Learn about Escrow: Definition, Importance, and How It Works in Real Estate Transactions

An escrow is a fundamental element of a real estate transaction, but many people may not understand what it is. In California, most real estate transactions use an escrow company, which holds funds and documents until all instructions of the transaction have been followed.

What is Escrow?

An escrow is a deposit of funds, a deed, or other legal documents by one party to another, to be delivered upon completion of a particular condition or event. The legal definition of escrow is provided by the California Escrow Law – Section 17003 of the Financial Code.

Why Do You Need an Escrow?

Whether you're a buyer, seller, lender, or borrower, you want to ensure that no funds or property will change hands until all instructions in the transaction have been followed. An escrow holder is obligated to safeguard the funds and/or documents while in their possession, and to disburse funds and/or convey title only when all provisions of the escrow have been complied with.

How Does Escrow Work?

The buyer, seller, lender, or borrower creates and signs escrow instructions, usually in writing, which are delivered to the escrow officer. The escrow officer processes the escrow, following the instructions, and closes the escrow only when all terms and conditions of the transaction have been met.

The escrow holder's responsibilities include: following instructions given by the parties in a timely manner; handling funds and/or documents in accordance with instructions; paying authorized bills; and closing the escrow only when all terms and conditions have been met, while providing an accounting for the same in the Closing or Settlement Statement.

Who Chooses the Escrow?

The selection of an escrow holder is usually agreed upon by the parties involved. If a real estate broker is involved, they may recommend an escrow holder. However, it is the right of the parties to use an escrow holder who is competent and experienced in handling the type of escrow at hand. Laws prohibit referral fees, ensuring that consumers receive the best possible escrow services without any compromise.

Understanding the basics of escrow is crucial in real estate transactions. Make sure to choose an experienced and competent escrow holder to ensure a smooth and secure transaction.