Escrow Principles and Rules
Once instructions have been signed by the buyer and seller and returned to the escrow holder, neither party may unilaterally change escrow instructions. Any changes must be made by mutual agreement between buyer and seller. The escrow agent does not have the authority to make changes in the contract upon the direction of either the buyer or seller, unless both agree to the change, in the form of an amendment.
In addition, it should be noted, the broker has no authority whatsoever to amend or change any part of the escrow instructions without the knowledge of the principals. Often, terms of the loan for the buyer are subject to change as complications may appear and include credit problems, liens, or there may be a cloud on the title.
Furthermore, time is of the essence when a buyer tries to lock in a certain interest rate on a mortgage or home loan. These issues can delay and create obstacles for the escrow officer to close the transaction. The obstructions may require an amendment. The written consent of both buyer and seller, in the form of an amendment to the original instructions, must be given before any dates or changes are made.
The Clarks and the Lees signed escrow instructions on June 9. The agreement reflected a sales price of $450,000, with $90,000 as a down payment. After signing the instructions, however, the buyers decided they only wanted to put $80,000 down, and told the escrow officer to change the instructions. An amendment was written for them to sign, and a copy sent to the sellers to sign.
The buyers were disappointed when the Clarks did not want to change the contract and refused to sign the amendment. When the Lees wanted to back out, the escrow officer reminded them that they had a mutually binding legal agreement with the sellers. Neither side could change any part of the agreement, including terminating it, without the written agreement of the other.
As agent for both parties to an escrow, the escrow agent is placed in a position of trust. By operating as a dual agent, the escrow holder sits between the buyer and seller as a stakeholder with an obligation to both sides to act as a neutral third party.
Rules Escrow Officers Must Observe
* Escrow instructions must be understood by the principals to the escrow and must be mutually binding. Instructions must be carefully written to be very clear about the agreement between the buyer and seller. Each party must understand his or her obligation to carry out the terms of the contract without assuming the escrow holder has any power to force compliance. The escrow holder may not act unless directed by the principals.
There must be a binding contract between the parties to an escrow. The binding contract can be a deposit receipt, agreement of sale, exchange agreement, an option, or mutual escrow instructions of the buyer and seller.
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The escrow holder does not get personally involved in disagreements between the buyer and seller, nor act as a negotiator for the principals. Escrow instructions make each party’s obligations and agreements clear, and it is up to the buyer and seller to keep the promises they each made in their agreement with the other. All parties must know that the escrow agent is not an attorney, and must advise anyone seeking legal advice to get counsel from a professional.
* An escrow agent has a limited capacity as agent for buyer and seller, and may only perform acts described in the contents of escrow instructions. While acting as a dual agent, the escrow officer must operate in the best interest of both parties, without special preference to either. The escrow agent serves each principal after escrow closes, in providing them with the documents and/or funds to which they are entitled.
* All parties must sign escrow instructions for the contract to be binding. An escrow is officially open when both buyer and seller have signed instructions.
* Escrow instructions must be clear and certain in their language.
* All documents to be recorded must be sent to the title company in a timely manner (as quickly as possible), and all interested parties should receive copies of recorded documents.
* Escrow instructions should specify which documents or funds the escrow holder may accept.
* Overdrawn trust accounts (debit balances) are prohibited by law.
* Information regarding any transaction is held in trust by the escrow officer and may not be released to anyone without written permission of the principals.
* An escrow holder has a duty to disclose to the principals any previously undisclosed information that might affect them. An amendment would be drawn at the direction of the buyer and seller to reflect any change as a result of new disclosures.
* A high degree of trust along with good customer service must be provided by an escrow holder.
* An escrow holder must remain strictly neutral regarding the buyer’s and the seller’s interests.
* Escrow records and files must be maintained daily. A systematic review of open escrow files will make sure no procedure has been overlooked, or time limit ignored.
* Before closing an escrow, all files must be audited carefully.
* All checks or drafts must have cleared before any funds may be released to the seller. Escrow must close in a timely manner, according to the agreement between buyer and seller. A prompt settlement must be made to all principals.
Prohibitions
* Referral fees may not be paid by an escrow company to anyone as a reward for sending business to them.
* Commissions may not be paid to a real estate broker until the closing of an escrow.
* Blank escrow instructions to be filled in after signing are not acceptable. Initials must be placed wherever there is a change or deletion.
