Escrow and Title Insurance
Escrow and title insurance perform vital functions in
most exchanges of or loans against real property. Escrows and title insurance
are infrequently employed in personal property transactions.
It is generally difficult and often impossible for each party
to a real property purchase or loan transaction (e.g. buyer, seller, lender, holder of an
existing deed of trust) to meet and perform its transaction obligations
simultaneously. Accordingly, the parties will generally employ an escrow, an
independent party, to assure that each party to a transaction receives what it has been
promised. The escrow may be a department of a title company (common in
Northern California), a separate commercial entity (common in Southern California), a
lawyer, or any other person or entity the parties choose. See the web site of Stewart Title Guaranty Companyfor an
explanation and example of escrow services provided by a title company.
Title insurance is insurance purchased from title companies to insure buyers and lenders against unknown liens and encumbrances against the real property involved in the transaction. See our sample policy of title insurance. Title insurance is often said to "drive a real estate transaction" because buyers and lenders typically will be unwilling to close a transaction without it. See the web site of Title Resources Guaranty Company of New York City, New York for a history and description of title insurance services.
Consider the following examples of the use of escrow and title insurance. A seller owns her real property residence free and clear of any liens. After the purchase and sale contract is signed, one of the agents (usually the agent of the seller) will open an escrow. Each party to the escrow (e.g. the seller, the buyer, the lender) will submit escrow instructions to the escrow describing that party's requirements for how the transaction is to proceed. See our sample lender's Escrow Instructions, buyer's Escrow Instructions, and seller's Escrow Instructions. For example, the instructions will require the seller to execute and deliver to the escrow a deed to the property and instruct the escrow to deliver that deed to the buyer when the escrow can deliver the purchase price to the seller (less title insurance premium and other closing costs that the seller has agreed to pay). The instructions will require the buyer to deliver her down payment to escrow and instruct the escrow to deliver that money to the seller when the escrow is ready and able both to record the deed in the buyer's favor and to deliver to the buyer a policy of title insurance insuring the buyer's title to the property against unknown and undisclosed liens. The buyer's lender will "fund" the escrow with loan proceeds when the escrow is able to record both a deed executed by the seller in the buyer's favor and a deed of trust executed by the buyer in favor of the lender and when the escrow is able to deliver to the lender a policy of title insurance insuring the buyer's clear title to the property.
If the seller owns the residence subject to two deeds of trust, the buyer most likely will be unwilling to purchase the property unless these encumbrances are removed. Therefore, the lenders of the money secured by these existing deeds of trust will submit deeds of reconveyance to the escrow with instructions that the escrow may record these deeds of reconveyance (thus extinguishing the liens) when the escrow is holding money for their account to pay the balance due on their notes. The seller will receive from escrow the purchase price less closing costs and less amounts paid to the holders of these prior deeds of trust.
Title insurance is insurance purchased from title companies to insure buyers and lenders against unknown liens and encumbrances against the real property involved in the transaction. See our sample policy of title insurance. Title insurance is often said to "drive a real estate transaction" because buyers and lenders typically will be unwilling to close a transaction without it. See the web site of Title Resources Guaranty Company of New York City, New York for a history and description of title insurance services.
Consider the following examples of the use of escrow and title insurance. A seller owns her real property residence free and clear of any liens. After the purchase and sale contract is signed, one of the agents (usually the agent of the seller) will open an escrow. Each party to the escrow (e.g. the seller, the buyer, the lender) will submit escrow instructions to the escrow describing that party's requirements for how the transaction is to proceed. See our sample lender's Escrow Instructions, buyer's Escrow Instructions, and seller's Escrow Instructions. For example, the instructions will require the seller to execute and deliver to the escrow a deed to the property and instruct the escrow to deliver that deed to the buyer when the escrow can deliver the purchase price to the seller (less title insurance premium and other closing costs that the seller has agreed to pay). The instructions will require the buyer to deliver her down payment to escrow and instruct the escrow to deliver that money to the seller when the escrow is ready and able both to record the deed in the buyer's favor and to deliver to the buyer a policy of title insurance insuring the buyer's title to the property against unknown and undisclosed liens. The buyer's lender will "fund" the escrow with loan proceeds when the escrow is able to record both a deed executed by the seller in the buyer's favor and a deed of trust executed by the buyer in favor of the lender and when the escrow is able to deliver to the lender a policy of title insurance insuring the buyer's clear title to the property.
If the seller owns the residence subject to two deeds of trust, the buyer most likely will be unwilling to purchase the property unless these encumbrances are removed. Therefore, the lenders of the money secured by these existing deeds of trust will submit deeds of reconveyance to the escrow with instructions that the escrow may record these deeds of reconveyance (thus extinguishing the liens) when the escrow is holding money for their account to pay the balance due on their notes. The seller will receive from escrow the purchase price less closing costs and less amounts paid to the holders of these prior deeds of trust.