Escrow Explained

Escrow is where the terms of a real estate agreement are coordinated, documented, and completed before ownership and money change hands.

Once an offer is accepted, buyers and sellers often hear the phrase “we’re in escrow.”

Escrow is a neutral process that helps carry out the terms of the purchase agreement. It coordinates documents, funds, signatures, and information between the parties and professionals involved until the transaction is ready to close.

Escrow does not negotiate for the buyer or seller. It follows the agreement and written instructions provided.

What Happens When Escrow Opens?

After an offer is accepted, the purchase agreement is provided to escrow and several parts of the transaction begin moving at the same time.

Escrow may:

• Receive the buyer’s deposit
• Coordinate documents and signatures
• Obtain loan payoff information
• Track funds needed for closing
• Work with the lender and title company
• Prepare settlement figures
• Coordinate recording and disbursement of funds

Meanwhile, inspections, financing, appraisal, disclosures, and title review may also be underway.

A lot can be happening even when the transaction appears quiet.

Escrow and Title Are Different

Escrow and title work closely together, but they have different responsibilities.

Escrow helps administer the transaction and account for documents and funds. Title work focuses on ownership and recorded matters that may affect the transfer of the property.

A title review may identify mortgages, liens, judgments, easements, or other recorded matters that need attention before closing.

This is especially important with inherited property, where ownership history or estate documentation may require additional review.

See Title vs. Escrow: What’s the Difference? for a closer explanation.

What Will the Sale Actually Cost?

The sale price is not the amount the seller or estate ultimately receives.

Depending on the transaction, the closing statement may include:

• Escrow and title charges
• Loan payoffs
• Property tax adjustments
• HOA-related charges
• Real estate compensation
• Buyer credits or negotiated expenses
• Liens or other obligations being paid at closing

Who pays particular expenses depends on the purchase agreement and the circumstances of the sale.

What ultimately matters is the net proceeds after the transaction’s costs and obligations are accounted for.

Before closing, review the settlement figures. If a charge, credit, payoff, or adjustment does not make sense, ask what it is before signing.

What Happens if the Sale Is Canceled?

Not every escrow reaches closing.

A buyer may cancel under an available contingency, financing may fail, the parties may disagree, or another issue may prevent the transaction from continuing.

What happens to the buyer’s deposit depends on the contract and circumstances. Escrow does not automatically decide who gets the money in a dispute.

For a seller, cancellation can have another cost: time.

While the property was tied up in escrow, the seller or estate may have continued paying taxes, insurance, mortgage payments, utilities, HOA dues, maintenance, and other expenses.

That is one reason a strong offer is not simply the highest offer. The buyer’s ability to complete the transaction matters too.

See How Sellers Evaluate Offers for more on comparing price, terms, and risk.

What Is Different With Probate Property?

Probate escrow may require additional documents showing that the Personal Representative has authority to act for the estate.

Whether the representative has Full or Limited Authority can also affect how the sale proceeds and whether additional probate procedures are required.

Escrow and title need to be satisfied that the person signing for the estate has the authority to complete the transaction.

See Probate Authority and Control in California for more about how that authority affects a property sale.

Why Does Escrow Sometimes Seem Slow?

Sometimes the transaction is waiting for a lender.

Sometimes it is a payoff, title item, signature, HOA document, probate document, insurance requirement, or funds needed for closing.

Instead of wondering whether something is wrong, ask three questions:

What are we waiting for? Who is responsible for it? What happens next?

Those questions usually provide a much clearer picture of where the transaction stands.

Before Escrow Closes

A smooth escrow should not mean signing documents without understanding them.

Before closing, know:

• What the property sold for
• What is being deducted
• Why those amounts are being deducted
• What the seller or estate is expected to receive

Escrow should provide an accounting of the transaction. Review it.

It’s Your Money!

Understand where it is going before the transaction closes.

If something about an escrow involving a Southern California property does not make sense, contact me. Start with the question or number you do not understand.