What is escrow?

We are closing escrow, we are in escrow, and we have fallen out of escrow! These are terms that are spoken all the time, but if you were to ask most people what escrow is, you would most likely hear a fumbling for words that actually barely describes the process.

Realtor.com defines escrow as follows:

“Escrow opens when the buyer and seller sign a sales contract, commonly called a real estate purchase agreement and receipt of deposit. The contract, along with any additional instructions, serves as instructions for the escrow officer. Escrow assures that the lender releases the home purchase funds at or about the same time that the deed is recorded to reflect new ownership. Escrow includes depositing, with a neutral third party, funds, documents and instructions necessary to complete the transfer.”

The key word in the definition above is Neutral. When a buyer and a seller bring their transaction to an escrow company, both are counting on complete lack of favoritism. In fact by law, the escrow company is described as “a neutral third party.” Escrow Law reads like a very dry text book with very technical language to define and ensure neutrality, protection of funds, protection from fraud, and most importantly protection of the buyer and the seller above all else.

The escrow officer has often been described as needing to be a combination of an attorney, an accountant, a mediator, a counselor, and a therapist. Though the escrow officer does not practice law, their knowledge of the residential purchase agreement and escrow and real estate law is significant. The officer is not a CPA, or in fact a mediator, counselor or therapist. But, during the transaction, when the going gets tough and stress levels rise with a first time home buyer and a seller going through a short sale, and emotions are at their peak with deadlines and delayed lender approval, believe me, a skilled escrow officer can make or break a transaction.

I have always been a bit biased against the term “fell out of escrow,” as if the escrow holder was the problem. Really, a transaction usually falls out of lending, third party inspections, geological survey, or just plain old buyer’s remorse.

Over the years, escrow has taken on more and more responsibility in the transaction. It is really important that buyers and sellers discuss with their agents who will be acting as the escrow holder and settlement agent and why. There are a few types of escrow companies. Many real estate brokers have what is called “in house escrow” and are regulated by the Bureau of Real Estate. The Department of Insurance regulates title insurance companies and their escrow department. The Department of Business Oversight, formerly the Dept. of Corporation, regulates what is generally termed as “Independent Escrow Companies” with no connections to either the Broker or the Title Company.

Companies that are licensed and regulated by the Department of Business Oversight have the following requirements:

A Certification Program for all Escrow Officers and staff in the company’s employ, including fingerprinting and background checks by the Department of Justice.

An Escrow Officer with at least 5 years’ experience must be on-site at any branch.

The company must meet state mandated net worth and liquidity requirements, including a minimum of one audit per year.

The company is prohibited to hire convicted felons or anyone who has been barred from the escrow industry by the Department of Business Oversight.

You may want to ask prospective escrow providers what procedures are in place to prevent fraud, identity theft, and cyber theft. In short, if something goes wrong, how am I protected? Does your escrow provider have Errors and Omissions Insurance?

Escrow is the place where the entire transaction is finally brought together — all the parts of the contract that a buyer and seller agreed to be met. If any parts of the contract are not met then escrow cannot close. Usually, if something unexpected pops up during the escrow process that may cause an issue can be resolved as long as both parties agree to the change. Escrow’s goal from the beginning is to close escrow and have all parties happy. We wish you many happy escrows.

Bob Fox is the co-owner and founder of Escrow Leaders with offices in San Juan Capistrano (serving Orange County) and a recently-opened office in Temecula (serving Riverside County). Escrow leaders can be contacted at: 27290 Madison Avenue, Suite 101, Temecula, CA. (951) 304-4100. Website:


One Response to "What is escrow?"

  1. Anunhappy user   August 2, 2014 at 6:47 pm

    We all know theirs always an gray area in all laws.


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