Escrow is a term that is frequently misunderstood or confused for other concepts. If you have purchased a house in California, you most likely used the services of an escrow company, but you may not have noticed or recognized the escrow services you were using; however, escrow is a critical function in real estate and other complex transactions.

1. Let’s start with a traditional definition: Escrow is a legal arrangement in which an asset (often money, but sometimes other property such as art, a deed of title, website, or software source code) is delivered to a third party (called an escrow agent) to be held in trust pending a contingency or the fulfillment of a condition or conditions in a contract such as payment of a purchase price. Upon the satisfaction of a condition or conditions, the escrow agent will deliver the asset to the proper recipient, otherwise the escrow agent is bound by his or her fiduciary duty to maintain the escrow account.
2. Still confused? One way to think about escrow is to start with a very basic business transaction. For example, when you purchase groceries at a store, you select the products that you want you proceed to the register, your price is calculated, and you pay for your goods and leave with them. When you purchase assets like real estate, you cannot usually walk up to the owner, tender payment and take possession of the real estate. The transactions are more complex and require the buyer and the seller as well as other parties such a title companies and mortgage lenders each to perform certain functions or satisfy certain conditions before the seller’s money is tendered and the title is transferred. That’s why escrow agents are used. All of the roles and responsibilities are set forth in a purchase agreement. Escrow agents take possession of assets (such as the buyer’s good faith deposit) and prepare to transfer title upon satisfaction of all of the conditions in the agreement. Because the escrow agent is a neutral third party, the escrow agent follows the terms of the agreement signed by the parties to the transactions and does not disburse funds or transfer title until all of the conditions have been met.
3. While escrow is best known in the United States in the context of real estate (specifically in mortgages where the mortgage company will establish an escrow account to pay property tax and insurance during the term of the mortgage), escrow companies are also commonly used in the transfer of high value personal and business property, like websites and businesses, and in relation to person-to-person remote auctions (such as eBay).
4. Escrow is a legal concept in which a financial instrument or an asset is held by a neutral third party on behalf of two other parties that are in the process of completing a transaction. The funds or assets are held by the escrow agent until it receives the appropriate instructions or until predetermined contractual obligations have been fulfilled. In a real estate transaction, the escrow officer is basically the person who brings together and coordinates all of the aspects of a said transaction.
5. Why Do I Need an Escrow?

An Escrow is generally required in California by lenders, buyer, and sellers. In California, an escrow company can be licensed/regulated by 1) The Department of  Financial Protection and Innovation (independent); 2) The Department of Real Estate (broker owned); 3) the Insurance Commissioner (title company). There are different levels of professional standard requirements for each governing body. An escrow holder as is an independent third party to a transaction, charged with holding funds, deeds and other documents, for delivery from one party to another, when all agreed upon conditions and/or terms have been met.

2. Who Chooses the Escrow Company?

The selection of the escrow holder is normally done by agreement between the principals in any transaction. If a real estate agent/broker is involved in the transaction, the broker may recommend an escrow holder. However, it is the right of the principals to use an escrow holder who is competent and who is experienced in handling the type of escrow at hand.

3. What Advice Can I Get from My Escrow Officer?

Please keep in mind that an escrow officer cannot give legal advice. The purpose of escrow is to carry out the mutual instructions of the buyer and seller. If there are any disagreements between the principals, the escrow officer remains neutral until an agreement is negotiated. Furthermore, the escrow officer will never become involved in the negotiations. Your primary consultant should be your real estate agent/broker if the negotiations have been conducted through them. The escrow officer will often refer you to the real estate agent/broker, legal counsel, or quite possibly a tax adviser.

4. What Happens At “Close of Escrow”?

The closing can take place when all instructions have been complied with and both sides of the transaction have fully performed. After all funds have been collected and costs paid, the property title can be transferred. Parties are not present for closing and once the documents are recorded with the county title is transferred and escrow considered closed. Recorded documents and new title policies will be mailed to you after closing from the county and title company. They know that whatever of value is deposited with such a corporation will not be delivered until the written instructions of all parties have been complied with.  The adjustment of taxes, rents, interest, and fire insurance; procuring of requested documents, such as bills of sale covering personal property and releases of existing encumbrances; the recording of all papers at the right moment; and the proper disbursement of the money involved to the persons entitled to it –  these are a few of the services required of the escrow officer. The escrow officer will be glad to compute the expense of an escrow in advance.