Chapter 10
Escrow
How to Navigate the Journey

I. The Escrow Procedure

The Escrow Procedure
 An escrow is the processing, by a neutral party, of the
paperwork and money involved in a sale or other real
estate transaction
 The purpose of an escrow is to assure that the appropriate
parties perform the terms of the contract
 An ESCROW is created when a new written agreement
instructs a neutral third party to hold funds and proceeds
only when all the agreed to conditions have been
performed

A. Requirements For a Valid
Escrow
 The Escrow Act is found in the Financial Code
 The three requirements for a valid escrow are:
 Signed escrow instructions, forming a binding contract
between two or more parties: usually a buyer and seller
 A neutral party, which is the escrow company, acting as
a dual agent of the buyers and seller
 Conditional delivery of funds and documents, after all
the conditions in the escrow are met
 When escrow closes, dual agency changes to
separate agency

B. Escrow Holder
 An escrow holder can be:
 A corporation
 An attorney
 A real estate broker acting as a real estate agent in the
transaction
 A NEUTRAL DEPOSITORY is an escrow business
conducted by a licensed escrow holder
 An ESROW OFFICER, HOLDER, or AGENT, though
not licensed by the state, is an employee of a licensed
escrow company who acts as the agent

Requirements (cont.)
 In Northern California, the majority of escrows are
handled by escrow departments of title insurance
companies which are governed by the Insurance
Commissioner
 In Southern California, many escrows are handled by
independent escrow companies which, by law, must be
incorporated and are governed by the Commissioner of
Corporations

The complete sequence of
events in a escrow is:
 Preliminary title search and report
 Lender’s demand
 Request for new loan documents
 Completion of conditions and depositing of funds
 Adjustments and prorations
 Transfer of existing policies, or creation of new ones
 Recording and issuing of title policy
 Disbursement of funds
 Escrow statement sent to each party

C. Real Estate Brokers Can
Conduct Escrows
 A broker can handle escrows for a fee only if the
broker is acting as a real estate agent or principal in
that transaction
 All written escrow instructions executed by a buyer
or seller must contain a statement, in not less than
10-point type, that includes the licensee’s name and
the fact that he or she is licensed by the Department
of Real Estate

II. How Escrows Work

A. Fax Purchase Agreement
to Escrow
 The last page of the Purchase Agreement contains an
acknowledgement for receipt of the completed
agreement
 Once the California Residential Purchase Agreement
and Joint Escrow Instructions form has been filled out
and executed, you will fax or deliver it to the escrow
company

B. Follow-through Checklist
 Always follow-up on
your escrows
 To keep track of the
escrow process, you’ll
want to use an
agent/broker escrow
checklist

C. Opening Escrow
 When opening escrow, always double-check the
spelling of names and the addresses
 If it’s available, provide escrow with the property
profile, obtained from the title company, when you
open escrow

D. Escrow Rules
 Once the escrow instructions have been drawn, neither
party may change them without written agreement of the
other party
 If a dispute should arise and the parties cannot agree to
terms, an escrow company will bring an INTERPLEADER
ACTION to let the courts determine where the money or
consideration goes

E. Who Selects the Escrow
Company?
 A real estate licensee is prohibited by law from
receiving any “kickback” for solicitation of escrow
business
 Either the buyer or seller can choose the escrow
company
 Death does not cancel an escrow; it is binding on the
heirs because of the prior, agreed-to contract

F. Escrow Instructions
 ESCROW INSTRUCTIONS are formal instructions
drawn from the information contained in the original
agreement, usually the signed purchase contract
 All parties to the escrow should read the escrow
instructions very carefully, and should sign them only
after every detail is absolutely correct and the terms
meet with their approval

G. Financing is An Important
Aspect of Escrow
 Most escrows for the sale of a home include obtaining
a new loan and the payoff or assumption of the old
loan
 The PAYOFF DEMAND STATEMENT is a formal
demand statement from the lender that details the
amounts owed, as calculated by the lender, for the
purpose of paying off the loan in full
 A BENEFICIARY’S STATEMENT is a demand
statement by a lender, under a deed of trust, that
provides information, such as the unpaid balance,
monthly payments, and interest rate, necessary if the
loan is to be assumed

H. Escrow Example

I. Closing Date is the Date of
Recordation
 Closing is the process of signing, transferring of
documents, and distribution of funds
 When time is not specified, the escrow will close by
mutual consent or within a reasonable period
 The CLOSING DATE is the date that the documents
are recorded

III. Proration

Proration
 Property taxes, interest, fire insurance, and rents are
prorated, but not title insurance or non-recurring fees
 PRORATION is the process of proportionately dividing
expenses or income to the precise date that escrow
closes, or any other date previously agreed upon
 All escrow companies use 30 days as a base month
 The two rules of prorations are:
 Date escrow closes
 Date item is paid

