The Escrow Process

Escrow is the process which facilitates the transfer of title, the funding of a new mortgage, the payoff of an existing mortgage, the issuance of new title insurance, the proper payment of all fees and expenses and the proper pro rations between buyer and seller. The escrow agent acts a third party to insure that all parties to the transaction have met their obligations prior to the recordation of any documents relating to the sale. Some states utilize lawyers instead of escrow agents to close a transaction, however most residential real estate transactions in California simply use an escrow agent. The escrow agent performs the following tasks:

1. Escrow Instructions: Obtains copy of the purchase agreement and prepares Escrow Instructions to be acknowledged and signed by all parties. Most of the terms of the escrow instructions will be obtained from the purchase agreement (such as closing date, contingency periods, inspections to be obtained, etc.), however there may be supplemental instructions agreed upon by the buyer and seller, such as agreements for the seller to pay certain required repair costs determined from a property inspection.

2. Order Preliminary Title Report:Order a title search and preparation of a preliminary title report. This report will disclose items which may have not been contemplated by the seller or buyer, including unpaid taxes, mechanics liens (claims on the property made by a tradesman for work which had not been paid), unusual easements (rights of another party to gain access to or across the property), etc.

3. Request a Demand for Payoff: Request a “Demand for Payoff” (if there is an existing mortgage in place which will be paid off by the sales proceeds), or a “Beneficiary Statement” ( if the new buyer will take the property subject-to an existing mortgage by assuming the mortgage) from any lenders appearing on the preliminary title report.

4. Received Inspection and Termite Reports:Receive all required inspection reports, insuring all parties have received a copy, and that all parties have approved the inspection reports, or provided additional escrow instructions to resolve any problems disclosed in the reports.

5. Obtain New Loan Instructions: Obtain new loan instructions and documents, assuring buyer approval of all documents. Determine that all contingencies required by lender prior to closing have been satisfied.

6. Obtain New Fire Insurance Policies: Determine that fire insurance, as required by lender, has been obtained.

7. Calculate Pro Rations and Closing Costs: Calculate all pro rations (such as property taxes) and other closing costs to be paid either by buyer or seller, and prepare a good faith estimate of closing costs and net proceeds to seller and net funds required by buyer.

8. Obtain Signed Copies of all Documents to be Recorded: Obtain signed and executed documents to be recorded (including notarizing all documents requiring notarization )such as the grant deed from the seller to the buyer, and the new note and deed of trust. The title company normally insures that a re-conveyance deed is recorded by the previous lender clearing title and documenting that the prior mortgage has been paid off.

9. Receive New Loan Funding and Insure Payoff of Existing Loans: Obtain all required fundings from the new lender, pay-off existing mortgages, obtain final required funds from the buyer, and prepare disbursement to the seller when all funding and checks have cleared. In southern California, if an independent escrow company is acting as the escrow agent, the new lender will deposit funds with the title company which will record the documents, make the payoff of the existing secured loan(s) and will then disburse the balance of the funds, if any, to the independent escrow company. This process is known as “sub-escrow.”

10. Record Documents and Final Title Insurance Policy: Order recording of the documents and the issuance of a final title insurance policy.

11.Closing of Escrow: The recording of the Grant Deed formally transferring title to the Buyer normally occurs at 8:00 a.m. on the morning following the funding of the buyer’s new loan, and the payoff of any previous loans and other seller encumbrances on the property.

12. Final Closing Statement: Provide Buyer and Seller with a final Closing Statement outlining all fees paid and final net proceeds from Buyer and net proceeds to Seller.