The History of Escrow

In the very early days of our country, property was transferred from the seller directly to the buyer. Often the parties knew one another. The seller handed over the deed when the buyer paid the money. This process worked well as long as the seller was sure the buyer’s consideration such as cash or bank check was good, and the buyer knew the seller’s deed was valid. However, as communities grew, more and more strangers arrived until buyer and seller were no longer acquainted. A system was needed to put the trust back into the transaction.

Even before California became a state, buyers began to hire attorneys to search the public records for proof the seller owned the land but there were no ownership guarantees. Sellers began giving buyers a written history of the recorded documents affecting a piece of land, called an Abstract of Title, with an attorney’s legal opinion attached. Abstract companies began to appear close to the courthouse to assist attorneys with their search.

In the 1870’s, abstract companies began issuing a brief summary of the history of the property called a Certificate of Title. However, the courts ruled that abstractors were not liable if the Certificate of Title contained errors or omissions. A guarantee or form of insurance was needed to protect consumers.  In 1886, California Title Insurance and Trust Company was incorporated; they issued their first policy of title insurance on March 17, 1887.

Reasons for Escrow: Escrow practitioners perform a very important function, yet there is no state law requiring all property transfers go through escrow, nor are escrow practitioners licensed by the State of California to perform escrow duties. The law does require certain types of transactions use an escrow, namely probate sales, liquor license transfers, new Dealer manufactured homes and securities or stock sales.

It is recommended that all property transfers use escrow services for the following reasons:

• Escrow serves as a neutral depository for money and documents. The escrow practitioner acts in a fiduciary or trust capacity. The escrow practitioner does not favor any one party and acts impartially towards all.

• An escrow practitioner assures that all conditions are satisfied before the deeds are recorded or other transfer documents filed or distributed.

• Escrow practitioners provide expertise in escrow practices, document preparation and in understanding the title insurance process.

• Escrow provides a clear, concise accounting of all funds involved in the escrow process.

• The escrow practitioner arranges for safe delivery of all funds and documents to their proper recipient.

• The consumer is protected by the secure and impartial nature of the escrow process.

A Step-by-Step Guide to the REO Escrow Process

• Upon agreement to sale, Asset Manager and/or Listing Agent provides completely executed Purchase Agreement and any Addendums/Counter Offers (including copy of signed Residential Listing Agreement from Listing Agent), as well as contact information for all parties to Escrow Holder.   • Escrow Holder contacts Selling Agent to obtain Buyer’s Deposit and verify contact information (Purchase Agreement usually requires that said deposit be made within 3 days of acceptance).   • Escrow Holder requests new Lender(s) information and/or Pre-Qualification letter from Selling Agent.   • Escrow Holder opens title order, requesting Preliminary Report and CC&R’S from Title Company.   • Escrow Holder prepares Escrow Instructions and supporting documents, distributing same to all parties.   • Upon receipt of Preliminary Report, Escrow Holder orders all applicable documents, including HOA disclosures, to ensure that clear title can be granted at Close of Escrow.   • Upon receipt, Escrow Holder distributes Preliminary Report, CC&R’s and other applicable disclosures (including Termite Report) for approval.   • Escrow Holder contacts new Lender(s) for status of Loan(s), including receipt of Credit Report, Appraisal and other required documentation. If loan(s) is/are approved, Escrow Holder verifies when loan documents will be ordered.   • Escrow Holder contacts applicable parties if any documents are still outstanding (ie; Receipts for Reports, Buyer’s Insurance, Statement of Information, etc.).   • If the Seller has authorized any repairs, Escrow Holder verifies if they have been completed, and how they will be paid (either outside of escrow or through escrow).   • Escrow Holder confirms receipt of Home Protection Plan or requests that the applicable Realtor order same if it has yet to be received.   • Loan Documents are received by Escrow Holder and prepared for prompt closing.   • Escrow Holder forwards Seller’s Estimated Closing Statement to Asset Manager for review and approval.   • Escrow Holder makes appointment with Buyer to sign Loan Documents, advising Buyer of the amount of money to bring to Escrow.

To Probate or Not to Probate, That is the Question

The big question is WHY someone would need to “probate” a property once someone passes away. In order to sell a Decedent’s property, the heirs, if there are any, must hire an attorney that specializes in probate in order to set up the Decedent’s estate. If someone passes away with a will, it is obviously much easier on the appointed Executor or Executrix to handle that individual’s final affairs in accordance with their wishes. However, many, many people die without creating a will. In that event, the individual passes away “intestate,” or without a will and the Probate Attorney must set up the estate to have an Administrator appointed to handle the final affairs of the Decedent. The probate that the attorney establishes for the Decedent can address many issues in addition to real property, including assets such as stock, personal property, cash in banks, etc. If one dies intestate or without a will, then all legal heirs are located by “heir hunters” (if necessary) and the total assets of the estate are divided amongst the legal heirs, whether or not that was the intention of the Decedent. A common misconception is that if one doesn’t have children, it is not necessary to make out a will. However, once real property and large dollar amounts are involved, it is critical that one creates a will or a trust. Although the probate process can be timely and involved, and truly this is dependent on the heirs and who stands to inherit what, the attorney fees are absolutely statutory and are pre-established in accordance with the probate code, based on the size of the individual estate. There are many arguments and issues, both pro and con, in going through the probate process or setting up and establishing a trust. The main issue to remember with regard to the probate process is that it is highly regulated and scrutinized by the Court in order to keep the individual representing the estate honest and that all matters are handled according to the last wishes of the Decedent. In a situation where the Decedent has transferred all of their assets into a trust, all of the heirs are relying on the honesty and integrity of the successors trustee(s) to comply with the terms of the Decedent’s trust agreement.

