Escrow Process Can Be Puzzling in More Ways Than One
Although almost everyone who has bought or sold a home in California has been through escrow, it remains confusing for many people.
Adding to the confusion is that there is no uniform pricing for escrow services and that different types of escrow service providers are regulated by different state agencies.
Simply defined, an escrow is a deposit of funds, deed or other instrument by one party for delivery to another party. The principals to the escrow--the buyer, seller, lender and / or borrower--forward their escrow instructions to an escrow officer, who is supposed to assure that no funds or property will change hands until all the instructions in the transaction have been followed. The escrow officer must follow all the principals’ instructions, paying all bills as authorized, distributing funds and accounting for disbursements in the form of a written closing or settlement statement.
The escrow process is often likened to a jigsaw puzzle--it’s not complete until all the pieces are in place. On the seller’s side, the deed to a property must be surrendered, liens must be settled and a termite report needs to be secured. The buyer must make a cash down payment, and get a new loan, fire insurance and possibly a home protection plan.
All escrow companies in California can be classified into two basic categories: licensed or so-called controlled. Licensed escrow companies are independent businesses licensed by the California Department of Corporations. Controlled escrow companies are owned by a variety of real estate related entities and are regulated by a patchwork of agencies.
Real estate and mortgage brokers who provide escrow services are supervised by the California Department of Real Estate, title insurers by the Department of Insurance and lenders by the California Superintendent of Banks or the Department of Savings and Loan. Lawyers can also facilitate an escrow, but this is rarely done in California because of the high cost of legal fees.
There is a growing battle for escrow business in the San Fernando and Santa Clarita valleys and Ventura County. The number of independent escrow companies has been declining as title companies and other “controlled” escrow providers snatch a bigger share of the business. Consumers could benefit from the competition, but they might also be confused about who to turn to when buying a home or refinancing.
The roughly 80 licensed independent escrow providers in the region say they are the only unbiased escrow companies. Other companies, they argue, can’t do an arms-length transaction if they are associated with a real estate firm, lender or title insurer.
Licensed independents are required by law to insure consumers’ funds against theft or misappropriation with a bond purchased through the Escrow Agents’ Fidelity Corp. They also must meet certain net worth or minimum liquidity requirements, surety bonding and regular audits.
“Title companies and other controlled escrow services are not neutral,” said Ken Carver, owner of Carver Escrow in North Hollywood. “We, as an independent, have no ax to grind.”
But whoever is performing the escrow service has to follow all the escrow instructions, and even independent escrow companies can find themselves beholden to clients who bring them lots of business.
Independent escrow companies are anxious because their numbers are waning as they find it harder to compete with discounted services offered by title insurance companies. Carver recalled recently declining an office building transaction because he couldn’t compete with the lower price offered by a title insurer.
Carver’s original bid was for $1,800. When the client asked for a discount, he matched the title insurance company bid of $1,000. But then the title company said it would charge just $200 for its escrow services, which Carver said he couldn’t afford to match.
“Within five years, there will be far fewer independent escrow companies,” Carver predicted. “The title companies will wipe us out and they’ll have a monopoly. Then prices will go up.”
Carver said he charges each side of an escrow transaction a $100 flat fee, plus another $2 per side for each $1,000 of the transaction value. For the sale of a $300,000 home, this would translate into a cost of $700 for the seller and $700 for the buyer. For a refinancing, the cost would be $700 for the owner.
Continental Lawyers Title Co. in Pasadena charges a total of $990 for the same size transaction in the San Fernando Valley, which is split between the buyer and seller, said Edward Beierle, the firm’s senior vice president and general counsel. That’s about 30% less than Carver’s fees.
What’s more, Beierle argued, consumers benefit from the backing of a large title insurer versus a small local escrow company.
Carol Hanson, vice president of Benevest Escrow Co., which has offices in Sherman Oaks, countered: “The title company that discounts its services can’t offer the same services that I do.”
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Because there is no uniform pricing, it is hard for consumers to know whether they are getting a good deal. “There is a wide difference in pricing, depending on where you are located,” Hanson said. “In Northern California, we can’t charge as much as we do in Southern California.” And in Southern California, she said, prices vary from neighborhood to neighborhood.
Whatever the price, consumers should be sure that they are dealing with a reputable escrow company. One important question to ask is what happens to escrow funds if they are embezzled. There should be some sort of insurance or fidelity bond to protect your transaction.
In August last year, California Escrow Systems Inc., an independently licensed escrow agent, was seized by regulators after several hundred thousand dollars were missing from trust accounts. Fortunately for clients of California Escrow Systems, the company was required by law to be backed by insurance from the Escrow Agents’ Fidelity Corp. The Department of Real Estate says it has no similar requirements for escrow operations affiliated with real estate and mortgage brokerages.
An estimated 500 home buyers and sellers involved in transactions with Country Oaks Escrow Inc. in Santa Clarita also faced the loss of $2.75 million that state investigators said was embezzled by the company’s owners. Country Oaks, which was the state’s third-largest escrow company, was shut down by the Department of Corporations in June, 1993. As with California Escrow Systems, losses were insured by the nonprofit Escrow Agents’ Fidelity Corp.
The Escrow Institute of California publishes a number of pamphlets that are available free to consumers. These include “‘Your Escrow and You,” “Dictionary of Escrow Terms” and “What a Licensed Escrow Company Can Do for You.” The toll-free number to call to receive these publications is (800) 3-ESCROW.
