Fisher Law Corporation’s Frequently Asked Questions

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Notice: The information contained in these articles is designed to provide accurate information in regard to the subject matters covered and is made available with the understanding that the information provided does not constitute the rendering of legal or professional services. All information is of a general nature, is specific to California law only, and is not intended to to replace professional or legal advice. Each person’s situation is unique and the information contained herein cannot be applied to any individual’s situation. If legal advise is required, the services of a professional should be sought.

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What is a deed in lieu of foreclosure? »

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What are Encroachments? »

How does escrow work? »

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Who bears the risk of loss during escrow? »

What are second deeds of trust? »

What is the Statute of Frauds? »

What is Statute of Limitations on Debts Secured By a Mortgage? »

Does a buyer’s broker have a duty to inspect? »

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Q. How does escrow work?

A. Because the transfer of title by the seller and the payment of the purchase price by the buyer are concurrent conditions, in most real estate transactions these functions usually are handled by a neutral escrow agent.

The buyer does not intend to part with the purchase money until he knows that he is receiving satisfactory title. The title must be marketable at the time his deed is recorded, and he wants to withhold his purchase money until that time. Similarly, the seller does not intend to risk the transfer of his title until he has received the purchase money.

The parties may require use of the purchase money or the property to facilitate performance of their obligations under the purchase contract. The seller, for example, may need the use of the buyer’s money to clear liens on the property in order to deliver marketable title. The buyer, on the other hand, may require title to the property as security for a purchase money loan. These transactions can be accomplished most efficiently by delivering the deed, purchase money, and other documents to a third party who can disburse the funds, create the liens, and deliver and record the documents necessary to consummate the transaction on behalf of each of its principal participants.

Also, the escrow agent usually is instructed to perform certain clerical functions such as prorating rents, taxes, and interest. The escrow agent serves as a clearing house for the payment of certain obligations, and aids in obtaining title insurance for the buyer. In Northern California, it is customary for a title insurance company to perform these escrow responsibilities, in which event its insurer functions and escrow functions, and the liability for each function, are considered separately. In Southern California an escrow company handles the escrow and purchases the title insurance for the buyer from a separate title company. In some cases these escrow functions are handled by the escrow department of the lender.

The use of a “double escrow” is a variation from the usual escrow procedure. It is most commonly used when a person is selling property which he does not own, but he has a right to purchase the property by virtue of a purchase agreement or an option. He intends to consummate the purchase in one escrow and immediately re sell the property in a second escrow. In many instances the seller uses the funds from the buyer in the second escrow to purchase the property in the first escrow and in many cases the buyer is re selling the property in the second escrow for a profit.

As long as the intermediary buyer seller is not an agent of one of the parties, and as long as there is no other misrepresentation, the use of the “double escrow” is a legitimate transaction. The seller has no duty to inform the buyer that he does not own the property nor the amount he is paying for it. There is also nothing wrong with the seller’s use of the buyer’s funds to acquire the property, unless the delivery of title is a condition to the payment of the purchase price, in which event the escrow may not be authorized to disburse the funds from the second escrow as may be required for the seller to obtain title in the first escrow. However, if the buyer is deemed to be the agent of the seller, he has a fiduciary duty to disclose the “double escrow” resale of the property for a profit.

Custom and practice in the real estate industry have further expanded the term “escrow” to loosely refer to the procedures for completing a sale of the property. The deposit of the initial instructions is called “opening” the escrow, and when the sale is completed and the conditions satisfied, the escrow is “closed.” After the contract of sale is executed, it is common to “go into escrow,” to “escrow the deal,” or to state that the “escrow is pending.” In each instance the parties are referring to use of a third party to perform the final conditions of the transaction.

When the parties to a transaction select a third person or entity to perform escrow functions, the third person becomes the agent of each of the parties to the transaction who have submitted instructions to the agent. The third party is a special agent who assumes agency duties and responsibilities toward all of the parties to the escrow.

The creation of an escrow establishes several complex legal relationships. On the one hand, the parties to the escrow assume responsibilities to the other parties to the escrow to perform their contract in compliance with the instructions given to their common agent. On the other hand, each party appoints the escrow agent as his common agent who owes special agency duties toward the parties as provided in their instructions, and they assume certain risks for the wrongful acts of their agent.

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