What is a Real Estate Escrow and Why Do I Need One?

Posted On: August 11, 2022
By: James Nickerson

<This blog is another in our “How To Buy A Home” blog series.>

An Escrow Is A Present Underneath the Christmas Tree
Escrow is something given by one person and intended for another, set aside or held by a third party until certain conditions are satisfied. That’s like a Christmas gift underneath a tree that can’t be opened until it’s Christmas.

  • The condition that has to be satisfied is for Christmas Day to arrive.
  • The Christmas tree is the neutral third party escrow holder, where all those gifts are stored until the condition is satisfied.
  • Unwrapping gifts closes the escrow, transferring use/possession/ownership to the recipient.

Once the conditions (day=Christmas) are met, the restriction is lifted and the gift can be opened – or the escrowed assets can be conveyed to the person for whom they’re intended. Your family wasn’t opening presents ’round the tree but closing escrows!

How Is Escrow Used In Home Purchases and Sales?

Escrow in real estate is a third-party that makes sure neither the buyer and seller are at risk of losing their money or their home until all parties comply with the purchase/sale or other agreements.

Escrow agents hold onto important documents and funds until both parties have fulfilled their duties. Money from the buyer and/or the buyer’s lender are the important buyer conditions to satisfy for a seller, while a signed or otherwise fully executed deed transferring ownership is the important seller condition to satisfy for a buyer. 

If the deal closes (goes off without a problem), the seller gets the buyer’s money and the buyer gets the seller’s home. But what if things don’t go perfectly? And since all of the money won’t arrive instantly at the exact moment the seller signs documents transferring ownership, what do you do to make sure everyone gets what they are owed and no one gets something without the other person also getting something?

Those are two of the main reasons that an escrow is used to take a transaction from contract (the signed purchase agreement between seller and buyer) to closing (the moment when ownership transfers, sellers get their proceeds and buyers get their keys). 

escrow issues when purchasing a home

Who Can Be An Escrow Agent?

Anyone that everyone agrees is an acceptable third-party can act as an escrow agent. In real estate or legal transactions, there may be additional qualifications or licensing requirements for an escrow agent, and requirements can also vary by location.

Can My Realtor Be My Escrow Officer?

Theoretically, No. In reality: No. While a Realtor could be a neutral third-party to a transaction in no way related to a client/deal/brokerage they work at, they would never meet the definition of “neutral” for a transaction in which they represent and are being paid by one of the parties. Could a Realtor be an escrow agent for a transaction in which they represent all parties? I believe advocating for everyone when being paid by one party is different than neutrality, your interpretation may vary.

San Francisco Real Estate Escrows

In San Francisco, tradition holds that the title insurance company issuing the title insurance policy also acts as the escrow agent. I have no idea where this tradition comes from, if you do I’d love to hear it! In southern California, there are escrow companies that coordinate with the lender, seller, buyer, title insurance and any other company involved in a transaction. In other states that use attorneys as settlement agents, the attorney is typically the third-party acting as the neutral escrow.

In San Francisco, your escrow officer is most likely going to be at the company issuing your title insurance policy.

What Does an Escrow Officer Do? 

An escrow officer will help a buyer make their initial deposit and any other deposits that are contractually required. In addition, they’ll coordinate and communicate with the real estate agents, the lender, and any other parties that are involved with the sale, from a lienholder to attornies or anyone else need to close a particular sale.

happy buyer sign loan docs escrow

They’ll also work with your agent to coordinate the signing of your buyer or seller documents, the lender to return all of those perfectly signed documents to the correct place, and the county assessor’s office to ensure that the deed transferring ownership is correctly recorded in the public record. And finally, after all of that, they’ll make sure that all of the funds involved in the transaction have been distributed or refunded to the correct person, so they can balance out their ledger to zero. And get ready for their next escrow!

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