A lot of things in real estate are non-intuitive concepts with an iceberg’s worth of context, history and process. Title. Chain of Title. The different types of deeds. Bundle of Rights. Financing and all it entails. Due diligence and due diligence periods. Cap rates.
The concept of escrow is right up there in terms of ambiguity.
Escrow, to me, is “the person in the middle.”
It is the organization and/or the officer in between the buyer and seller, performing several duties.
Taking in money.
Providing an accounting of the money as it is to be collected and disbursed.
Preparing and assembling the paperwork and getting it signed.
Recording what needs to be recorded and notifying the parties.
Disbursing the money.
In doing the above, the escrow officer wears many hats that are familiar, including but not limited to:
Neutral Third Party
Deposit Banker
Document Pro and Quality Control
Referee
Problem Solver
Accountant
Disburser
Checklist Master
Team Leader
Orchestra Conductor
It’s no surprise that Title Insurance Providers and Escrow Closing Service Providers are one and the same. You name the title company, they perform two separate and distinct duties. Escrow, and title/ title insurance. (So if you have a problem, it is best to recognize if it is an escrow issue, or a title issue, and talk to the specific Escrow Officer or the Title Officer. Usually, most of the public interface is with the escrow officer and that person’s team, but if it is a title issue, it is often best to talk to the title officer, and they are usually behind the scenes. There is a natural tendency for the escrow officer to try and answer most things. Sometimes, a person has to firmly and diplomatically insist on talking directly to the title officer, if appropriate, and I am never, ever sorry to talk to a title officer. They are behind the scenes and know a ton.)
Now that you know the basics of what an escrow is, here’s a rhetorical Pop Quiz:
Do you know the difference between an escrow for a real estate closing, and an escrow between a buyer and seller for an owner-financed transaction?
An escrow with a Title Company is for a real estate buy-sell or refinancing transaction and lasts from the opening of the escrow account (upon a fully-signed sales contract and the deposit of earnest money, or when ordered by the loan originator for a refinance transaction) to the recording of the transaction. (Keep in mind that the Title Insurance function of the Title Company starts at closing and lasts past it, although all of the work done by the Title Company prior to closing ties into the issuance of Title Insurance.)
An owner-finance deal involves an escrow post-closing, and is usually set-up by the Title Company for the buyer and seller with another institution or service. The escrow company in this scenario is again in the middle, taking in money (payments), providing accounting, and disbursing funds to the seller, who is also the lender. In this case, they provide this service for the life of the Note. It is a longer-term arrangement and escrow.
Most owner-finance deals I see locally go with First National Bank Alaska Escrow Department, or First Mortgage, Inc.
All in all, escrows are pretty awesome. It is fun experiencing them and establishing professional relationships through them. Mostly, they are collaborative projects, dealing with people and money. Understanding the function of escrows, and how they work, is important when you want to close a transaction.
-Hugh
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