What is escrow? | What is closing? | The role of the closer or escrow officer
Preperation of documnets | What items might be payable at the time of closing
General escrow rules | Good funds | Title Services

What is Escrow?
The primary reason for the existence of escrow is the distrust by the parties involved in the transaction. The concern of conflicting interests and mutual distrust exists in many real estate transactions. The seller does not want to deliver the deed to the property until he or she is certain of receiving his or her money, and the buyer is nervous about becoming obligated on the loan and delivering the remainder of the purchase price until he or she is assured of receiving title to the property, that is until a closing has taken place. The lender is, of course, concerned about its security before lending the money.

An escrow or other closing officer, including an attorney acting as a closer, is required to be a disinterested third party who holds the money and documents subject to specific instructions from the principals as to delivery and disbursement.

What is a Closing?

Closing officers (agents) and their associates should have a clear understanding of both their relationships and obligations to the several parties in a transaction. They are required to keep all information and knowledge coming to their attention in strict confidence. Confidentiality requires that requests for information regarding the escrow or closing by persons unrelated to the transaction be declined unless approved by the parties. This includes Internal Revenue Service agents and law enforcement officials, lawyers, real estate and mortgage brokers, unless they are representing the parties to the escrow and/or have approval from the parties to the transaction. The courts often speak of the closer as an agent and as having a "fiduciary" relationship with each of the parties to the transaction. Essentially, this means the escrow or other closing officer is held to the highest standards of strict compliance with the instructions of the parties, full confidentiality and of absolute neutrality in the transaction.

The closer never wants to release funds unless the existing encumbrances which are not assumed by the buyer, are paid off, and no payoffs of existing encumbrances should be made unless they are made directly to the creditor preferable by the closer and the proper release of the indebtedness is obtained. Mortgage holders will not execute satisfactions or releases of their mortgages until they are paid. In some instances a lender will permit the release to be held by an escrow agent pending receipt of the payoff. When there is no release available until payoff, the payoff should be made through the escrow agent. In some instances the lender will deliver a payoff demand to the closer or escrow agent together with permission to release the mortgage of record when the funds are paid to the mortgagee. The failure of lenders to properly release the mortgage after being paid has created confusion in the land record systems and with the title companies and their agents. In many areas there are a large number of unreleased but paid mortgages of record.

The Role of the Closer or Escrow Officer
The basic requirement imposed on the closing officer is to follow instructions directed by the parties to the closing officer or escrow. The closing instructions leave no discretionary authority to the closer. The only decisions for an escrow or closing officer to make are whether to accept and act on the instructions from the parties or, once accepted, to determine whether the parties have complied with the instructions. The escrow officer or closer should never indulge in presumptions as to what the parties intended or wished to be done.

Escrow or Closing Instructions
In an escrow or in certain other forms of closing, the parties submit written instructions to the neutral third party (the closing or escrow agent) along with the consideration (money and/or a mortgage from the buyer, money from the lender, and a deed or other transfer document from the seller). The instructions should be in writing and be clear, concise, comprehensive, unequivocal and non-conflicting. While the safest form of instructions for the closing officer are written instructions, an escrow or closing contract can be established orally. Closing or escrow instructions are not transfers of real property and are not subject to the terms of the Statute of Frauds. Oral instructions, while valid, create a problem of proof for the parties and for the closer in the event any problem arises.

Once the instructions are received, the closing officer must be certain that they will be able to close the transaction based on the instructions and issue the title policy in accordance with the closing instructions. Care should also be taken to determine if the requirements of the instructions can be completed within the times established. The escrow or other closing agent should decline to act if unable to strictly comply with the instructions. All deposits received from any party can only be disbursed when the escrow or closing agent has met the required conditions of the instructions. In addition to gathering the documentation and funds, the instructions often require the closer to prorate taxes, rents and hazard insurance premiums.

