Why We Need Escrow

Why Do We Need Escrow?

In our article under “Escrow – An Impartial and Neutral Third Party” we described what an Escrow is and what we do. The question then remains, “Why”?

In our video for this section we describe a scenario in which an estranged husband sneakily tried to sell the house by forging his wife’s signature. Granted the script may be depicted in excess, but the point is, things like this do happen in real life, and the more distressed the economic times, the more we see strange things going on.

Here is a list of basic reasons why you need to go through escrow:

The general public would not know what documents are needed for different scenarios and how they are properly completed. For instance:

  • Grant Deed
  • Quitclaim Deed
  • Note
  • Deed of Trust
  • Affidavit of Death
  • Power of Attorney
  • Substitution of Trustee and Full Reconveyance

Different cities and counties have different government regulations, for instance:

  • Which cities require a residential property report before the property can be sold?
  • Which cities require the payment of documentary transfer tax and how are they calculated?
  • Which cities require sewer inspections before the sale?
  • Is the Seller a foreigner? The IRS has their requirements if he is.
  • Does the Seller live on the property? The Franchise Tax Board has requirements for upfront tax payment if he does not.

If fraud is perpetuated by one of the parties or by a third party.

  • Is the party really who they say they are?
  • Is there evidence that not everything is as it seems?

Cleaning up the title ownership to the property:

  • Has the owner transferred the property back and forth to others, making the ownership rather murky?
  • Is there a possibility that others may have an interest due to the transfers?
  • Did an owner pass away and the proper documents were never filed?

Liens, judgments and debts, oh my!

  • Are there IRS or State Tax Liens against the owner that attached to the property?
  • Are there outstanding judgments that need to be paid?
  • Is there a loan that was paid off but a Release cannot be found?
  • What if there is a private loan? What documents are needed?
  • What if the Beneficiary of a private loan cannot be found?

Title Insurance is needed:

  • The Lender and a Buyer needs title insurance to assure themselves that their interests in the property are not unduly encumbered and all the items above have been taken care of. To get title insurance, an Escrow has to be opened.

Requirements of the government agency:

  • In a sale of a business that has a liquor license, the Department of Alcohol and Beverage Control requires that an Escrow process the transfer of this liquor license.

Fulfillment of conditions of an agreement:

  • The parties have agreed that certain conditions are to be fulfilled before money and paperwork transfers hands. The Buyer may deposit all his money, the Seller may sign all his documents, but it is the Escrow that makes sure all conditions are met before the money goes to the Seller and documents go to the Buyer.

Provide an accounting of where the money went:

  • The Buyer deposits his money and the Lender sends the loan funds. With all this money, the Escrow pays the Sellers’ loans and liens, Vendors and all those who have submitted approved bills before the Seller’s final net proceeds is calculated. The Escrow then provides a final accounting on the Closing Statement of exactly where every penny has gone. This Closing Statement is used by the parties to declare their income tax.

Every transaction is opened for all the reasons mentioned here, and more. Some transactions are clean and go through smoothly; others may have problems that make the end result more difficult to achieve. Having a knowledgeable Escrow Officer who gives good customer service will make a huge difference. In conclusion: “Why Do We Need Escrow?”  It is for your protection and peace of mind.

Please check out our video below regarding a scenario in which using an Escrow is imperative.