Very simply defined, an escrow is a deposit of funds, a deed or other instrument by one party for the delivery to another party upon completion of a particular condition or event. The California Escrow Law- Section 17003 of the Financial Code- provides the legal definition.

Whether you are the buyer, seller, lender or borrower, you want the assurance that no funds or property will change hands until ALL of the instructions in the transaction have been followed. The escrow holder has the obligation to safeguard the funds and/or documents while they are in the possession of the escrow holder, and to disburse funds and/or convey title only when all provisions of the escrow have been met

The principals to the escrow- buyer, seller, lender, borrower- cause escrow instructions, most usually in writing, to be created, signed and delivered to the escrow officer. If a broker is involved, he will normally provide the escrow officer with the information necessary for the preparation of your escrow instruction and documents.

The escrow officer will process the escrow, in accordance with the escrow instructions, and when all conditions required in the escrow can be met or achieved, the escrow will be “closed.” Each escrow, although following a similar pattern, will be different in some respects, as it deals with YOUR property and the transaction at hand.

The duties of an escrow holder include: following the instructions given by the principals and parties to the transaction in a timely manner, handling the funds and/or documents in accordance within instructions; paying all bills as authorized; responding to authorized requests from the principals; closing the escrow only when all terms and conditions have been met; and distributing the finds in accordance with instructions and provide an accounting for a same- the closing or settlement statement.

The selection of the escrow holder is normally done by agreement between the principals. If a real estate broker is involved in the transaction, the broker may recommend an escrow holder. However, it is the right of the principals to use an escrow holder who is competent and who is experienced in handling the type of escrow at hand. There are laws that prohibit the payment of referral fees; this affords the consumer the best possible escrow services without any compromise caused by a person receiving a referral fee

If you are obtaining a new loan, your escrow officer will be in touch with the lender who will need copies of the escrow instructions, the preliminary title report and any other documents escrow could supply. In the processing and the closing of the escrow, the escrow holder is obligated to comply with the lender’s instructions.

It has become a practice of some lenders to forward their loan documents to escrow for signing. You should be aware that these papers are lender’s documents and CANNOT be explained or interpreted by the escrow officer. You have the option of requesting a representative from the lender’s office to be present for explanation; or arrange to meet with your lender to sign the documents in their office.

A closing statement is an accounting, in writing, prepared at the close of escrow which sets forth the charges and credits of your account. The items shown on the statement will reflect the purchase price, the funds deposited or credited to your account, payoffs on existing encumbrances and/or liens, the costs for all services and a determination of the funds you are entitled to at the close of the escrow. When you receive your closing papers, review the closing statement; it is extremely logical and reflects the financial aspects of YOUR transaction. If anything does not make sense to you, you should ask your escrow officer for an explanation.

When going through your closing papers, examine all of them; there may even be a refund check hiding in there. Cash the check quickly, please. Be sure to have the check properly endorsed. All payees must endorse the check. This will eliminate the check from being returned unpaid due to irregular or missing endorsements.

Your closing statement and al other escrow papers should be kept virtually forever for income tax purposes.

Your accountant will need the information about the sale or purchase of the property. The IRS and other agencies may require you to prove your costs and/or profit on the sale of any property. The closing statement will assist in this task. Do not rely on your escrow holder retaining the escrow file so that you can “…always call and get copies of the closing statement;” most escrow holders files will be destroyed after the statutory retention period which is usually five years. Maintaining and storing the closed escrow files is a costly endeavor to the escrow holder. Therefore, a nominal fee may be charged by your escrow holder for a file from storage, photocopying the requested documents, and returning the file to storage.

Escrow fees are not regulated by the state.  The escrow holder, like any other businesses, will charge fees that are commensurate with the costs of producing the service, the liability undertaken, and the overhead expenses which include a profit factor. Therefore, the fees will vary between companies and from county to county. Normally, the escrow holder will follow its minimum fee schedule, which will provide for extra charges based upon the differing elements of your escrow. On occasions, an additional fee will be charged for unusual expenditures of time on a given transaction.

