Updated on September 3, 2021
Escrow is a third party, neutral, who helps facilitate the real estate transaction by providing a secure exchange location where the officer holds the money and property to be exchanged by the parties to the transaction. It is essentially the middle man who makes sure no property or money is transferred before both parties to the transaction get the benefit of their margin – their money or their property.
As it relates to buying a home and obtaining a mortgage for the purchase, escrow plays several roles. At the most basic level, it is the location where the buyer deposits the money necessary for the purchase of the property from the seller. The seller, in turn, deposits the deed to the property. Once escrows confirm that buyer has deposited the full amount of the money for the sale it will facilitate recording title (legal ownership) in buyer’s name and the distribution of the sale proceeds to the seller. In California, typically a title company is involved in the recording process.
When a mortgage is involved, escrows will also help facilitate obtaining the necessary bank funds to complete the purchase and sale agreement. In particular, escrows act as a go between between the borrower and the bank. Banks use them to make sure that borrower deposits the necessary documents into escrow, like the mortgage or deed of trust and promissory note, before the lender will disburse the funds to escrow. Once the lender disburses the funds, those same funds are typically used to satisfy the buyer’s deposit of money towards the purchase of the property.
Typically the buyer’s initial deposit is refundable. In most real estate transactions, the buyer deposits an earnest money deposit into escrow to open it and start the purchase and sale transaction. Most real estate contracts contain contingencies or conditions to be met before the contract becomes final. If buyer does not remove their contingencies or the conditions to the contract are not met, then the earnest money deposit is typically refundable.
Companies will typically accept wire transfers, cashiers checks, or certified checks. This depends on the escrow holder and the specific terms of the instructions that the escrow company provides. To ensure a timely close, most escrow holders prefer wire transfers.
Companies typically charge a flat fee of several hundred dollars to open escrow. They then charge a certain amount per thousand of the value of the transaction. A common rate would be $2 per $1,000 for the total cost of the property. The fees are also transactional, meaning you only pay them per transaction. There is no ongoing fee.
Accounts are typically managed by licensed real estate professionals in their state. The escrow agent becomes of a fiduciary of each of the parties at the outset to the transaction with separate duties to each party in the transaction. The officer/agent manages the account and reports back to both parties to the transaction. In most real estate transactions, the real estate agent and the parties will wind up interacting extensively with their escrow officer.
Escrow is not required for private transactions. That said, it is very risky to exchange money for title without an officer in place to make sure both parties complete their obligations before the exchange actually occurs.
Banks who lend money, however, do not have an opt out option. If you are going to a commercial lender for a mortgage, then the lender will require escrow so that they can have a middle man in place to ensure the parties to the purchase and sale transaction meet their respective obligations before the lender deposits money into the account to be used towards the purchase of the property.
The lender will require escrow because they want it to provide assurance that the borrower deposits the documents necessary for their loan into escrow and to make sure that their security (mortgage or deed of trust) is properly recorded against the property at the close of escrow.
Has your escrow gone sideways? Do you need help with your real estate matter? Contact our real estate lawyers in Los Angeles at Schorr Law who can help you navigate difficult escrow related issues. We offer free initial consultations on most real estate disputes.