What is Escrow and When is it Necessary?
Escrow is, to many, an obscure and somewhat vague word they know is somehow related to real estate dealings. Actually, escrow is not a difficult concept to grasp, and here I’ll explain a few basic facts about escrow and its place in transactions, particularly in the field of property sales.
Regardless whether you are the buyer, the seller, a borrower or a lender, you will find using escrow protects your interests during a financial transaction. A transaction such as the purchase or sale of real estate obviously implies an exchange not only of real estate, but actual money. In the past such dealings were closed with a handshake, and even the ancient custom of handing a bundle of twigs over to a buyer as an indication of giving the buyer a “bundle of rights” that accompanied the transaction.
Whether all that is actually true may be debated, but these days business transactions must be a case of caveat emptor, let the buyer beware. Actually, it is just as important for the seller to beware as well.
That is where escrow services enter the picture. The escrow company offers assurance that the transaction will be handled as agreed upon by the parties involved. An offer is carefully written, and when accepted, a deposit of “earnest money” will be placed with an escrow company. The company will then proceed to regulate the paperwork and undertake to clarify any outstanding debt against the property. When satisfied everything is in order, and the funds are ready to be released (this is normally in the form of a loan from a bank or mortgage lender), the parties are asked to sign the appropriate documents. After which, the buyer will receive the keys to the property in question, and the funds are released to the seller.
Aside from following the instructions given by the parties involved, it is incumbent upon the escrow officer to process the entire transaction in a timely manner, carefully handling all instructions and funds in accordance with instructions. Frequently certain bills must be cleared before a sale can commence. The escrow officer should respond quickly to any communication from buyer or seller or their brokers, and when everything is in place, the officer may proceed to close the transaction, thus assuring that each party has been treated justly and fairly in accordance with their initial agreement.
Normally, the buyer and seller together will agree upon the choice of escrow company. Often a real estate broker who is involved in the transaction may propose an escrow office. It is however, the right of the principals to choose any escrow holder they like, preferably one who is well-versed in the processing of the particular transaction being processed.
Earlier it was mentioned that escrow is a simple concept, but in practice, it is not always quite so straightforward. Once a transaction has been placed in escrow, the process may take somewhat longer than many would expect. It may take time to gather all the necessary information about any liens that may exist against the property, any outstanding obligations that must be cleared away, and of course, it is vital that the escrow office find no doubts relating to the title of the property. These could be from any source such as a clerical error made 50 years earlier, a hitherto forgotten interest of another on a property, and various other items that may crop up. For that and many other reasons, escrow is possibly the most important step in getting through a transaction that potentially involves complications such as real estate.
A last word to remember is that oral agreements have no weight at all in legal entanglements. All serious agreements involving money should always be clearly outlined and signed in writing.
Please note: The information in this article is intended for informational purposes only, and not as a substitution for legal advice.