* Information regarding an escrow may only be provided to parties to the escrow.
* Copies of escrow instructions must be provided to anyone signing them.
The following items included in the offer apply only to the most common aspects of a residential purchase. Commercial, industrial, vacant land, farm or ranch development, and other types of properties require different treatment by a real estate agent.
Information Required in Residential Purchase Offers
1. The date and place contract is signed by buyer
2. Correct name and address of the buyer
3. Form of the buyer’s deposit: cash, check, cashier’s check, promissory note, money order, or other
4. Designee to hold the deposit: broker, seller, or escrow
5. Purchase price of the property
6. Terms under which the property will be purchased: all cash, refinance, loan assumption, or taking title subject to the existing loan. Do any of the existing loans contain acceleration clauses or prepayment penalties? If so, has the buyer approved the terms?
7. Amount of time to be allowed for the seller to consider the buyer’s offer to purchase, and to complete the transaction. Is time of the essence?
8. Definite termination date stated in the contract
9. Covenants, Conditions and Restrictions; easements; rights or other conditions of record that affect the property
10. Deed of conveyance: Is it to be executed by the seller to contain any exceptions or reservations? Has the buyer approved of this?
11. Are there any stipulations or agreements regarding any tenancies or rights of persons in possession of the property?
12. Roof and electrical wiring inspections: Who pays for inspections and work, and who orders reports?
13. Are there any stipulations or agreements regarding facts a survey would reveal, such as the existence of a common wall, other encroachments, or easements?
14. Are there any special or unusual costs or charges to be adjusted through escrow? Who will pay for the title policy, escrow services, and other customary charges? Who pays for any unusual charges?
15. Who will select the escrow holder? The parties should reach a mutual agreement on this.
16. Are there any special documents to be drawn in the transaction, and if so, who will prepare them?
17. If prorations are not to be made as of the date escrow closes, what date is to be used?
18. If possession is granted prior to the close of escrow, what type of agreement must be prepared to cover this occupancy and who will prepare it?
19. If a structural pest control inspection report and certification are to be furnished, who pays?
20. Are other brokers involved in this transaction? What are their names, addresses, and telephone numbers?
21. Determine the sales commission and when it will be paid. If the deposit receipt initially establishes that a commission will be paid, it must contain the commission negotiability statement, which declares that by law all commissions are negotiable.
22. All parties must sign the contract. Check signatures of all buyers, all sellers, and agents. Certain documents require in-person and notarized signatures. Electronic signatures such as on a fax, e-mail, or voice mail giving authorization are not allowed on most recorded documents.
23. Every purchase contract prepared or signed by a real estate salesperson must be reviewed, initialed, and dated by the salesperson’s broker within five working days after preparation or signing by the salesperson, or before the close of escrow, whichever occurs first.
24. If the transaction is a residential sale of four-or-fewer units and involves seller-assisted financing, and a licensee is the arranger of such credit, a financing disclosure statement must be prepared and provided to both buyer and seller.
25. A specific written disclosure must be made to prospective buyers of one-to-four dwelling units with facts about the particular piece of property that could materially affect the property’s value and desirability.
26. Licensees acting as listing and selling brokers in certain residential real estate transactions must make informational written and oral disclosures concerning who is representing whom.
27. A real estate licensee who acts as the agent for either the buyer or the seller in the sale or transfer of real property, including manufactured housing, must disclose to both parties the form, amount and source of any compensation received or expected to be received from a lender involved in financing related to the transaction.
Amendments to the escrow instructions can change the original agreement if all parties agree. When all instructions are completed, escrow closes, the buyer gets a deed, and the seller gets the money.
The Clarks put their home on the market, listing it with a local broker. It was competitively priced, and the broker said it would take about two weeks to sell. An agent from another real estate company showed the house to the Lees, and they loved it. After writing up an offer and presenting it to the Clarks, the buyers’ agent called them with the news that the sellers had accepted.
The next day, the agent took the buyer’s earnest money (usually about one percent of the purchase price) to the escrow office, gave it to the escrow agent, and got a receipt. The escrow holder immediately cashed the check and deposited it in a trust account. The escrow holder then drew up escrow instructions to reflect the terms and conditions of the sale. The sellers signed their copy, the buyers signed theirs, and both were returned to the escrow company. The escrow was now open.
