What Is Escrow?
When you are talking about a real estate transaction you will hear the word "Escrow" but what is that? What does it mean exactly? This is always a hard word to describe but to put it in the most basic terms it is a process that a buyer and seller go into when they are in contract. So to begin a buyer finds a house and they put in an offer and negotiations commence. Once the buyer and seller have agreed upon a price and the conditions of the sale they will be in contract. The agents will then contact the agreed upon title company and open escrow. The title company will oversee the transaction. They are neutral and work for both the buyer and the seller at the same time. Title is not allowed to make decisions that will influence the transaction...they act on the express and signed instructions that have been agreed upon by the buyer and the seller.
Earnest Money Deposit
When you are writing an offer you will specify an EMD or earnest money deposit that will be held in escrow in the event that you, the buyer default on the contract. This money is a pledge of commitment that you will follow through on your offer. If you release your contingencies and then decide not to buy the home then the seller is given the earnest money deposit as compensation for the wasted time that their home was not on the market. An EMD is typically 3% of the purchase price however it doesn't have to be. The buyer is responsible for specifying the earnest money deposit amount when they write the offer.
Preliminary Title Report & Title Insurance
When escrow is opened and the process starts to progress the title company will do a search of the title to make sure there are no clouds on the title. Clouds are items such as tax liens, easements, loans that have the home as collateral and so on. Once they have performed this search they will provide a Preliminary Title Report. This report will list the title insurance policy that is available for the home as well as any clouds that would be exceptions to coverage. The report will also come with some supporting documents, if available, that indicate where the title company got their information. These are normally county, state, or federal documents however not always.
Once all contingencies have been released and closing day is upon you title will coordinate with the lender and get the loan paid and the title recorded at the county office in the buyer's name so that the buyer can get the keys to their new home!
