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  • Writer's pictureDHG Homes

What is Escrow & Why You Need it

Escrow account Pro's & Con's

Escrow is the depositing of funds and documents that establish the terms and conditions for the transfer of property ownership with an impartial third party (Title) for delivery upon completion of the terms of the escrow instruction. When the parties deliver documents and money to the impartial escrow holder to be held for further delivery until certain conditions have been met, we say the documents are held “in escrow”. We may also say the parties have “opened an escrow”. Each of the principals of the escrow (Seller, Buyer, Lender) will give to the escrow holder written instructions setting out the conditions under which the further delivery is to be made.

The purpose of an escrow. The common use of an escrow is to enable the parties in a real estate transaction to deal with each other with less risk, since the escrow holder acts as:

• Custodian for funds and documents.

• A clearing house for payment of all demands.

• An agency to perform the clerical details for the settlement of the accounts between the parties.


An escrow begins with the Realtor® opening the order for title work and providing the Purchase Agreement and all executed documentation to escrow. Once received, Title prepares a preliminary report. Upon receipt of the preliminary report, an analysis is made to determine the necessary action and documents required to complete the transaction:

• Demands for satisfaction of liens not acceptable to Buyer and/or Lender.

• Documents for recording.

• Instructions and requirements of the new Lender.In most areas,

Buyer and Seller instructions are prepared for signature from the information gathered. When all the title and financial requirements are met and instructions from all parties can be fully complied with, the escrow is said to be “in perfection” and can close. Once the financial settlement takes place, documents are recorded and the title insurance policies are then issued.

The (Most Important) Inspection Process

During the contingency period, the Buyer or Seller will order physical inspections as specified in the Purchase Agreement. Legislation mandates (under Civil Code 1102) that the Seller has the responsibility to reveal the true condition of the property on a Transfer Disclosure Statement. This may help determine what kind of property inspections are desired or necessary. Who Pays? Your Purchase Sale Agreement will specify who is responsible for the costs of inspections and for making any needed corrections or repairs. It is negotiable between the parties and should be considered carefully. Your agent will advise you what is customary and prudent.

Structural Pest Control Inspection. A licensed inspector will examine the property for any active infestation by wood destroying organisms. Most pest control reports classify conditions as Section I or Section II. The inspection and the ensuing Section I repair work is usually paid for by the Seller. Section II preventative measures are generally negotiated, and not necessarily completed. Section I Conditions are those currently causing damage to the property. These conditions generally need to be corrected before a Lender will make a loan on a home. Section II Conditions are those not currently causing damage but which are likely to, if left unattended.

Home Inspection.This inspection may encompass roof, plumbing, electrical, heating, appliances, water heater, furnace, exterior siding, and other visible features of the property. A detailed report will be written with recommendations and pictures which may include the suggestion to consult a specialist (such as a structural engineer or roofing contractor). The inspection fee is usually paid by the Buyer.

Geological Inspection. If requested, a soils engineer will inspect the soil conditions and the stability of the ground beneath the structure, as well as research past geological activity in the area. You may also elect to go to the city and research the property’s proximity to known earthquake fault lines. Typically, the Buyer pays for this inspection.

Home Protection. Home protection plans protect the Buyer’s major investment beginning immediately upon close of escrow. The plans cover major mechanical systems in the home as well as certain major appliances. Realtors® are familiar with some of the various plans available and will be happy to gather a selection of programs for you to study.

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