The escrow instructions reflect the understanding and agreement of the principals. The principals are the main parties of any agreement; they are not always buyer and seller, since not all real estate transactions involve selling of a property. Any time a neutral third party is needed to handle documents or money, such as leases, sale of personal property, sale of securities, refinances, or mobile home sales, an escrow may be required. Only certain types of transactions are required by law to be escrowed - liquor license transfer, security sales, and court ordered probate sales. The law does not require the use of escrow in any other transactions. However, most buyers and sellers find it advisable to have a third party handle the details of the agreement.

An escrow ensures that the property or funds will not change hands until all of the agreement's instructions have been met. An escrow company is obligated to safeguard funds and documents while in their possession and transfers title and funds according to the contract.

After instructions are signed, it is the job of the escrow holder to follow them and request all parties to the escrow to observe the terms and conditions of the contract. The escrow holder coordinates communication between the principals, the agent and others involved in the transaction.

Escrow is a small or short-lived trust agreement. The principals trust that the escrow holder will carry out their wishes, and the escrow holder has the duty to be trustworthy as the agent for both parties. An average escrow period runs between 30 to 45 days, although it can be shorter.

The decision as to who will open escrow is based on the property's location. Although there are many qualified escrow companies, it is advisable to open escrow with a licensed escrow company (one that is regulated and bonded for its trust fund and licensed by the state Department of Corporations or similar state regulatory agency).

The escrow process

The escrow holder sits between the buyer and the seller as a stakeholder with the obligation to both sides. The buyer and seller - or their real estate agents - open escrow and provide the escrow holder with the following information:

Seller

• Full names of all sellers

• Property address

• Type of property - single family home, condo or townhouse, mobile home

• Sale price

• Existing lender's name, loan number and telephone number

• Other liens that need to be paid from seller's proceeds

• Name and telephone numbers of the real estate agents, and the commissions paid

• Expected close of escrow

• Inspections, reports, repairs and who is paying for them

• Warranties, if applicable

• Power of Attorney, if required

Buyer

• Full names of all buyers, including social security numbers

• Vesting or how buyers will take title to the property

• Earnest money deposit as specified in the contract

• New lender information, including name and telephone number

• Terms of the sale in case of any conflict in the instructions

Responsibilities of the escrow company

• Takes instructions from both buyer and seller or their agents

• Orders preliminary title report from title company

• Obtains Covenants, Conditions and Restrictions (CC&Rs)

• Orders HOA documents, when applicable

• Sends for payoff for seller's existing loans on the property

• Handles loan documents from the lender

• Compiles invoices and copies of all reports, warranties, repairs, as well as broker's demand for commission, which is paid through escrow

• Receives hazard and other insurance policies

• Prepares disclosures if the seller is a non-resident of the state, and retains the potential to withhold money from the seller's proceeds if necessary

• If a Power of Attorney is used, the escrow holder must get approval from the title company

• Reviews the complete file to ensure that all conditions have been met

• Secures title insurance polices

• Calculates and prorates interest taxes, insurance, rents and other recurring costs

• Obtains signatures on required documents from the seller and buyer, including all loan documents, and has the necessary documents notarized

• Sends signed loan and other documents required by the lender

• Obtains the balance of funds from the buyer to close escrow

• Receives funds from the lender to close escrow

• Orders the recording of the deed at the County recorder's office

• Prepares final closing statement and HUD 1 document for all parties, including the buyer, seller and lender and the agents involved in the transaction

• Disburses funds to seller, and all other costs incurred during escrow

In the case the transaction fails to close, both the buyer and seller have to sign the release. Agents do not have the authority to cancel or void an escrow. Based on the cause of the transaction's cancellation, the party in default and - as specified in the contract - the buyer and/or seller may have to pay for any costs incurred in escrow.

Useful tips for escrow

• If a large amount has been placed as deposit, or if the escrow is going to take a long time, you can request that the escrow company place the funds in an interest-bearing account.

• Preferably, the buyer should deposit the balance of the down payment one or two days prior to closing, using a cashier's check. Most escrow companies do not accept personal checks.

• Buyers should remember to take a photo identification card - either a valid driver's license, ID card issued by the state, or passport.

• Sellers should keep their mortgage current through the escrow period.

• Have the escrow officer explain all the documents that you sign at closing.

• In case of any discrepancy in the documents, have the escrow office contact the necessary party by telephone and if possible, have the issue resolved right away.

• Escrow information may not be released to anyone without written permission of the principals.

• An escrow holder must remain strictly neutral regarding the buyer's and seller's interests.

• All documents to be recorded must be sent to the title company in a timely manner, and all interested parties should receive copies of the recorded documents.