What is Escrow?
Escrow is the depositing of funds and documents by the parties with an impartial third party for delivery upon completion of the terms of the escrow instruction. The word escrow is derived from the French word 'escroue' meaning a scroll or roll of writing.
When the parties deliver documents and money to the impartial Escrow Officer to be held for further delivery until certain conditions have been met, we say that the documents are held "in escrow." We may also say the parties have "opened an escrow." Each of the principals of the escrow (buyer, seller, lender) will give to the escrow holder written instructions setting out the conditions under which the further delivery is to be made. These instructions are usually typed by the Escrow Officer or the Escrow Secretary from oral instruction supplied by the principals or from a contract signed before they arrived at the escrow office.
A Typical Escrow Transaction
Typically, an escrow begins with the customer "opening the order for title work." In other words, giving the Title company the necessary information regarding the transaction and requesting that it prepares a preliminary report or a commitment. Preliminary provides the customer with an analysis of the present status of the title to the property as revealed by the public records filed or recorded in the county in which the property is located. A commitment (issued by some jurisdictions) additionally specifies the requirements which must be met in order to issue the requested insurance.
Upon receipt of the preliminary report, an analysis is made to determine the necessary action and documents required to complete the transaction: demand for satisfaction of liens not acceptable to buyer and/or lender; documents for recording; instructions and requirements of the new lender. In most areas, buyers and sellers instructions are prepared for signature from the information gathered. When all the title and financial requirement are met, and instructions from all parties can be fully complied with, the escrow is said to be "in perfection" and can close. Then the financial settlement takes place, the documents are recorded and the title insurance policies are issued.
Why Escrow is Important
The common use of an escrow is to enable the parties in a real estate transaction to deal with each other with less risk, since the escrow holder acts as:
- Custodian of funds & documents
- A clearing house for payment of all demands
- An agency to perform the clerical details for the settlement of the accounts between the parties