Real Estate Articles
The Escrow Process
By Rathin Neogy, MBA
Broker Associate
Escrow is a term that only applies to those who own property. Escrow is often
used in the buying or selling of property, or in the refinance of that property.
Most real estate transactions utilize the services of an escrow company.
Simply stated, escrow is the involvement of an impartial third party in a real
estate transaction. This neutral third party acts as an intermediary between
the buyer and seller, and also collects and remits funds as instructed by these
two parties. Buyer’s funds are deposited with the escrow company which
then remits funds as instructed. The basic purpose of escrow is to ensure that
both the buyer and seller are protected during any real property transaction.
Buyers and sellers often place their faith in the real estate broker or lender
to recommend an escrow company. The escrow company being chosen is entrusted
to safeguard funds and to execute all necessary instructions in the real estate
agreement. In order to protect the interest of both buyer and seller, it is
therefore very important to ensure that the escrow company is both reputable
and impartial.
Escrow in most states in the U.S. is performed by banks, savings and loans
and title companies as well as independent escrow firms which are licensed
by the state in which they operate. All escrow funds must be kept in trust
accounts and the escrow company must furnish the state with annual audits of
their books.
Escrow companies are usually held liable if any instructions are violated during
the course of an escrow. The escrow company will not allow the change of instructions
once the process of escrow has begun unless there is mutual agreement between
buyer and seller. The term escrow has come to mean neutral protection for the
buyer, seller and the lender. For these reasons it is very important to select
an escrow company that clearly defines its services, and which lists all fees
and charges up front.
If you have a say, you should ask your real estate agent to recommend two or
three escrow companies from which you can make your choice. In most cases escrow
companies work together with title insurance companies. In some companies,
the title company also provides the escrow service.
Although the majority of escrow companies are honest and above board, the large
sums of money handled by escrow companies can entice unscrupulous individuals
to abscond with the funds they are holding in trust. Check with the state you
reside in to see how the escrow process is regulated by them. In California,
all escrow companies are classified into two basic categories: “licensed”
or “controlled”. Licensed escrow companies are independent businesses
licensed by the California Department of Corporations. The state regulates
the procedures and practices of the companies and subjects them to stringent
requirements designed to protect consumers.
In contrast, “controlled” escrow companies are non-licensed businesses
that can be owned by a variety of entities, including real estate brokers,
mortgage brokers, banks, savings & loans institutions, and title insurance
companies. Such companies fall under the jurisdiction of a variety of supervising
agencies, with regulations and requirements that vary widely. Even though these
controlled companies are supervised, they do not fall under the strict regulations
of licensed companies.
And in today’s market, where large brokerages often own their own title
and escrow company, as a buyer and/or seller, you would get complete peace
of mind if your escrow company is truly independent.
*Rathin Neogy is a Broker Associate with the Sterling Real Estate Company servicing
the San Diego county.