The closer must require supplementary written instructions 1) when ambiguities or inconsistencies exist in instructions given to the closer, 2) when the instructions given do not cover all possible contingencies, or 3) when disputes arise between the parties to the closing.

The escrow or closing officer is required to prepare closing statements reflecting the disposition of all funds and documents deposited in the escrow in compliance with the escrow instructions. Although the seller may submit his deed to the escrow agent days or weeks in advance of the expected closing date of the transaction ("close of escrow"), the escrow agent may only deliver the deed to the buyer when the instructions permit, which is generally when the escrow holds the money which seller is to receive. In many instances the parties are probably not present at the close of escrow. In most jurisdictions the doctrine of equitable conversion applies in escrow type situations.

Preparation of Documents
The preparation of documents by the closer will be controlled by the custom or law of the jurisdiction where the closing takes place. Many states, or areas of states, prohibit the closer from drafting documents, or limit the type of documents which can be drafted, because drafting is declared to be the unlawful practice of law. Care should be exercised by the closer if he or she is not a licensed attorney to determine the bounds of the closer's legal authority.

In those areas where drafting of documents by a non-attorney closer is permitted, the closer should not exercise any personal discretion concerning the terms or language to be used in the documents and only follow instructions given by the parties. Any other action on the closer's part could be construed to be the illegal practice of law.

Taxes Payable at the Time of Closing
If all real property taxes are not paid by the closer, the taxes will continue to be a lien and must be reflected in the title policy. The payment of taxes is a matter that should be addressed by the instructions. A closer should not rely on the possession of a receipt showing the payment of taxes, but should only accept written verification of payment of taxes by the appropriate taxing agency.

Rent Prorations and Deposits
When commercial rental property is being sold and closed, rent is also considered as an asset to the seller to the extent that the property has been rented by the seller prior to the closing date. Rent collected prior to the closing date is generally to be prorated on the basis of the number of days of ownership by the seller within the rental period for which the rent was collected. The remaining rent goes to the buyer. When rent due prior to closing is collected subsequent to the date of closing, the buyer must pay back to the seller that portion of the rent applicable to the time owned by the seller. The closing agent should not assume any liability for rental figures approved by the buyer and seller.

In addition to the rental amounts to be prorated are security deposits held by the seller. Security deposits are not to be prorated and should be credited in total to the buyer because the buyer will be liable for their repayment when the lease is terminated subsequent to the sale.

Pay-offs of Mortgages, Judgments and Other Liens
Only written, verified and unqualified pay-off figures obtained directly from the lender or other lien creditor should be accepted for making pay-offs.

Pay-off figures should contain as much detailed information as possible, including the actual loan number, the creditor's and debtor's names, the debtor's social security or tax I.D. number, amount of debt, interest rates and per diem amounts, and any pay-off penalties or late charges. If the pay-off relates to a mortgage or other security agreement on real property, there should be a verification of the legal description and arrangements made to obtain a release or reconveyance of the security. A closer should not rely on a pay-off made by any other party unless there is an opportunity for separate verification or unless approved by management or the title insurer.

In paying off federal or state tax liens and obtaining releases, both a search of the public records and a determination from the taxing authority should be made that there are not other tax liens which would create additional problems.

General "Rules" of Escrow
Each transaction handled by the title company must be handled as a separate file. In that regard, following are ten "rules" of escrow:

Rule 1. Every transaction relates to a separate file and a file number should be on every supporting document.

Rule 2. Transactions are accounted for separately and exactly as they occur.

Rule 3. Funds are disbursed only after good funds are received and credited to the bank account.

Rule 4. Operating funds are never co-mingled with escrow funds.

Rule 5. Each file must have a disbursement sheet detailing the deposits and checks for that file.

Rule 6. Each file should have copies of checks received and disbursed and copies of validated deposit slips.

Rule 7. Each check disbursed should be supported by third party documentation (i.e. invoices, bills, statements.)

