What the heck is an ESCROW?
Many years ago, real estate was modestly priced, and buyer and seller could dicker a little and come to an agreement, and money, and title was exchanged with a hand shake.
As real estate became a sizable thing of value, more care had to be taken with legal and tax considerations.
We first see escrow laws in this country in the thirties, originally institutionalized in the United States as "mortgage payment escrows" during the Great Depression as a vehicle to protect the interest of homeowners.
Many homeowners were in danger of losing their properties if they were unable to come up with the property taxes, which were collected as a lump sum at the end of the year. To alleviate this hardship on strapped-for-cash homeowners, lenders agreed to collect 1/12th of the anticipated taxes due, along with the mortgage payment, each month, spreading the total tax payment into smaller, more easily digested amounts over twelve months.
The accounts into which these amounts were deposited were the forerunners of modern day mortgage escrow accounts.
In 1934, the Federal Government mandated that lenders manage escrows on all FHA insured mortgages. Eventually, this became the standard practice for every real estate transaction.
(The word “escrow” is from middle English word, “escrowl” or scroll, meaning a checklist.
A modern escrow agent is simply a third party entity that holds money, and maintains documents according to law, distributes funds, and makes sure all obligations from both sides are met. No money changes hands until everything is settled. These contingencies could be repairs, mortgage approval, or other requirements of buyer, seller or lender.
When a buyer, and seller agree on price, and other details, escrow opens, and the process begins. This can take any amount of time the parties agree on, but most commonly, it’s thirty days. This gives everyone time to finalize repairs, and other conditions of the sale.
When the all conditions are met, the transaction is finalized, escrow is closed and the buyer officially owns the property.
Escrows are not really a new concept, historically “trusted third parties” have been used to hold title and funds until buyer and seller fulfilled their promises, and obligations.
Unfortunately, these “trusted third parties” were not always trustworthy!
Now, escrow officers must fulfill a number of steps to be licensed for escrow. They must have significant escrow experience (5 years in California) and a track record, undergo substantial investigation, have assets that comply with state escrow laws, post bond, and carry insurance to fulfill the role of Trusted Third Party and be awarded a license to practice Escrow or obtain an Escrow Agent or Escrow Officer certification.
Now you know something about how an escrow works, and why the two most exciting events for buyers and sellers, are open escrow, and close of escrow!