The escrow holder has no control over the costs of other services that are obtained, such as the title insurance policy, the lender’s charges, insurance, recording charges, etc.

Your escrow officer, upon request, can provide you with an estimate of the escrow fees and costs, as well as, fees charged by others, provided such information is available.

No escrow is opened with the intention that it will cancel, but there are occasions when a contingency cannot be met or when the parties disagree during the pendency of the escrow. Some escrow holders provide for such an event by incorporating an instruction in the typed or printed General Provisions.

Ordinarily, an escrow holder will take the position that no funds on deposit can be refunded until the escrow holder is in receipt of mutual cancellation instructions signed by the principals. The escrow hold cannot normally make a determination as to who is the “rightful” party in a dispute on a cancellation and therefore will not return the funds or documents until the principals agree; the escrow holder is not a judge.

Do expect to be charged a cancellation fee, as this is a charge for professional services rendered and quite often for several “out of pocket” expenses that have been incurred on the client’s behalf. These fees can vary form company to company depending upon their policies.

Sometimes, when a dispute exists, the escrow holder may be forced to allow a court to decide which party is entitled to what documents or funds; this is called an Interpleaded Action. Fortunately, most disputes are resolved before the Interplead is filed, as the costs for such legal actions are extreme. Those costs, incidentally, are normally paid out of the fund on deposit in the escrow.

The terms of your transaction  and the resultant escrow instructions determine how the property taxes will be handled. If there is no mention of the proration of taxes, your escrow officer will not deal with any credits or charges for prorated taxes. However, if your escrow calls for a proration on taxes, there will be an item in your closing statement that will reflect either a credit or charge to your account. If the taxes are not paid (even though there has been a credit or charge against your account), the buyer is obligated to obtain a tax bill and pay the taxes. If the buyer does not have a tax bill with which to pay the taxes, you can request a bill form the Tax Collector; send a photocopy of the deed.

Supplemental Property Taxes is another concern of the buyer. Upon transfer of real property, a supplemental tax bill is generated. This is accomplished in cooperation with the county assessor and the County Tax Collector.

Shortly after the close of an escrow involving the conveyance of real property, the County Assessor will request information about the property form the buyer. This information assists the assessor in determining the value of the property for taxation purposes. Some of the information may have preciously been supplied by the escrow holder at the time of the closing of the escrow via a preliminary change of ownership form that should accompany each deed when it is recorded.

 California law enacted under Proposition 13 requires the county tax assessor to adjust the taxable value of a property when the ownership of the property changes or when the property undergoes new construction. The supplemental assessment represents the difference between the current value and the value which is established at the time of sale or upon completion of new construction.

As an example: On the current tax roll, a property has a value of $200,000.00. The property sells for $250,000.00. A supplemental assessment is levied for $50,000.00, bringing the tax rate in line with the current market value.

New construction on a property can also trigger a reassessment of the value. Examples of new construction might include room additions, pools, spas, and patio covers. Normal maintenance and repairs such as a new roof or garage door will not increase the taxable value.

Each change of ownership or completion of construction generates a separate supplemental assessment which becomes a lien on the real property. Events that occur between January 1 and May 31 result in two supplemental bills: the first bill is for the balance of the current fiscal year, and the second bill is for all of the upcoming fiscal year.

How are supplemental taxes handled in an escrow?

          Any unpaid supplemental tax bills which are reported to the Escrow Holder during the escrow period are charged to the Seller at close of escrow. The buyer and seller may instruct the escrow holder to prorate the taxes, including the supplemental amounts, at the time of settlement.

The parties may receive supplemental tax bills after the escrow has closed. These bills are handled directly between the buyer and seller. Questions which arise after closing concerning supplemental taxes can be directed to your accountant, attorney, the tax assessor’s office, or your real estate agent.