What happens in Escrow?

An escrow is an arrangement in which a disinterested third party, called and escrow holder, holds legal documents and funds on behalf of a buyer and seller, and distributes them according to the buyer's and seller's mutual instructions. An escrow account is opened when buying and selling real estate. The buyer can instruct the escrow holder to distribute the purchase funds only upon the satisfaction of certain prerequisites and conditions. The seller can instruct the escrow holder to retain possession of the deed to the buyer until the seller's requirements, including receipt of the purchase price, are met. Both parties rely on the escrow holder to carry out faithfully their mutually agreed upon instructions relating to the transaction and advise them if any of their instructions are not mutually consistent or cannot be carried out.

An escrow is convenient for the buyer and seller because both parties can move forward separately but at the simultaneously in providing inspections, reports, loan commitments and funds, deeds and additional items, using the escrow holder as the central depositing point.

The escrow holder works off escrow instructions signed by both parties, which direct the escrow officer in specific steps to complete so the escrow can be closed.

Typical Instructions in include the following:

1) The method by which the escrow holder is to receive and hold the purchase price to be paid to the buyer.

2) The conditions under which a lapse of time or breach of purchase contract provision will terminate the escrow without a closing.

3) The instruction and authorization to the escrow holder to disburse funds for recording fees, title insurance policy, real estate commissions and any other closing costs incurred through escrow.

4) Instructions as to proration of insurance, taxes and HOA fees (if in a home owners association).

5) Instructions to the escrow holder on the payment of prior liens and charges against the property and distribution of the net sale proceeds. Since the escrow holder can only follow the instructions as stated, and may not exceed them, it is extremely important that the instructions be stated clearly and be complete in all details.