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 UNDERSTANDING
ESCROW
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Why
Do I Need Escrow?
Whether you are the buyer, seller, lender or borrower, you want
the assurance that no funds or property will change hands until
ALL of the instructions in the transactions have been followed.
The escrow holder has the obligation to safeguard the funds
and/ or documents while they are in the possession of the escrow
holder, and to disburse funds and/ or convey title only when
all provisions of the escrow have been complied with.
Escrow - How
Does It Work?
The principles to the escrow - buyer, seller, lender, borrower
- cause escrow instructions, most usually in writing, to be
created, signed and delivered to the escrow officer. If a banker
is involved, he or she will normally provide the escrow officer
with information necessary for the preparation of your escrow
instructions and documents.
The escrow officer will process the escrow, in accordance with
the escrow instructions, and when all conditions required in
the escrow can be met or achieved, the escrow will be closed.
Each escrow, although following a similar pattern, will be different
in some respects, as it deals with YOUR property and the transactions
at hand.
The duties of an escrow holder include; following the instructions
given by the principals and parties to the transaction in a
timely manner; handling the funds and/ or documents in accordance
with instruction; paying all bills as authorized; responding
to authorized requests from the principles; closing the escrow
only when all terms and conditions have been met; and distributing
the funds in accordance with instructions and provide an accounting
for same - the Closing or Settlement Statement.
Who Chooses The
Escrow?
The selection of the escrow holder is normally done by agreement
between the principals. If a real estate 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. There are laws that prohibit the payment
of referral fees; this affords the consumer the best possible
escrow services without any compromise caused by a person receiving
a referral fee.
What
Do I Have To Do While in Escrow?
The key to any transaction as important as your sale, purchase
or loan, is to READ and understand your escrow instructions.
If you do not understand them, you should ask your escrow officer
to explain the instructions.
Ask the question - What can I do to expedite the closing
of the escrow?
Respond quickly to correspondence. This will assist in the timely
closing of the transaction. If you are required to deliver funds
into the escrow, make sure you provide funds in the form required
by the escrow officer. Company procedures differ in this regard,
and there are ways that you can help at the time of closing;
check with your escrow officer. Do not give the escrow officer
a personal check and expect the escrow to close immediately;
the escrow can only close on cleared funds, and the processing
of a personal check can take days, even a week or more.
When the escrow officer closes the escrow, you may want the
closing papers, checks, title policies, statements, etc. made
available immediately. There are many aspects to the closing
of the escrow, and some of these cannot be processed on the
day of the closing. Some requirements may take several days
to complete.
What
Is A Closing Statement?
A closing statement is an account, in writing, prepared at the
close of the escrow which sets forth the charges and credits
of your account. The items shown on the statement will reflect
the purchase price, the funds deposited or credited to your
account, payoffs an existing encumbrances and/ or liens, the
costs for all services and a determination of the funds you
are entitled to at the close of the escrow. When you receive
your closing statement; it is extremely logical and reflects
the financial aspects of YOUR transaction. If anything does
not make sence to you, you should ask your escrow officer for
an explanation.
YOUR CLOSING STATEMENT AND ALL OTHER ESCROW PAPERS SHOULD BE
KEPT VIRTUALLY FOREVER FOR INCOME TAX PURPOSES. Your account
will need the information about the sale or purchase of the
property. IRS and other agencies may require you to prove your
costs and/ or profit on the sale of any property. The closing
statement will assist in this task.
Do
not rely on your escrow holder retaining the escrow file so
that you can always call and get copies of the closing statement.
Most escrow holders will destroy the files after a statutory
retention period, usually five years. Maintaining and storing
escrow files is a costly endeavor to the escrow holder. Therefore,
a nominal fee may be charged by your escrow holder for the retrieval
of a file from storage, photocopying the requested documents
and returning the file to storage.
What
About Property Taxes?
The terms of your transaction and the result escrow instructions
determine how the property taxes will be handled. If there is
no mention of the proration of taxes, your escrow officer will
not deal with any credits or charges for prorate taxes. However,
if your escrow calls for a prorate of taxes, there will be an
item in your closing statement that will reflect either a credit
or charge to your account. If the taxes are not paid (even though
there has been a credit or charge against your account), the
buyer is obligated to obtain a tax bill and pay the taxes. If
the buyer does not have a tax bill with which to pay taxes,
you can request a bill from the Tax Collector; send a photocopy
of the deed.
