Escrow Is Not an Open-and-Close Issue

If you ask a friend whether he’s sold his car or truck, you usually get a simple, one-word answer, either “yes” or “no.”

But ask another friend if she’s sold her house, and you’ll hear vague, seemingly non-responsive phrases, such as: “My house is in escrow,” “I just opened escrow,” or “We expect escrow to close soon.”

If you’ve never been through an escrow, you probably don’t know what your friend is talking about.

What is escrow anyway? And why do we need it?

Why can’t we just sell houses as we sell refrigerators? You pay your money, and in the very next breath, you receive your new appliance.

Unknown Risks

Buying real estate is usually not that simple. There are lots of unknown risks. The escrow process is intended to reduce those risks and facilitate the mounds of paper work needed.

When you buy a car or a boat, you can see it, you can touch it, you know what you are buying. You may not trust the seller completely, but you can personally inspect the item and return it if it is defective.

But when you buy real estate, there is much you can’t see.

The first thing you have to make sure of is that the seller actually owns the place free and clear, and that means someone will have to search the records at the local county recorder’s office.

You may find there are liens on the house, such as old tax bills that were never paid, mechanic’s liens for failure to pay repair workers or a judgment lien because of an adverse legal judgment in a damages suit. And you’ll want those taken care of before ownership of the house is transferred to you.

You’ll also need the house inspected by professionals to make sure it is not filled with termites or other hidden defects. And you will have to arrange for a significant amount of financing to pay for your purchase.

All of this takes time. The seller can’t simply hand the house over to you or deliver it next Sunday.

The seller will record a deed of trust when the transfer is complete, but certainly won’t do that until he’s been paid.

Obviously, the seller wants his money. And you want your new house. Because you can’t just exchange money for house, as you could with a refrigerator, that’s where the escrow holder comes in.

The escrow holder is a neutral third party, who facilitates the transfer of ownership. In simple terms, you give the escrow holder the money, and the seller gives him the house (really the paper work to confirm transfer of title in the house), and then on a pre-selected date, after all the paper work is complete, the escrow holder makes the switch, money for house.

In California, there are escrow companies that do nothing but act as the neutral escrow agent in real estate transactions. In some states, such as New York, the buyer and seller each retain a lawyer, and the lawyers act as the neutral “go-betweens,” instead of using an escrow company. Insurance companies and banks also act as the escrow holder in real estate or other business transactions.

Need for the Process

Theoretically, if both sides completely trusted each other, and you could get all the financing and other paper work done ahead of time, you wouldn’t even need to go through the escrow process or use an escrow company.

That’s in theory. In reality, the reason we need escrows is basic--lack of trust. Because the buyer and the seller really do not--and should not--trust each other, especially with the large amounts of money at stake in a house sale, they rely on a neutral third party to make sure that each side fulfills its obligations.

Escrow is “opened” when the escrow holder accepts the buyer’s deposit, and the parties sign the instructions advising the escrow company what needs to be done before escrow will “close.”

After the instructions are carried out, financing is secured and the paper work is completed, escrow “closes.” The escrow holder makes the final transfer--gives the seller the money (most of which comes from the bank loan) and records the new ownership documents for the buyer.

It is actually almost as simple as it sounds.

Attorney Jeffrey S. Klein, The Times’ senior staff counsel, cannot answer mail personally but will respond in this column to questions of general interest about the law. Do not telephone. Write to Jeffrey S. Klein, Legal View, The Times, Times Mirror Square, Los Angeles 90053.