IV. Termites and Other
Problems

A. Structural Pest Control
Certification Report
 A Structural Pest Control Certification Report is usually
a condition of the escrow
 Pest control reports are NOT required by law, but
many lenders will require them
 The best time for a seller to have a termite report
issued is before putting the home on the market

B. Broker Maintains Pest
Control Documentation
 The Civil Code requires that the broker shall deliver
a copy of the Structural Pest Control Certification
Report and Notice of Work Completed to the buyer
if such a report is a condition of the deposit receipt
 If more than one broker is acting as an agent, the
selling broker shall deliver the required documents
to the buyer, who needs to sign them

V. Fire Insurance

A. Fire Insurance…A Must!
 Fire insurance is very inexpensive compared to the possible
dollar loss due to fire
 The CALIFORNIA STANDARD FORM FIRE INSURANCE
POLICY insures the dwelling against:
 Fire
 Lightning
 Additional coverage can be obtained to cover:
 Perils of windstorm
 Explosion
 Hail
 Aircraft
 Smoke
 Riot
 Vehicles not attributed to a strike or civil commotion

B. Fire Insurance Proration
 When purchasing property, a buyer usually obtains a
new policy
 If the seller has filed an insurance claim during the
previous five years, he must disclose this to the buyer
in writing

VI. Title Insurance

A. Chain of Title
• This is the recorded public history of a property
• TITLE PLANT is all information about people and their
real property which is stored in computers at the county
recorder’s office

B. Title Insurance
 Because many things outside the public record can
affect the legality of title, title insurance functions to
protect the insured
 Title insurance also insures the lender against losses
that result from imperfections in title

C. Preliminary Title Report
 The first step in a title search is the ordering of the
preliminary title report
 A PRELIMINARY TITLE REPORT is a report showing the
condition of title before a sale or loan transaction
 State law requires that buyers acknowledge receipt of the
preliminary title report
 The report consists of:
 The name of the owner and description of the property
 A list of any outstanding taxes, bonds, or other assessments
 The identity of any covenants, conditions, or restrictions
 Any recorded liens or other encumbrances that must be
eliminated before an loan is made

VII. Types of Title
Insurance Policies

A. California Land Title
Association
 In California, the standard title insurance policy is
the CLTA
 This standard policy protects against:
 someone else who owns a recorded interest in your
title
 a document not properly signed
 forgery, fraud, duress, incompetency
 defective recording of a document
 unmarketability of title
 restrictive covenants
 lack of a right of access to and from the land

B. American Land Title
Association
 Most lenders require extended coverage or an ALTA
policy
 This ALTA policy is an extended coverage policy that
insures against many exclusions in the standard
cover policy
 An ALTA policy is a lender’s policy

C. ALTA-R
 The ALTA-R POLICY is recommended by title
companies for one-to-four unit owner-occupied
residential dwellings
 This policy does NOT require a survey of property
lines and gives the buyer more coverage for the
same price

D. Who Pays Title Insurance
Fees?
 The title insurance fees are part of the escrow
closing costs
 In Southern California, it is customary for the seller
to pay the fees
 In Northern California, it is usually paid for by the
buyer

E. Title Insurance Disclosure
 In any escrow transactions for the purchase of real
property where a title insurance policy will NOT be
issued to the buyer, the buyer MUST sign and
acknowledge a disclosure statement stating that it
may be advisable to obtain title insurance

VIII. Real Estate
Settlement Procedures
Act

RESPA
 RESPA allows borrowers to shop for settlement
services
 The law covers first loans on one-to-four unit
residential dwellings
 RESPA is a law that states that the closing
settlement costs of a real estate transaction MUST
be made known to the borrower, on or before the
settlement date

IX. California Escrow
Association

California Escrow Association
 The California Escrow Association has
developed a statewide program to promote
professional service and educational
opportunities for its members

Chapter Summary
• Escrow Procedure
• Requirements of a Valid Escrow
• Escrow Holder
• Real Estate Brokers Can Conduct
Escrows
• How Escrow Works
• Fax Purchase Agreement
• Follow-through Checklist
• Opening Escrow
• Escrow Rules
• Who Selects the Escrow Company?
• Escrow Instructions
• Financing
• Closing Date
• Proration
• 30 day months
• Termites and Other Problems
• Structural Pest Control Certification
Report
• Fire Insurance
• Prorated
• Title Insurance
• Chain of Title
• 4 functions
• Prelim Report
• Types of Title Insurance
• CLTA
• ALTA
• ALTA-R
• RESPA
• California Escrow Association