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What is Escrow and Why is it Needed?
Courtesy of the Talon Group
What is Escrow?
An escrow is an arrangement in which a neutral third party (the Escrow Agent) assembles
and processes all of the components of a real estate transaction (including legal
documents), records the transaction, and ultimately, disburses and distributes funds
according to the Buyer's and Seller's instructions. Your transaction is typically closed by
an Escrow Officer or LPO (Limited Practice Officer).
People buying and selling real estate often open an escrow for their protection and
convenience. Both the Buyer and Seller relay on the Escrow Agent to carry out 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. If the instructions
from all parties to an escrow are clearly drafted, the Escrow Officer can take many
actions on behalf of the Buyer and Seller without further consultation. This saves much
time and facilitates the closing of the transaction.
Typical roles in the Escrow process:
The Seller/Agent
- Delivers a fully executed Purchase & Sale Agreement to the escrow agent.
- Executes the paperwork necessary to close the transaction
- Deposits evidence of pest inspection and any required repair work, per the
Purchase & Sale Agreement
The Buyer/Agent
- Deposits funds required to close (in addition to the purchase price) with the
Escrow Agent.
- Approves any inspection reports, commitment for title insurance, or other items as
called for by the Purchase & Sale Agreement.
- Fulfills any other conditions specified in the escrow instructions.
The Lender (when applicable)
- Deposits proceeds of the loan.
- Directs the Escrow Agent of the conditions under which the loan funds may be
used.
The Escrow Agent
- Obtains the order for title insurance
- approvals from the Buyer(s) on pest inspections, the commitment for title
insurance, and any other inspections that are called for in the Purchase & Sale
Agreement.
- Obtains any required payoffs/release documents to clear title.
- Receives funds from the Buyer and/or Lender.
- In most cases, prepares vesting document and excise tax affidavit on Seller's
behalf.
- Prorates insurance, taxes, rents, etc.
- Prepares a final statement (often referred to as the "HUD Statement" or
"Settlement Statement") for each party, indicating amounts paid in conjunction
with the closing of your transaction.
- Oversees the signing of your loan documents.
- Forwards deed to the county for recording.
Once the proper documents have been recorded, the Escrow Agent will disburse and
distribute funds to the proper parties.
In Summary
Some of the Escrow Officer's responsibilities include:
- Process and coordinate the flow of documents and funds.
- Keep all parties informed of progress to the escrow.
- Respond to Lender's requirements
- Oversee signing of loan/closing documents.
- Obtain approvals of reports and documents from the parties as required
- Prorate and adjust insurance, taxes, rents, etc.
- Record the deed and loan documents.
- Prepare a final statement outlining funds received and to be disbursed in
conjunction with your transaction.
Escrow is the process that assembles and processes all the components of a real estate
transaction. The transaction is officially closed when the new deed is recorded, thus
transferring ownership from the Seller to the Buyer. The Escrow Agent is a neutral third
party acting on behalf of the Buyer and Seller under the guidelines set forth by the
State of Washington Department of Financial Institutions.
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