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February 14, 2018

ESCROW


Word of the day

ESCROW

The process by which money and/or documents are held by a disinterested third person (a stakeholder) until satisfaction of the terms and conditions of the escrow instructions (as prepared by the parties to the escrow) has been achieved. Once these terms have been satisfied, delivery and transfer of the escrowed funds and documents takes place. Although in some states a real estate broker is authorized to handle escrow functions, the common practice is to employ the services of a licensed escrow company, title company or lending institution. In some states, it is called a settlement service.

Escrow can generally be used to close the following types of real estate transactions: sales, mortgages and exchanges; sales by means of a contract for deed; and leases of real estate. In all cases, the escrow holder acts as a fiduciary and retains documents and entrusted assets until specified conditions are fulfilled. The holder is the special and impartial agent for both parties and acts in accordance with the escrow instructions given by both. The sales contract usually serves as the basis for escrow instructions for both seller and buyer because it contains (or should contain) the agreement of the parties concerning who must pay the various expenses, the proration date and the like. This importance of the sales contract underscores the critical role of the real estate salesperson or broker whose responsibility is to advise the parties and properly complete the sales contract form (and advise the parties to seek legal counsel if appropriate). If the contract has been unprofessionally prepared, the escrow company may be delayed or even prevented from closing the transaction. It is important to remember that an escrow agent does not prepare or review the legal documents—escrow merely takes directions from the parties to the contract and acts on them in a confidential manner. Thus the parties should not rely on the escrow agent to discover defects in the transaction. If an established escrow company is not involved in the transaction, an attorney should be consulted about the preparation of proper escrow instructions.

Because of the escrow’s limited duties of disclosure and the confidentiality of the escrow in general, facts known to the escrow holder are normally not imputed or implied to the other party. Escrow is a limited agent for both parties, but once the conditions to the escrow transaction have been performed, the nature of the dual agency changes—escrow then becomes the agent for the seller for the money and the buyer for the deed. Escrow acts as the “clearinghouse” for the details of the transaction. Escrow cannot be unilaterally revoked, and in the event of disagreement the escrow can only be amended, changed or revoked by mutual agreement.

In closing a real estate transaction, the escrow company may perform such duties as paying liens, computing prorations, ordering title evidence, having new documents prepared, drawing up closing statements, obtaining necessary signatures, recording documents and receiving and disbursing funds. After payment of their respective closing costs, the buyer is thus assured of receiving a clear title and the seller is assured of receiving the appropriate funds. Typically, escrow fees are split equally between buyer and seller.

Some special situations to which an escrow arrangement is most appropriate are closing of sale and immediate resale or purchase; closing when several lenders are involved either in new mortgages or releases of prior encumbrances; closing an entire condominium project when purchasers’ funds must be escrowed under state law; closing a VA or an FHA loan (an FHA and VA requirement).

Once a valid escrow has been set up and a binding and enforceable contract of sale has been deposited with the escrow holder along with a fully executed deed, the death or incapacity of one of the parties to the escrow will not terminate the escrow. Upon performance of the decedent’s part of the contract, the other party is entitled to have escrow concluded according to the terms of the contract.

An escrow is usually not opened until major contingencies in the contract of sale have been met. Such major contingencies might be the arrangement of new financing or the approval of a loan assumption, building permit, zoning change or the like. Among the contingencies that can be taken care of after the start of escrow are the appliance check, the termite inspection and the signing of bylaws or house rules.

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