Hearing the word “escrow” in a real estate transaction can be confusing. There’s actually a good reason for this as it can mean two different things.
One meaning refers to a third-party organization involved in a real estate transaction and the other refers to a mortgage payment that includes property taxes and homeowners insurance.
We’re going to discuss the former and what an escrow company is and what they do. Here are the three questions we’re going to answer…
- What is an escrow company?
- Is there a difference between title and escrow?
- What does an escrow company do?
What is an escrow company?
Simply put, an escrow company is a neutral third party involved in a real estate transaction. They help facilitate the home selling and buying process and are mainly responsible for two things:
- Making sure the buyer doesn’t receive the property before all conditions have been met in the purchase agreement.
- Ensuring the seller doesn’t receive any funds until those same conditions are finalized and the sale is complete.
In a real estate transaction, the seller is usually the one who decides which escrow company will be used for the sale. Their agent will almost always “open escrow” before putting the home on the market, as this helps to ensure a smoother transaction.
What is an escrow officer?
An escrow officer is the main contact at the escrow company who is facilitating a transaction. Each office at an escrow company can have as little as one escrow officer to as many as fifteen.
They’re the ones who are communicating with all parties during the transaction and are responsible for making sure all of the T’s are crossed and all of the I’s are dotted.
What does an escrow officer do?
An escrow officer’s number one priority is to ensure that all parties meet the conditions of the contract before the title of the property is transferred from the seller to the buyer. When a real estate purchase contract is ratified, the escrow officer is given a copy of the contract so that they know what conditions need to be met.
Their role is not to provide any kind of advice to either party. They can objectively discuss the instructions for the closing to take place, but they must remain completely neutral.
Of course, for facilitating the transaction, there is a cost to the buyer and seller. These are commonly known as escrow fees.
What is title and escrow?
The role of an escrow company is separate from that of a title company.
It is very easy to get confused between the two as they are both involved in a real estate transaction and their names can sometimes be mistakenly used interchangeably.
A title company handles the transfer from a legal perspective. They ensure that all rights and interests of a property are in line to proceed with the transfer. The role of a title company is to ensure that legally, the property may transfer from one person to another.
They must do a thorough check to ensure that there is nothing to prevent this transfer from happening. Any mistakes or misinterpretations in legal documents, false ownership of the property, or previously unknown family members of the seller who may, in fact, have some form of entitlement to a share could all prohibit a real estate transaction from proceeding.
Individual regions maintain different practices for escrow and title companies, as well as their interaction. For example, in northern California, most escrow companies handle both escrow and title tasks. In southern California, escrow and title tasks are usually separate.
Closing the Sale
The signing of final documents between a buyer and seller will take place at an escrow company. A notary will typically be present. In the instance of an all cash deal, a notary is not a requirement. With all conditions complete, the transfer of the funds and deed between the buyer and seller will proceed. This is typically referred to as the closing date, and takes place several weeks after a formal offer.
Understanding what is an escrow company provides clarity on a critical part of the closing process. Escrow companies ensure that the entire transferal of property and funds from one owner to the next is fair, timely and in line with the conditions of both parties. A neutral middleman, an escrow company will make the final and important stages of buying or selling a home safe and secure for individuals on both sides of the transaction. Learning what is an escrow company early on in the selling process will prepare homeowners for what they can expect when closing.