Explaining Escrow

For many home buyers and sellers, escrow is an unfamiliar term that’s often confused with closing. While an escrow agent is involved in the closing of a real estate transaction, escrow itself is the process where an impartial third party holds money and documents until a specified set of instruction – established by the parties to the escrow (the buyer and seller) – has been satisfied. Then, the documents are transferred and escrowed funds are distributed.

Legally, an escrow holder must be a disinterested third party who remains impartial throughout the process. In some states, an attorney is required, but in most circumstances, a licensed escrow company, a title company, a lending institution or even a real estate agent can perform the necessary functions. The escrow agent doesn’t prepare or review any documents, he simply safeguards the paperwork and other assets until the necessary terms are fulfilled. 

In most for-sale-by-owner cases, the buyer and the seller both open escrow by contacting a title company or escrow agent and providing a description of the property, including the purchase price; both parties’ names and addresses; the parties who should receive the preliminary title report; the termite report information; the deposit amount that will be held; financing information; and the projected closing date. The escrow agent then prepares the escrow instructions, deposits the earnest money, and orders a title search. He’ll also work with a buyer’s lender to coordinate the transfer and disbursement of funds with the escrow closing date.

Once the conditions of the escrow have been met, the escrow agent will join the buyer and the seller at closing. At this time, the escrow company will serve as the clearinghouse for the transaction and may pay liens, order title evidence, draw up closing statements, get the necessary signatures, and record documents, among other tasks, as needed. Then, the agent will finalize the transaction by giving the buyer a clean title and transferring the appropriate moneys to the seller, completing the sale and closing the escrow.