Common Questions about Escrow
1. Why is Escrow Important?
Escrow is a service that protects the public and minimizes the potential risk involved in any real estate transaction. With an experienced neutral third party in possession of the legal documents and funds, which party is obligated to safeguard the instruments and funds, buyers and sellers, as well as lenders and borrowers, can safely interact with one another and be assured that no legal documents will be recorded, and no funds will be released, until all of the conditions of the real estate contract or agreement between the parties have been completed.
2. What types of transactions go through escrow?
All sorts of transactions use escrows to facilitate the transfer, lease, or financing of real or personal property. Escrows are most commonly used when – real property is bought, sold, or refinanced, but they are also utilized for the purchase or sale of business opportunities or mobile homes. Bulk sales, stock transfers, and holding escrows are less well known, but are other types of transactions handled by an escrow company. Escrows in non-real estate transactions (e.g., those for personal property) are beyond the scope of this publication.
3. Are escrow costs fixed by law; and how much do escrow services cost?
Escrow fees are not fixed by law or regulated by the State. The escrow fee is typically commensurate with the size and complexity of the transaction, the cost of performing the services, overhead expenses, and the liability involved. Some escrow holders may have a set fee schedule in place, or a formula that they use to calculate their escrow fee by using the selling price of the property in a sales transaction or loan amount in a refinance transaction.
Please note that escrow fees are only a portion of your closing costs. There are other closing costs that you will be responsible for that are not controlled by escrow holders. If you are using the services of a title company, mortgage broker and/or securing a new loan with a lender, there will most certainly be fees charged by those respective parties.
5. Who pays for the escrow fee?
In a real estate transaction, it is customary that the escrow fee be split between the buyer and seller. The northern and southern regions of California have different customs. Ultimately, however, the buyer and seller may negotiate and agree to any arrangement. This agreement should be reflected in writing in the purchase contract.
6. How should I take title to my property?
One of the decisions you will have to make when you are purchasing a property will be how you would like to hold title to the property. There are several different title vesting options (joint tenancy, community property, community property with right of survivorship) in California, and each one has different tax, legal, and/or estate consequences. It is wise not to rush through this part of the escrow paperwork. Rather, you should do your homework and consult a licensed attorney or tax professional if you have questions.
7. What happens when a transaction fail to close and the escrow cancels?
Many escrow instructions provide for cancellation of escrow in the event of a default. Where a transaction fails to close, the parties will need to execute a cancellation agreement. If the parties are able to come to a mutual agreement to cancel, it is likely that the parties will execute a “cancellation of contract” completed by a real estate broker. Also, most escrow companies will prepare and require their own mutual cancellation instructions to be executed, and this is especially true in cases where the escrow holds funds on deposit. Before the escrow officer can release any funds, the parties must agree to the disposition of the funds in writing. This instruction will include the payment of any applicable fees or charges incurred by the escrow holder or other costs indicated in the escrow instructions.
Information collected from http://www.dre.ca.gov
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Questions about Escrow? Please Call for Your Grace for more information!
Grace Chih, Escrow Officer