Escrow is the depositing of funds and documents by the parties with an impartial third party for delivery upon completion of the terms of the escrow instruction. The word escrow is derived from the French word 'escroue' meaning a scroll or roll of writing.

When the parties deliver documents and money to the Escrow Officer to be held for further delivery until certain conditions have been met, we say the documents are held "in escrow". We may also say the parties have "opened an escrow". Each of the principals of the escrow (seller, buyer and lender) will give to the escrow holder written instructions setting out the conditions under which the further delivery is to be made. These instructions are usually typed by the Escrow Officer or the Escrow Secretary from oral information supplied by the principals or from a contract signed before they arrived at the escrow office.

The Purpose Of An Escrow

The common use of an escrow is to enable the parties in a real estate transaction to deal with each other with less risk, since the escrow holder acts as:

1. Custodian for funds and documents
2. A clearing house for payment of all demands
3. An agency to perform the clerical details for the settlement of the accounts between the parties

Typical Escrow Transaction

Typically, an escrow begins with the customer "opening the order for title work". In other words, giving the Title Company the necessary information regarding the transaction and requesting that they prepare a title report. There are two basic types of title reports: a preliminary title report and a commitment. A preliminary title report provides the customer with an analysis of the present status of the property as revealed by the public records filed or recorded in the county in which the property is located. A commitment (issued in some jurisdictions) additionally specifies the requirements that must be met in order to issue the requested insurance.

Upon receipt of the title report, an analysis is made to determine the necessary action and documents required to complete the transaction: Demands are ordered for satisfaction of liens not acceptable to buyer and/or lender, documents for recording, instructions and requirements of the new lender In most areas, buyers and sellers instructions are prepared for signature from the information gathered. When all the title and financial requirements are met, and instructions from all parties can be fully complied with, the escrow is said to be "in perfection" and can close. Then the financial settlement takes place, the documents are recorded and the title insurance policies are issued.

Title Insurance

In California most real estate transactions are closed with the issuance of a title insurance policy in favor of the owner, the lender or both. Many homebuyers erroneously assume that when they purchase a parcel of real property, possession of the deed to the property is all they need to prove ownership. Not so, because hidden hazard may attach to real estate. Forgeries, faulty surveys, hidden liens, the false representation of ownership of a married person as being single are just a few examples of factors which may cloud the title to real property ownership. A property owner's greatest protection is a policy of title insurance.

What Is Title Insurance?

Title insurance assures property owners that they are acquiring marketable title. Unlike casualty insurance policies which insure against future events, title insurance is designed to eliminate risk or loss caused by defects in title from past events. Title insurance provides coverage only for title problems, which were already in existence at the time the policy was issued.

A title insurance policy is a contract of indemnity, which guarantees that the title is as reported, and if it is not and the owner is damaged, the title policy covers the insured for his or her loss up to the face amount of the policy.

The Title Search

Issuing a title policy is an extensive and exacting process. Title companies work to eliminate risks by performing a painstaking search of the public records. They also examine their own "plant", where public records, laws and court decisions pertaining to the property and the parties to the escrow are maintained. They determine the current recorded ownership, any recorded liens or encumbrances, or other matters of record which could affect the title to the property. Once a title search is complete, the title company issues a preliminary report detailing the current status of title.

The Preliminary Report

The preliminary report contains vital information which may affect the willingness and the ability of the parties to close the escrow. It reflects ownership of the subject property, the manner of which the current owners hold title, matters of record which specifically affect the subject property or the owners of the property, as well as a legal description of the property and an informational plat map.

The preliminary report indicates the type of title insurance offered by the title company and the exclusions and exceptions from coverage subject to which the policy will be issued, such as recorded deeds of trust, easements, agreements, and covenants, conditions and restrictions (CC&R's), etc.