Escrow Issues: Ensuring a Smooth and Secure Transaction

Posted by: kevensteinberg
Category: Real Estate Law

Escrow is a term that is commonly used in real estate that relates to a process in which a neutral third party holds funds or documents during a transaction between a buyer and a seller. The escrow procedure will confirm that all agreement terms are satisfied and both parties are protected from fraud and other risks.

When it comes to real estate, an escrow agent or escrow holder is usually a licensed and regulated professional acting as a neutral third party to facilitate a transaction who does not represent either a buyer or seller but instead serves as an intermediary to collect and hold funds and documents until all the requirements of a sale agreement are fulfilled. Anybody needing help with the escrow process will want to work with an experienced Los Angeles small business attorney.

How Escrow Works in Real Estate

The escrow process usually begins with a buyer and seller signing a purchase agreement that outlines a property’s sale price, deposit amount, closing date, and certain contingencies or conditions. After the purchase agreement is signed, the buyer will often deposit an earnest money check or wire transfer with the escrow provider that demonstrates their good faith intention to purchase the property. 

Earnest money deposits are often held in an interest-bearing account until closing, when they will be credited towards the purchase price or returned to the buyer if a sale falls through. An escrow agent begins the transaction by collecting and reviewing all the necessary documents and funds from a buyer, seller, and other parties involved, including lenders, title companies, or attorneys. 

An escrow agent will also ensure that all conditions and contingencies of a sale agreement are satisfied, including reviewing a clear title search, completing any repairs, or obtaining necessary permits. A buyer, seller, and escrow agent communicate and exchange information, updates, and requests throughout the escrow procedure. 

An escrow agent also prepares and coordinates closing documents, which can include all the funds stated in the mortgage agreement and real estate contracts such as insurance fees, purchase funds from mortgage loans, and other closing payments. After all conditions are met, an escrow agent will release funds and documents to the respective parties, and a transaction will be complete. 

An escrow agent could also provide post-closing services, including disbursing any remaining funds, recording a deed, or issuing a homeowners insurance policy. While the escrow procedure can be complicated and strictly regulated, it can also lead to a smooth and secure transaction process.

Types of Escrow Transactions

Escrow is perhaps most common in the home buying process, as escrow accounts can protect both the buyer and the seller. After a potential buyer makes an offer on a home and a seller accepts the offer, the earnest money deposit will be put in an escrow account and the deposit is held until both parties close on the house with the money going towards closing costs.

When a person is closing on a house, escrow is commonly used to pay taxes and insurance. When a person is working with a mortgage lender, then an escrow account could be used for monthly payments.

PITI is an acronym that stands for principal, interest, taxes and insurance, and many mortgage lenders will estimate PITI for a person before the lender decides whether a person qualifies for a mortgage. People can make deposits in an escrow account with each monthly payment to help to smooth out big annual expenses such as mortgages, and each monthly PITI payment will mean funds go towards a loan balance as well as taxes and insurance.

When people are renting, a security deposit itself can be a type of escrow because a person will pay a certain sum of money (one month to six months rent) and the money is returned to the person when their lease ends. While California does not require escrow accounts for rentals, they can again be a good idea for the protection of both a tenant and the landlord.

Escrow could also be used for major goods or services, and it is more common with online transactions. An online escrow account can protect a buyer from any possible fraud and also protect a seller from nonpayment.

Escrow accounts can also be common in private mergers or acquisitions in which large companies are acquiring full or partial equity stakes in other companies. Prior to a closing, an escrow account will be created where money will reside until all terms and conditions are fulfilled.

Many stocks are also issued in escrow. Although a shareholder will be the actual owner of a stock, they have limited rights when it comes to the disposal of their stock. 

Executives receiving stock as a bonus to their compensation typically must wait for an escrow period to pass before they can sell the stock. 

Contact Our Los Angeles Small Business Attorney

Did you need help understanding how to navigate the escrow process in California? You will want to work with Steinberg Law because we are intimately familiar with these kinds of issues. 

Our firm will be able to help you understand exactly how escrow could benefit you and determine the best way to manage the account. Call (818) 855-1103 or contact our Los Angeles small business attorney online for a free consultation.

Author: kevensteinberg