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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.

The Escrow Process 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.

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