It derives from prehistoric Germanic skrautha 'something cut.' It was borrowed through Medieval Latin scroda into old French as escroe, where its meaning 'cut piece, strip' narrowed to 'strip of parchment.' The Anglo-Norman version escrowe was acquired by English and survives in full as escrow, originally a legal term for a sort of deed.
The word now denotes an arrangement in which an impartial, disinterested third party "stakeholder," called an escrow holder, holds legal documents and funds on behalf of the buyer and seller of property and distributes them according to the buyer's and seller's instructions.
An escrow protects both buyer and seller and also provides a secure and convenient service. The buyer entrusts the escrow holder with purchase monies and gives instructions to disburse these funds to the seller upon satisfaction of certain conditions. The seller instructs the escrow holder to retain possession of the deed and transfer it to the buyer only when the seller's requirements have been met.
Buyer and seller are able to rely on the escrow holder to carry out their mutually consistent instructions relating to the transaction and to advise them of inconsistencies or other difficulties. In order to avoid problems, the escrow holder will draft detailed escrow instructions which both buyer and seller will sign. On the basis of these instructions the escrow holder can coordinate and monitor the many different components of the transaction such as inspections, reports, deeds, loan commitments and funds. In the case of the Seller Assist transaction, the funds used to purchase the owner-financed note are placed in the escrow.
This ability to take action on behalf of both buyer and seller without further consultation saves time and makes for a smooth transaction. It is important that the escrow instructions are complete in every detail because the escrow holder, as the agent of both buyer and seller, may not exceed his or her instructions.
The escrow instructions will reflect the terms of the purchase agreement and typically contain direction on:
The Seller:
The Buyer:
The Lender:
The Escrow Holder:
The escrow holder may be any disinterested third party appropriately licensed in California. Select an established, independent escrow firm, a bank or S&L with an escrow department, an attorney or a title company. There is a convenience factor in opening the escrow with the the same title company that is providing the title insurance in the transaction.
Escrow officers are trained in real estate procedures, title insurance, taxes, deeds and insurance. The outline and explanation offered here is rather simple. Escrows can be very complex. If you have questions, interview some escrow officers and ask them for answers. FSBOs should be educated. This is part of your "due diligence."
Here is a link to the California Escrow Association, where you can find information on local affiliates.
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