Home Buyer and Seller Closing Costs

Buying or selling a home is a euphoric experience for both of the parties involved. However, this euphoria can cool when you get to the issue of who pays closing costs.

When looking to buy or sell a home, every person eventually arrives at the question of who pays closing costs on the transaction. To put it simply, both buyers and sellers typically pay some of the closing costs. However, the exact amounts paid can vary significantly from area to area and depending on what agreements the buyers and sellers come to in the process of writing and agreeing to an offer/counteroffer.

As these costs frequently change from state to state and often city to city, it is important to research the area you are looking to buy or sell in and be knowledgeable regarding any laws and standards of practice for the area. By knowing what you will have to pay ahead of time, you can be prepared to cover these costs.

Below are some examples of what buyers and sellers generally have to pay in Southern California:

Buyers typically pay the following closing costs: fees charged for obtaining a mortgage; inspection fees; homeowner's insurance (must be prepaid for one year at closing); lender’s title insurance (if the Buyer obtains a loan) and escrow fees.

Sellers' closing costs typically include: loan payoff fees; the real estate; owner’s title insurance (to protect the Buyer from any pre-existing liens or encumbrances on the property); termite repairs; cash payments in lieu of repairs to the property; home warranty; all or part of transfer taxes and escrow fees.

In addition to the fees described above, there are many other charges that may apply to a particular transaction and local customs will dictate which party is expected to pay for these items.

Why Does My Escrow Agent Insist the Final Deposit be Wired?

When preparing to close escrow, clients will regularly ask if it is acceptable to bring closing funds via personal check. When posed with this question, Escrow Agents should always respond that we’re unable to accept a personal check for closing, as GOOD FUNDS are required. One of the core functions of an Escrow company includes being a depository for funds required to comply with the instructions from the principals of the escrow. Thus, it is critical to obtain GOOD FUNDS. Good funds means that the check has been paid by the bank on which it is drawn and the funds are actually available for use as payment for closing costs, commissions and proceeds to the seller.

In California, the various laws specifically regulating Escrow Agents do not define holding or clearing times for various types of instruments. There are reasons why a deposit, including by Cashier’s Checks and ACH, may not actually pay within the timelines listed in the Federal Regulations. Escrow Agents are also occasionally the victims of fraudulent, forged or stop paid cashier’s checks.

Since Bank privacy policies in place today make it difficult to confirm a check has been paid; wired funds are the best source of ensuring you have GOOD FUNDS for closing because the funds are immediately clear. Wires are not without drawbacks, but until a better system comes along, an Escrow Agent and its clients are safest with a Wire Transfer for any final closing funds. By failing to follow these procedures, an escrow company is likely to have to advance funds for any dishonored deposit if the escrow has already closed; or face regulatory action, civil action, or both.

Why it’s important to choose your Escrow Officer and Escrow Company

Independent, licensed escrow companies are the first line of defense for homebuyers and property owners. Savvy real estate consumers and Realtors® know that buying or selling property doesn’t stop with finding the right buyer/client or the right investment. And yet, escrow remains one of the least understood elements of the real estate process.

Licensed escrow companies are consumers’ best bet for safeguarding their funds. That’s why it’s so important to work with an Escrow Officer who has met the strict licensing requirements of the California Department of Corporations and has undergone a background check and fingerprinting by the Department of Justice.

Accountability

Licensed escrow companies are required to complete a financial audit every year to ensure compliance with California regulations, and all licensees are subject to random, surprise examinations by the Department of Corporations.

Security

The Department of Corporations scrupulously regulates licensed escrow companies. Each licensee is required by law to be a member of the Escrow Agents’ Fidelity Corporation, which provides fidelity coverage for member trust accounts in the amount of $5 million. This fidelity bond guarantees that, in the event of theft of trust accounts, consumer funds are protected.

Safety

All employees must submit to California Department of Justice fingerprinting and criminal background checks.

You have the right to select your own Escrow Officer.

That’s right, smart consumers can help in the selection of their Escrow Officer by investigating those companies themselves rather than leaving this important decision solely to their Realtor® or Lending Institution.

Here’s a checklist to help you choose the right Escrow Officer for your real estate purchase:

Ask your Realtor® to make three recommendations for both escrow service and title insurance, and ask why the agent likes these companies.

For escrow, determine whether a company is truly acting as a neutral party, or is under the control of
a Real Estate broker or Mortgage broker.

Remember that price is not the only consideration, attention to your specific needs and good service can, and in most cases, should be more important.

Contact the state agency that regulates a company to determine if there are any pending complaints or disciplinary actions.