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Bilateral escrow instructions

17/03/2021 Client: saad24vbs Deadline: 3 days

Chapter 30: Escrow, the way to perform 211

After reading this chapter, you will be able to:

• understand the steps escrow takes to facilitate the closing of a real estate sale;

• distinguish the various services rendered by escrow and the duties of an escrow officer;

• appreciate how the purchase agreement and the escrow instructions work in tandem to create and close a transaction;

• recognize how agents ensure the escrow instructions conform to the purchase agreement and the intent of the buyer and seller;

• calculate prorations and adjustments for the buyer and the seller in a transaction; and

• advise on who has the right to receive the buyer’s funds held in escrow when escrow fails to close.

Learning Objectives

Escrow, the way to perform

Chapter

30

Escrow is a process employing an independent agent to manage and coordinate the closing of a real estate transaction through the exchange of documents and money between two parties such as a buyer and seller. Escrow activities are typically based on a primary agreement, such as a purchase agreement.1

In mortgage situations, escrow references the accounting by the lender for its management of the receipt and disbursement of funds received from the property owner for the annual payment of property taxes and insurance

1 Calif. Financial Code §17003(a)

The execution of a purchase agreement

escrow

escrow instructions

escrow officer

good faith deposit

proration

Statute of Frauds

Key Terms

212 Real Estate Principles, Second Edition

premiums (TI) owed by the owner of the secured property. Typically, these funds are collected monthly with the regular principal and interest (PI) payment. Collectively, the mortgage principal, interest, property taxes and insurance premiums are referred to as PITI.

Escrow activity employed to close a real estate transaction consists of:

• one person, such as a seller or buyer of real estate, who delivers written documents or money, called instruments, to an escrow company for the purpose of fully performing their obligations owed another person under an agreement entered into before the escrow is opened for a sale, a mortgage origination or leasing of real estate; and

• the escrow company, who receives and delivers the documents and money to another person, such as the buyer, seller or third parties, on the occurrence of an specified event or the performance of prescribed conditions, such as the receipt of reports or the issuance of a title insurance policy.2

An individual engaged in the business of acting as an escrow agent is called an escrow officer. The officer is employed by an escrow company and needs to be licensed. Likewise, the escrow company is licensed by the California Department of Corporations (DOC), unless exempt.3

Individuals exempt from the escrow licensing requirements include:

• a licensed real estate broker, either individual or corporate, who represents a person in the real estate transaction in which the broker will be performing escrow services;

• a licensed attorney who does not hold themselves out as an escrow agent;

• a bank, trust company, or insurance company; and

• a title insurance company whose principal business is preparing abstracts or making searches of title used for issuing title insurance policies.4

The services rendered by escrow officer typically include:

• receiving funds and collecting necessary documents, such as property reports, disclosure statements and title reports called for in the escrow instructions [See RPI Form 401];

• preparing documents necessary for conveyancing and mortgaging a property required for escrow to close;

• calculating prorations and adjustments; and

• disbursing funds and transferring documents when all conditions for their release have been met.5

2 Fin C §17003(a)

3 Fin C §17200

4 Fin C §17006

5 Fin C §17003(a)

escrow The depository process employed to facilitate the gathering of instruments and funds for use to transfer real estate interests between two persons.

Escrow companies and escrow

officers

escrow officer An individual licensed and employed as an agent of an escrow company or other escrow service provider to perform escrow services.

escrow instructions Directives an escrow officer undertakes, as given by buyer and seller, or lender and borrower to coordinate the closing on a purchase agreement or mortgage origination. [See RPI Form 401]

Chapter 30: Escrow, the way to perform 213

The specific duties of the escrow officer, outlined in the escrow instructions, vary according to local real estate custom. [See RPI Form 401]

Consider a buyer and seller who enter into a purchase agreement for the sale of the seller’s one-to-four unit residence. As provided in the purchase agreement, escrow is opened to handle the closing of the transaction.

In modern real estate practice, opening escrow simply means establishing a depository for the instruments (deeds, money and other items) with accompanying instructions for their use. Escrow instructions are signed by all necessary persons (the buyer and seller in the case of a sale), each authorizing escrow to transfer or hand their instruments to the other person or third parties on closing.6

Before accepting any instruments as an escrow holder for a transaction, an agent of the buyer or seller dictates instructions to the escrow officer. The purpose for this communication is to establish precisely when and under what circumstances the documents and monies deposited with escrow are to change hands.

When receiving instructions from an agent, the escrow officer prepares a “take sheet” noting all the tasks they are to undertake to handle and close escrow. When drafting escrow instructions, the officer relies on the take sheet as a checklist to determine the contents of the instructions.

Increasingly, agents simply email a copy of the purchase agreement to the named escrow company. The escrow officer then drafts escrow instructions as needed for the buyer and seller to comply with their obligations under the purchase agreement. When prepared, the officer sends the written instructions to the agent to verify they conform to the intent of the persons in the transaction.

As a checklist for “going to escrow,” a worksheet helps the seller’s and buyer’s agents to organize the collection of facts and supporting papers the escrow officer needs to draw instructions, clear title conditions and close escrow. [See RPI Form 403]

An escrow officer will perform only as instructed. Escrow instructions are prepared by the escrow officer based on the information received from the seller’s agent about the transaction.7 [See RPI Form 401]

In practice, the escrow officer prepares the instructions on forms adopted for this use. Once completed, the instructions are forwarded to the agents of the persons in the transaction for their signatures and return to escrow. When returned, escrow is then open for the person who signed and returned the instructions.

6 Montgomery v. Bank of America National Trust & Savings Association (1948) 85 CA2d 550

7 Moss v. Minor Properties, Inc. (1968) 262 CA2d 847

Escrow basics

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