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Escrow Procedure

     In California, using an escrow company to close a real estate transaction isn't required by law, but it should be.  Escrow is such a vital part of the real estate loan transaction. Deals done on a handshake carry too much legal ambiguity for both parties.  Escrow serves as an independant third party that represents both the buyer and seller.  Escrow hold legal documents and funds on behalf of both the buyer and seller and takes instructions from both the buyer and seller.  For example, the buyer can instruct escrow to not allow a transaction to close until an unfinished repair is done, per the original contract agreement.  The seller may instruct escrow not to close until the last moving box is removed from the garage.  Escrow will explain issues in a contract or preliminary title policy, but not give any advice so that a party will have an advantage over the other.

     Escrow becomes involved in a home purchase transaction once a purchase contract has been signed by both parties, and an earnest money deposit has been given by the buyer.  The escrow company selected is usually selected by the seller, but can be negotiable with the buyer. The contract and deposit, made out to the escrow company, are both given to the escrow officer of your choice.  From there escrow instructions are drawn up for signature by both the buyer and seller.  The instructions are also given to the buyers lender to illustrate the agreement that esrow is to serve as an impartial third party.  Escrow also orders the payoff statement of the sellers outstanding real estate loans on the property.  Depending on the state, they will also handle the disbursement of funds to payoff all outstanding lienholders on the property. 

     You will also need  to provide a title company of your choice to escrow..  The seller again usually selects the title company, but again it is also negotiable with the buyer.  The seller by California tradition pays for these fees, but everything as you will see is negotiable with the buyer.  Many larger escrow companies also own title companies.  For example, Fidelity Title and Escrow.  If you do not have a title company preference, escrow may give you a recommendation. 

     Escrow will contact the title company of choice and from there a preliminary title policy will be opened.  The Prelim, for short, will show any outstanding encumbrances on your property such as your first mortgage lender, property tax liens, judgements levied against you and your property, and encroachments. The lender and buyer need to be guaranteed that clear title can be obtained to your property subject to a list of conditions.  This is the title companys main function. Typically the buyer and seller get their own title policies,  they both have different coverages and the timeline to generate the Prelim could take from 1-14 days depending on the how extensive the the title search is.  There are also several different kinds of policies for both parties, call your escrow officer or title officer and they can give you more details.  You can always upgrade your title policy after it's been opened.  However once escrow has closed, you can not upgrade to a different policy.

     Now you have two different entities working on your transaction, the title company and the escrow company, and you will soon begin receiving paperwork and correspondence in the mail, with some of the documents needing your signature and some of it not.  Read these documents and call your escrow and title officers with any questions you may have.  Their names and phone numbers will be on the cover page of the documents you receive in the mail.

     Both entities are an absolute necessity to the real estate process.  Escrow and title will work closely to make sure things go smoothly, but be proactive and ask questions, this is an educational process.  Be prepared for a wrinkle here or there, the process isn't perfect, and sometimes there may be a communication breakdown.  Being proactive will keep everyone in the loop.

     That in a nutshell are the escrow and title company functions, but how do you go about selecting an escrow officer and title officer?

     Most of the time, Realtors have their favorite escrow and title companies, but not having a Realtor means you don't have a liason to know who to select.  Referrals go a long way.  If you have a friend or relative who just completed a refinance or purchase loan ask them about their experience.  Escrow companies can have as many as 6 escrow officers in their office, and if you don't have a referral, you can walk in and ask to interview one that is available.

     What to look for in an escrow officer?

     First off, you need to tell them you are doing a FSBO transaction.  This is important because a FSBO transaction typically calls for greater customer service since there is not a Realtor in place, who is usually the first contact.  Some escrow officers do not want FSBO business. 

     Realize that escrow officers get a salary + commission on the amount of deals they do, so they should want your business.  Look for someone who is organized and can connect with.  You will see if they are organized by looking at their desk.  Escrow can be a stressful business, so working with someone who makes you feel at ease is equally important.  Ask how much they charge for their services, and letters of recommendation from past clients. Make sure and compare fees.  Next when you get home, check the reputation of the escrow officer and company by searching Google.  Also keep in mind you will be visiting the escrow office frequently so, one that is in close proximity to your home is important as well.

     Escrow is your liason to the title company.  You won't be contacting title unless you have a problem that needs further explaining that what the escrow officer gives you, so the selection of the title company will be a bit more difficult.  But make sure and call around for fees and compare!  Sometimes if you use the same title company as the escrow company you may get a  reduced rate.

     The selection of a good reputable escrow company can make or break your experience.  Make sure if you can't get a good referral from a friend, to do your due diligence as listed above.