Supplemental Property Taxes is another concern of the buyer.
Upon transfer of real property, a supplemental tax bill is generated.
This is accomplished in cooperation with the County Assessor
and the County Tax Collector.
Shortly after the close of an escrow involving the conveyance
of real property, the County Assessor will request information
about the property from the buyer. This information assists
the Assessor in determining the value of the property for tax
purposes. Some of the information may have previously been supplied
by the escrow holder at the time of closing of the escrow, via
a Preliminary Charge of Ownership from that should accomplish
each deed when it is recorded.
What
About Title Insurance?
Title insurance is usually obtained when real property is purchased.
The policy of title insurance insures the owner and/ or the
lender of ownership of the property. There are various coverages
afforded, but a basic policy insures that the buyer is the owner
and that the lender shown on the policy is an insured lender.
Many different types of extended coverage are available; for
example, an ALTA policy is quite often required by institutional
lenders to afford them additional protection under the title
insurance policy. The title policy is written after an extensive
examination of the public records is made and the recording
of the required documents as called for in the escrow.
The title insurance policy fee is a one-time fee, paid at the
close of escrow. The determination of who pays for the policy
is not uniform from county to county in California. In some
counties, the buyer will pay while in others the seller will
pay. In other counties the seller will pay the owners policy
and the buyer will pay the lenders title policy. But in almost
every case, the question of who pays closing costs is a matter
of agreement between parties. Usually this agreement is based
on the customary practice in your county or area. In the case
of some FHA or VA transactions, the escrow officer must follow
the guidelines as required by the lender and/ or government.
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What is Escrow?
Very simply
defined, an escrow is a deposit of funds, a deed or other instrument
by one party for the delivery to another party upon completion of
a particular condition or event. The California Escrow Law _ Section
17003 of the Financial Code - Provides the legal definition. |
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Escrow
And Your New Loan
If you are obtaining
a new loan, your escrow officer will be in touch with the lender who
needs copies of the escrow instructions, the preliminary title report
and any other documents escrow supplies. During the processing and
closing of the escrow, the escrow holder is obligated to comply with
the lender's instructions.
It has become a practice of some lenders to forward their loan documents
to escrow for signing. You should be aware that these papers are lender's
documents and CANNOT be explained or interpreted by the escrow officer.
You have the option of requesting a representative from the lender's
office to be present for explanation, or arrange to meet with your
lender to sign the document in their office.
What
About Cancellations?
No escrow is opened with the intention that it will cancel, but there
are occasions when a contingency cannot be met or when the parties
disagree during the pendency of the escrow. Some escrow holders provide
such an event by incorporating an instruction in the typed or printed
General Provisions.
Ordinarily, an escrow holder will take the position that no funds
on deposit can be refunded until the escrow holder is in receipt of
mutual cancellation instructions signed by the principals. The escrow
holder cannot normally make a determination as to who is the rightful
party in a dispute on a cancellation and therefore will not return
the funds or documents until the principals agree; the escrow holder
is not a judge.
Do expect to be charged a cancellation fee, as this is a charge for
professional services rendered and quite often for several out-of-pocket
expenses that may have incurred on the client's behalf. These fees
can very from company to company depending upon their policies.
Sometimes, when a dispute exists, the escrow holder may be forced
to allow a court to decide which party is entitled to what documents
or funds; this is called an Interpleader Action. Fortunately, most
disputes are resolved before the Interpleader is filled, as the costs
for such legal actions are extreme. Those costs, incidentally, are
normally paid out of the funds on deposit in the escrow.
What Fees & Costs
Will Be Charged?
Escrow fees are not regulated by the state. Escrow holders, like any
other businesses, will charge fees that are commensurate with the
costs of producing the service, the liability undertaken, and the
overhead expenses which include a profit factor. Therefore, the fees
will vary between companies and from county to county. Normally, the
escrow holder will follow its minimum fee schedule, which will provide
for extra charges based upon the differing elements of your escrow.
On occasions, an additional fee will be charged for unusual expenditures
of time on a given transaction.
The escrow holder has no control over the costs of other services
that are obtained, such as the title insurance policy, the lender's
charges, insurance, recording charges, etc. Your escrow officer, upon
request, can provide you with an estimate of the escrow fees and costs
as well as fees charged by others, provided such information is available.
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