What is Escrow?
Very simply defined, escrow is a deposit of funds, a deed or other instrument, by one party for the delivery to another party, that is held by a third party (escrow holder or escrow company) until certain conditions are met. The escrow holder is a neutral third party.
Whether you are a buyer, seller, lender or borrower, you want the assurance that no funds or property will change hands until all of the instructions in the pending transaction have been followed. The escrow holder has the obligation to safeguard the funds and/or documents while they are in the possession of the escrow holder, and to disburse funds and/or convey title only when all provisions of the escrow have been complied with.
Reasons for Escrow
- Escrow serves as a neutral depository for money and documents. The escrow holder does not favor one party or another and acts impartially towards all.
- The escrow holder assures that all conditions are satisfied before the deeds are recorded or other transfer documents are filed or distributed.
- The escrow holder provides expertise in escrow practices, document preparation and in understanding the title insurance process.
- The escrow holder provides a clear, concise accounting of all funds involved in the escrow process.
- The escrow holder arranges for the safe delivery of all funds and documents to their proper recipient.
Common Types of Escrow
The subject of an escrow may be either real property, which is defined as land and structures affixed to land, or personal property, defined as moveable property, such as a mobile home, business, or a beneficial (lender’s) interest in a note or deed. An escrow transaction may even cover a combination of real and personal property. Here are common types of escrows:
- Real Property Sales Escrows
- Bulk Sales, also known as Business Opportunity Escrows
- Exchange Escrows
- Loan Escrows, also known as Refinance or Refi Escrows
- Subdivision Escrows
- Mobile Home Escrows
- Land Contract Escrows
- Sale of a Deed of Trust
How Escrow Works
Escrow instructions are agreed to and created in writing that outline the transaction and all conditions of the transaction. The principles to the escrow (the buyer, seller, lender, borrower) will sign the escrow instructions. The escrow holder will process the escrow in accordance with the instructions. When all conditions are met or achieved, the escrow will be “closed”.
Who Are the Escrow Parties?
- Principals – people who sign the escrow instructions. They are usually the buyer and seller in the sale; the borrower in a refinance; the lessor and lessee in a lease or rental agreement; the vendor and vendee in a land contract; and the transferor and transferee in a bulk sale or a liquor license transfer
- Other parties – in addition to the principals, many other parties may be involved. This includes real estate brokers and salespeople; attorneys; title officers; lenders and mortgage brokers; insurance agents; government agencies representing municipal reports, taxes, liens, judgments and other monetary or non-monetary encumbrances.