Escrow

 When you fund a loan or purchase a promissory note, this transaction should be done through escrow.  Escrow is a specific process in which a title of transfer and a funds transfer take place via a neutral third party during a real estate transaction.  The company providing escrow acts as the middle person in the transaction, and the escrow agent is the one who will process the transaction in accordance to the initial escrow instructions that were agreed on by the lender and the borrower.

The instructions provided by escrow determine the conditions that need to be met or waived before the escrow officer can take action and disburse your money to either the note holder or the borrower.  Some of these conditions include, but are not limited to –

1. Delinquent taxes are paid
2. Certain liens are removed
3. Choosing title insurance coverage
4. Completion and handing over of the deed of trust or promissory note, or the completion and handing over of the endorsement or assignment of the promissory note.

Escrow instructions

Due to the fact that escrow usually involves the transfer of an investment in land, all conditions regarding the transfer need to be in writing.  That being said, the following is a list of the criteria that is required to be stated within the escrow instructions:

1. Name of the escrow agent, third party or depository
2. Names of both the buyer and seller as well as their proper title (ex: joint partnership, corporation, individual person, and so on)
3. A legal description of the property that is to be transferred
4. The price at which the property was purchased
5. Set conditions in regards to transfer and payment
6. Distribution of cost, insurance costs, taxes and assessment
7. The signature of both the seller and buyer
All of the transaction details, including the agreement made by the seller and buyer, need to be written in the escrow instructions so that it is clearly understood by all parties involved.  Even promises made orally should be written down.

When the instructions have been completed, it is then important for the investor to read the preliminary title report more than once to ensure that everything is understood and nothing has been overlooked or missing.  The investor (you) should also check and see that the trust deeds and notes, as well as the amount of indebtedness are all in proper order.

If the investor has the first deed of trust, then there will be no other lien before theirs.  Furthermore, the investor should also make it a point to ask questions in the event they discover certain wording or restrictions they fail to comprehend.  Should this occur, the investor should ask the escrow agent to produce copies of the listed documents in the title report.  As an investor, you should never feel embarrassed to ask questions.  Remember, only through asking questions will you learn all the facts of purchasing a trust deed.

Important facts about escrow to keep in mind

Legal advice -
Be advised that while an escrow company will assist you, escrow’s purpose is not to provide advice on legal matters.  Nevertheless, an investor may ask the advice of a broker or escrow company, and they may or may not tell the investor how a similar problem was resolved in past escrows.  However, if an escrow involves tax and legal problems and is extremely technical, than the investor should seek the advice of an attorney.

Casualty and Fire Insurance –
Insurance is imperative when it comes to making a trust deed investment; because as an investor you will want to ensure that you have sufficient insurance to protect your investment.  The investor should check with the escrow agent to ensure that when the close of escrow occurs, an endorsement will follow. 

Notice request –
A notice request must be placed in the agreement to make sure that the investor will be notified should a default action start on one of the previous loans.  If in the event the investor held a second deed of trust, and the initial trust deed holder began a foreclosure action, the investor would receive notification.  The reason why such foreclosure actions are started is due to the fact that payments on the promissory note have not been made, or it could be that taxes and insurance are overdue.

Include important conditions –
Should a late charge be included as part of the note, the investor needs to ensure that the conditions regarding the late charge, are included in both the escrow instructions and the note.

Acceleration Clause – An acceleration clause should be apart of the escrow documents.  This clause indicates that full payment of the loan is required to be made upon liens, change of ownership or a transfer.

Escrow number –
Should it become necessary in the future, for the investor to discuss a section of the escrow with the agent in charge, if the investor has the escrow account number it will be easier for the agent to locate the escrow file in question.  Furthermore, it is in the investor’s best interest to safely secure the escrow agent’s card, and inset the escrow number on it.  Thus, this will ensure that the investor has the escrow number, the name of the escrow company, as well as the name of the individual responsible for the documentation.

To make things easier, investors should keep all loan escrow documents/papers in a single folder, and to ensure the protection of the original deed of trust and note, secure these documents in a place safe from theft, fire or other potential hazards that could lead to their loss.  Finally, the investor should make copies of all the important documents (for example- escrow instructions, trust deed, promissory note), and keep them at home where they can be easily accessed and referred to when needed.

Obtain certified copy of escrow papers –
The investor needs to obtain a certified copy of escrow papers, which is an escrow file that has been verified and signed by an agent of the escrow company and is considered to be a valid and accurate copy of the original document.  Once the investor has the certified copy, the escrow company recognizes that the investor expects all conditions and terms of the escrow to be completed precisely.  A certified copy of escrow papers is especially important when it comes to cash transactions where the investor wants to ensure the trail of cash is carefully documented.

Closing Escrow

Once you have completed all of the necessary instructions and requirements for escrow, and it begins to take its normal course, you are now ready to close escrow which is often referred to as “close of escrow”, “closing” or “settlement”.    Regardless of the term used, the closing of escrow is when all of the final papers are signed, and the closing officer is prepared to record the deed to the property, and the sale goes to the seller.

The instructions for escrow that you will be requested to sign could be unilateral (separate set of instructions for the buyer and separate ones for the seller) or bilateral (one set of instructions for the seller and one for the buyer).  Different areas use different methods.  Those that use unilateral escrow instructions generally sign at the end of the escrow term, while those that use bilateral escrow instructions usually draw up and sign in the initial opening of escrow.

Be advised that once the escrow documents have been signed, if you try to cancel, regardless of the reason, you may be subject to penalties or even legal consequences.  Therefore, it is imperative that you carefully read and re-read all the closing documents.  Double check the documents for clerical or mathematical errors.  

Sometimes issues may arise that can cause a delay in the closing process, such as one party may be not be able to sign the papers at the closing time, because they are unavailable.  Although this can be a problem, it is one that can be dealt with in several different ways such as:

1. The documents can be sent to the unavailable party ahead of time and pre-signed.
2. A power of attorney can be implemented to allow another individual to act on behalf of the absent party and sign for them.

When everything is in the clear, and the documents have been appropriately signed, the escrow officer will inform the title company to record the trust deed, who will then deliver the loan package (all the executed loan documents) to the lender.  As soon as the lender is in possession of these documents, they will then release to the title or escrow agent their loan proceeds.  The title attorney or escrow agent will ensure that the exchange of documents and funds runs smoothly.

Thus, escrow closes when every condition of the escrow instructions have been met or waived, the documents have been recorded, and the funds have been released.  A closing statement will be sent to you, which describes how and to whom the documents and funds were distributed.