What Happens in Escrow?

What is an Escrow and Why is it Needed?

An escrow is an arrangement in which a disinterested third party holds legal documents and funds on behalf of a buyer and seller, and distributes them according to the purchase agreement, the escrow holder’s “Standard Conditions and Acceptance of Escrow,” and any mutually consistent instructions from buyer’s seller’s.

People buying and selling real estate often open an escrow for their protection and convenience. The buyer can instruct the escrow holder to disburse the purchase price only upon the satisfaction of certain prerequisites and conditions. The seller can instruct the escrow holder to retain possession of the deed to the buyer until the seller’s requirements, including receipt of the purchase price, are met. Both rely on the escrow holder to carry out faithfully their mutually consistent instructions relating to the transaction and to advise them if any of their instructions are not mutually consistent or cannot be carried out.

An escrow service is convenient for the buyer and seller because both can move forward separately but simultaneously in providing inspections, reports, loan commitments and funds, deeds, and many other items, using the escrow holder as the central depositing point. If the instructions from all parties to an escrow are clearly drafted, fully detailed, and mutually consistent, the escrow holder can take many actions on their behalf without further consultation. This saves much time and facilitates the closing of the transaction. There are also many outside factors that only an experienced escrow officer is generally aware of. Such as City, State, and Federal, codes, regulations, and requirements.

Who May Hold Escrows?

The escrow holder may be any disinterested third party (although some states require that certain escrow holders be licensed).

There are two important reasons for selecting an established title company, bank, S & L, independent escrow firm, or an attorney. One is that real estate transactions require a tremendous amount of technical knowledge and experience to be handled smoothly. The other is that the escrow holder will generally be responsible for safeguarding and properly distributing the purchase price.

Escrow officers with established firms generally are experienced and trained in real estate procedures, title insurance, taxes, deeds, and insurance.


An escrow officer must remain completely impartial throughout the escrow process; he or she will normally adopt a courteous but rather formal manned when dealing with parties to the escrow, keeping conversation to the matters of the escrow. This formal behavior is meant for the benefit of all concerned, since the escrow officer must follow the instructions of both parties without bias.

Escrow Instructions

Typical instructions are written documents, signed by the parties giving them, which direct the escrow officer in the specific steps to be completed so the escrow may be closed.

Typical Instructions Would Include the Following:

  • The method by which the escrow holder is to receive and hold the purchase price to be paid by the buyer.
  • The conditions under which a lapse of time or breach of purchase contract provision will terminate the escrow without a closing.
  • The instruction and authorization for the escrow holder to disburse funds for recording fees, title insurance policies, real estate commissions, and any other closing costs incurred through the escrow.
  • Instructions as to the proration of insurance and taxes.
  • Instruction to the escrow holder on the payment of prior liens and charges against the property and distribution of the net sale proceeds.
  • Since the escrow holder can follow only the instructions as stated, it is extremely important that the instructions be stated clearly and be complete in all details.

Closing the Escrow

Once all the terms and conditions of the instructions of both parties have been fulfilled, and all closing conditions are satisfied, the escrow is closed and the safe and accurate transfer of property and money has been accomplished.

Division of Charges

The method of dividing the charges for the services performed through escrow or as a result thereof varies from place to place. The fees and service charges to be divided might include, for example, the title insurance policy premium, escrow fee, any transfer taxes, recordation fees, and cost in connection with any loan being obtained. Unless there is some special agreement between the buyer and the seller as to how these charges are to be paid, local custom will generally be followed in drafting the instructions to the escrow holder as to how they are to be divided.