Escrow, Closing, And Recording Escrow
Escrow - An English word that means the "quote; scroll;" or the list of things that is to be done. Therefore, escrow is the necessary process in order to close a real estate transaction. The escrow officer will take the Purchase and Sale Agreement and make sure the buyer and seller can deal with each other on a fair basis. Escrow will be collecting necessary documents to close the transaction.
Escrow Process - It allows the buyer and seller to close the transaction with an independent and disinterested party working on their behalf. The escrow officer will collect the necessary documents, signatures, government forms, etc. and make sure that the dealings are fair to both parties.
Buyer to Deliver - The buyer or buyer's agent is to deliver the earnest money to the escrow officer and the necessary forms for the financing the loan commitment. If assuming the seller's debt instrument, the buyer must have signed acceptance of the loan assumption. Also, there must be additional cash that was stated in the Earnest Money Provision of the Purchase and Sale Agreement.
Seller to Deliver - The seller is to provide a deed or contract to the property. The seller must also deliver a statement that all encumbrances are paid or to be paid by escrow and that they will not be assumed by the buyer.
Represents Buyer & Seller
Dual Agency - The escrow officer is an agent for both the buyer and the seller. The officer is to deal fairly on behalf of each. Escrow will have fiduciary capacity on behalf of the buyer and seller. All fiduciary information cannot be released to other parties FOREVER. Escrow must represent both parties fairly and cannot receive instructions from any other party. The officer cannot receive instructions from just one party. Escrow must follow the instructions that both the buyer and seller came up with together. Escrow it neutral to both parties.
Mutual Instruction Changes - The escrow officer can only make changes to escrow instructions that were made by mutual agreement between the buyer and the seller in writing.
Accounting - The escrow officer must give an inclusive, clear, and precise accounting of all the necessary funds, costs, taxes, payments, etc. in writing to both the buyer and the seller.
Arms Length - The escrow officer may not invade the privacy of the principals and ask unnecessary questions. Escrow must only ask proper and pertinent questions necessary to close escrow. In short, the escrow officer must only ask for information that escrow needs to follow to carry out the P/S instructions.
Principal's Privacy - The escrow officer must always maintain the principals' privacy even after the transaction has closed. Escrow must follow instructions and give out only that information that is required by law. In today's information world, the fiduciary capacity of handling a person's personal information is imperative and forever.
Advantages And Problems With The Escrow Process
Advantages of Escrow - Escrow provides a number of advantages to both the buyer and the seller.
Fiduciary - Escrow is an objective process that has a neutral caretaker of the necessary funds and documents in closing a transaction.
Professional Services - Escrow provides a professional level of completion that will have an impact as long as the buyer owns the transferred property.
Clouds - An escrow officer can recognize "clouds on title" and make them technically correct. Escrow provides the procedure for "clearing clouds" and allowing delivery of a marketable title to the buyer. This would include knowing how to remove any encumbrances recorded on the property.
Instructions Followed - The escrow officer assures that all buyer and seller instructions will be followed and carried out.
Information - The primary document to obtain the instruction is the P/S agreement. The Purchase and Sale document is often called the "Agreement to Sell." It has that heading at the top of it. Since it provides the instructions for escrow, the instructions should be clear, precise, and complete.
Improper Information - If any areas of the sale are not covered properly, there will be "gray" areas. This includes areas that are not properly stated or understood by all parties. This constitutes a situation of "no agreement." This creates a voidable contract situation.
Correction - If an unclear area arises during the escrow process, escrow will explain the problem to the buyer and seller. This would require the buyer and the seller to establish a new agreement or amendment signed by both parties.
Ratification - The buyer and the seller would have to ratify the new agreement. The document must be in writing and mutually agreed to in order to save the transaction. If this is not done properly, the original P/S agreement would be deemed a void contract and the sale voided.
Escrow Closing a Transaction
Closing - Closing is also called "Title Closing," "Settlement," or "Escrow Closing." This is the final stage of escrow.
Final Meeting - Closing is simply a meeting at which the sale is finalized. All the documents and cash are distributed properly between the buyer and the seller. This takes the P/S agreement from an " executory contract" to an " executed contract." The P/S agreement begins as an executory contract in that the buyer and the seller must execute specified requirements in order to complete the contract. When escrow closes, the contract of sale is completed and the transfer is then executed. This finalizes the sale.
Closing Costs - Escrow prepares and fully explains the actual closing costs. It will show that the costs are consistent with escrow instructions, local custom, and good business practice. The seller will get their copy and the buyer will get their copy. The final statement gives a complete breakdown of every cost associated with the transfer of ownership.
Closing Statement - The statement of costs that the buyer and seller receive is called the closing statement. The entire costs and payments of the event are summarized on the buyer's and seller's closing statement. Each gets a separate accounting of what values escrow received from them (credits) and amounts paid out by escrow (debits) on their own closing statement. They will show the debits - money received out of escrow and their costs paid out by escrow. Their closing statement will show the credits - the money or value that they paid into escrow.
Credits/Debits - Each statement will show the total debits (money paid out by escrow) on one side of the column and the credits (money or value that escrow received) on the other side of their column. The debits and the credits must balance out on each of the closing statements. The buyer and the seller are given their own balance sheet and explanation of the money they paid into escrow (credits) and the money taken/received out of escrow as well as the costs that were paid out by escrow on their behalf (debits).
RESPA Procedure - There is no universal law on the use of debits and credits. Escrow officers can utilize systems of accounting of their choice, but it must be clear and concise. The closing statement forms, however, must be uniform and the same under what is called the Federal Real Estate Settlement Procedures Act (RESPA). This way a person in New York can read a closing statement drawn by an escrow officer in Oregon.
P/S Rules - The Purchase and Sale agreement prevails above all aspects of the escrow procedure. The debit and credit accounting must follow the P/S agreement instructions to the letter unless the P/S agreement is ruled illegal.
Local Practice and Law - The closing procedure will be influenced by the local escrow practices and/or the statutory laws of the applicable State. Local regulation mainly pertains to certain items such as VA points and maximum closing costs that are allowed.
Which statement below does not accurately reflect the duties of escrow agents?
A) they are to act impartially for both the buyer and seller
B) they must follow escrow instructions
C) they must act as fiduciaries until escrow is closed
D) in reviewing legal documents, they are to discover defects
The Real Estate Settlement Procedures Act (RESPA) applies to:
A) second mortgages
B) land sales contracts
C) purchase money mortgages
D) first mortgages
The Federal Real Estate Settlement Procedures Act:
A) applies to all mortgage loans
B) is administered by the Federal National Mortgage Association
C) requires the use of a uniform settlement statement
D) requires lenders to account for referral fees received from firms issuing mortgage insurance
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