Escrow Instructions

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.

*
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.