Facilitating real estate transactions in the U.S varies from state to state. There are typically two types of closings: traditional closings and escrow closings. In states that use escrow closings, like California, conditions of the contract and the transfer of funds are cleared prior to the day of close of escrow by a settlement agent. While in traditional closings, the parties of the transaction come together at the same time to a closing table to execute the documentation and exchange funds for keys. In California, the settlement agent is typically an Escrow Officer employed by a title insurance company or an independent escrow company. The Escrow Officer has several responsibilities associated with the transactions he/she is settling. By examining the life of an escrow, the range of real estate transactions, and the types of customers that an Escrow Officer works with, one can conclude that the settlement agent’s role is a vital part of the professional activity in real estate transactions.
Life of an Escrow:
“An escrow is an arrangement in which a trusted and impartial third party acts on behalf of two or more parties” (Fidelity National Financial). Settlement agents act pursuant to written escrow instructions that are executed by the principal parties to the transaction. The instructions typically require the Escrow Holder “to perform various actions such as to prepare and deliver standard form documents,” receive and disburse funds, and record official documents with the county recorder when certain specified conditions are met (Fidelity National Financial). “The precise functions performed by the escrow holder are detailed in the written escrow instructions or contract, and vary by the specific type of transaction” (Fidelity National Financial). Depending on what type of escrow transaction is taking place, the parties are typically the Buyer and Seller or Borrower and Lender. The Seller of real property is most interested in receiving their proceeds from the sale of real property and the release of any liability associated with the financing of the property that they own. Settlement agents work with the Seller to order demands for payment for any liens that have been recorded in the county where the property is located. Typical liens and defects that show of public record and attach to real property include but are not limited to: mortgages/deeds of trust, equity lines of credit, mechanics liens, creditor judgments, tax liens (IRS, state, personal property, real property), and child support judgments. The Escrow Officer disburses the funds to the beneficiaries of said liens at close of escrow and requests reconveyances/releases to record with the county to clear the title of the property and the Seller from further obligation. Sometimes the sale of the property only provides enough funds to partially release the obligation and the property. This arrangement is agreed upon between the beneficiary/creditor and trustor/debtor. If the Buyer/Borrower is getting a purchase money loan to acquire the property, their lender will primarily be concerned that their Deed of Trust has priority among other liens on title. They will require that all Seller obligations are removed from title, taxes are paid current, and their lien is recorded first in order to secure the property in question as collateral in the event of default. They will also require title insurance to insure over such defects in title.
Life of An Escrow:
Many Escrow Officers specialize in different types of transactions, although all usually begin with the most common: Residential Re-Sale and Residential Refinances. The typical life of a regular residential re-sale escrow includes, but is not limited to several steps. The steps involved in the process are as follows:
1. Open the Escrow, Order Preliminary Title Search/Report
2. Review Preliminary Title Report/Commitment for Title Insurance
- Addresses who (individual or entity) owns the property Fee Simple,
- Addresses if property taxes are paid current or in default,
- List Covenants, Conditions and Restrictions and Homeowner’s Associations,
- Lists Easements, and
- Lists existing Liens, Mortgages, and Deeds of Trust.
3. The Buyer’s Lender will review the Preliminary Title Report and use it as a means to qualify the property as collateral
4. The Escrow Holder will work on clearing all of the deficiencies in title:
- Order demands from judgment creditors, beneficiaries, homeowner’s associations;
- Request documentation to clear old liens that were paid in full but never released;
- Assist heirs and administrators of estates if the fee simple owner is deceased after the probate court has approved the sale of real property by preparing documentation and ordering the court documentation; and
- Assist successor trustees and joint tenants by preparing the proper documentation when a joint tenant or trustee of a trust is deceased.
5. Once the new lender has underwriting approval the loan documents are sent to the Settlement Agent and the Escrow Officer prepares the Settlement Statement in accordance with the Department of Housing and Urban Development RESPA guidelines. This HUD-1 Settlement Statement is required by federal law in most transactions and discloses to the parties all the charges associated with the transaction such as:
- Prorations of property taxes, rents, association dues;
- Secured Creditor Payoffs
- Broker commissions and referral fees;
- Loan origination charges, credit report fees, appraisal fees, upfront MIP, upfront impound account charges, hazard insurance, pre-paid mortgage interest;
- County recording fees and transfer taxes;
- Title Insurance Fees and Settlement Charges;
- Unsecured creditor payoffs required for financing;
- Property Taxes due and payable;
- Real Estate Withholding taxes;
- Home Warranties;
- Inspection fees required as part of the contract such as Pest, Roof, Septic, Well, Water or disclosure reports.
