrow can be pushed out due to the loan process, and other unforeseen circumstances such as disputes about repairs, incomplete paperwork, etc.

Escrow is closed and the transaction is completed when the escrow officer records the deed in the buyer's name, the seller is paid funds for the home and all other monies are disbursed. Some of the final paperwork that will be taken care of right before escrow closes includes: any final escrow instructions or contingency releases, the settlement sheet of disbursements, title reports, inspection report, the deed of trust lender forms, tax statements and a rental agreement should the seller live in the home after escrow closes.