6. Seller Signing: the Escrow Holder will prepare escrow instructions, state and federal tax forms, and the Grant Deed. The Seller will execute the documents along with the settlement statement and any other disclosures required in the state where the property is located. In California, the escrow holder also acts as the Withholding Agent on behalf of the Buyer is the Seller does not qualify for the 3 1/3% real estate withholding exemption.
7. Buyer Signing: the escrow holder will have the Buyer execute loan documents in accordance with the Lender’s Instructions, along with the settlement statement, escrow instructions, and any other disclosures required in the state where the property is located.
8. The Funding Documents are then sent to the lender for final review before they fund the loan. The Lender usually requires the escrow holder to order and provide evidence that the property will be insured along with evidence that the Buyer has deposited their funds to close into the escrow trust account. Upon satisfaction of the lender conditions, the lender will fund the loan by wiring the funds to the escrow holder’s trust account.
9. At this point, all of the conditions of the initial contract and any amendments or supplements executed thereafter should be satisfied and if the parties are ready to close, the escrow holder will record the Grant Deed to transfer title to the Buyer with the county and will record the Deed of Trust to secure the note executed by the Buyer in favor of the Lender.
10. Upon confirmation of recordation. The escrow holder will disburse the funds in accordance to the settlement statement. The Final Settlement statement will be prepared and given to the principals for their tax records. Title prepares the title insurance policies to the new owner and lender in accordance with their instructions.
One of the other special areas of expertise for Escrow Officers is working with Builders who specialize in Subdivisions. Currently, the most frequent transactions in response to the increases in mortgage loan default are short sales and sales of REOs (real estate owned by lenders from foreclosure). Also, many Escrow Officers specialize in commercial transactions, such as Commercial Loans, Sales, and Bulk Sales. Lastly, those individuals that sale their property without hiring a Real Estate Broker employ escrow professionals to facilitate the “For Sale By Owner” transaction.
Because the escrow holder acts as an independent, neutral third party between the parties/principles to an escrow and only acts in accordance to written instructions by the principals, all parties in the transaction are protected (Fidelity National Financial). The principals typically hire other real estate professionals to act in their best interest such as Attorneys, Real Estate Brokers, and other tax professionals. The escrow holder also works with other entities that have an interest in the property and are needed to facilitate the transaction: Payoff Lenders/beneficiaries, Homeowner’s Associations, Property Management Firms, Tax Authorities, Fire/Hazard Insurance Agents, county recorders/clerks, Pest/Roof/Septic/Well inspectors, and Home Warranty Companies. The Escrow Holder may also be instructed to work with an intermediary if the Seller or Buyer is doing a 1031 tax deferred exchange. Escrow Officers typically market their services to Real Estate Brokers and Loan Originators. In California, the Listing Broker (seller’s representative) usually chooses which settlement agent they would like to work with, one whom they have built a working relationship with. If the Escrow Officer is employed by a title insurance company, the state insurance commissioner governs the activities of the escrow holder. Employees have to comply with the rates and services published by the company. A recent bill passed into law in California (Senate Bill 133) prohibits title companies for varying their fees among customers and soliciting customers through favors and gifts to encourage competition and consumer protection. This emphasizes that an Escrow Officer must provide superior customer service to their customers while maintaining fiduciary responsibilities. The best quality that an escrow professional can have is to be ethical. If an escrow professional, who is ethical, truly acts on behalf of the principals in a transaction, then everybody associated with the transaction’s interest should be protected, as long as everything has been disclosed to the Escrow Officer. Brokers that are only concerned with working with Escrow Officers that get the transaction closed quickly at any cost in order to get paid their commission are not truly acting on behalf of the Buyer or Seller that hired them.
Escrow Officers tend to be extremely detail oriented and enjoy working in a fast-paced, demanding environment. People in real estate transactions, especially those who are purchasing or selling their primary residence, tend to be emotional about the transaction. Orchestrating an escrow transaction requires extreme finesse and patience. It is truly like conducting a symphony due to all of the moving parts and emotionally driven people involved. Complying with instructions and staying compliant to legal requirements, requires professional responsibility and skills. Working neutrally between many individuals requires great people skills and patience especially because every deal has its quirks and disagreements. Escrow Officers present a unique role in the professional real estate activity.
1. Fidelity National Financial. “Life of An Escrow: Non-Table Closings.” Employee training module. January 2, 2008.
2. My experiences as an escrow professional (Angela Salemme)