Rule 8. Escrow funds received should be deposited immediately into the escrow bank account.

Rule 9. Receipts and disbursements must match the settlement sheet and third party documentation.

Rule 10. Files should be put together in a consistent manner to avoid omissions and errors.

Cash in Excess of $10,000.00
An information return, IRS form 8300, must be filed with the Internal Revenue Service by any company when it receives cash in excess of $10,000.00 by any single remitter in any single year. Cash is defined as the coin and currency of the United States or any other country. This provision was enacted to block attempts by a real estate purchaser to structure his transaction outside the requirement of cash reporting.

The return must be filed by the 15th day following receipt of the cash. Some states have enacted legislation that imposes the same reporting requirement for state use. If the party brings in two (2) or more cash deposits in one transaction that total over $10,000.00, then the report must be filed.

In a recent audit of an independent closer the IRS alleged that in some real estate transactions where there were multiple deposits that were $10,000 or under in one file, the form had to be filed. The IRS interpretation is that if a certain number of deposits under the amount of $10,000 are made in an escrow, this automatically causes an escrow holder to have the requisite knowledge that the buyer is attempting to avoid reporting, and the form must be filled out. A secondary issue in this audit was the freedom given to the IRS to audit files without a subpoena. A failure to have a subpoena may trigger the right of one of the parties to the closing to sue for a breach of fiduciary duty. The duty of confidentiality is paramount in agency relationships. Title companies are ill-equipped to handle cash. The best solution is to insist that the party go to the bank, give the bank the cash and obtain a cashier's check to be deposited in escrow. As noted, the IRS will not permit willful blindness on the part of the closer.

GOOD FUNDS
A continuing problem in the closing industry is "good funds", that is, receiving good funds and not being required to disburse until the funds are in the escrow or fiduciary account. A continued attempt to satisfy some mortgage brokers and realtors by disbursing prior to clearance of the funds is leading to losses. In most instances the loss is caused by the check or draft not clearing the bank because the account is NSF, closed or stayed by bankruptcy.

Utah State law requires that a closer not close or disburse any funds prior to all deposits of checks, drafts, wired funds or cash deposits made to the escrow account having "cleared the bank" or having become good, usable funds. The term "good funds" means that the escrow account funds are fully available for withdrawal. In many instances the closer will be pressured to close before sufficient time has passed to be sure that all checks have cleared.

A draft is less than a check. A draft must be approved by the issuing party even if funds exist in the account because the draft is a request for payment, and can be rejected by the issuer for any or no reason if the issuer decides that specific requirements have not been met. Physically, drafts look much like checks but words such as "draft" or "payable through" indicate the tell-tale signs of a draft. The conditional nature or drafts make them much more risky than a check, and there can be long periods of time that pass while waiting for the draft to be refused or paid. If payment is refused after disbursements have been made, the closer can suffer serious consequences.

One of the most effective ways to guarantee "good funds" is to require the use of wire transfer funds. A wire transfer is a method utilized by banks to arrange the transfer of funds between themselves. A closer can arrange to receive the wire transfer funds from a lender or buyer. The time difference between areas of the country must be considered when a wire transfer is being arranged. Cashier's checks are also often used as "good funds."

TITLE SERVICES

A. The Role of the Title Company

The overwhelming majority of real estate closings in this area are handled by a title company acting as an Escrow Agent. Title companies are customarily involved in two types of closings, such as:

1.The mortgage loan closing wherein the lender deposits its loan funds with the title company for disbursement, along with an instruction letter, and

2.The sale closing which often originates with a real estate broker, buyer, seller, or attorney delivering to the title company a copy of the sale agreement or contract with verbal instructions to proceed.

Title insurance is often required in both of the above examples. The very nature of real estate transactions, large or small, require impartial escrow and closing services with the issuance of a title policy. Purchasers and lenders can rest assured that the simultaneous and concurrent exchange of money and documents has created a certain estate, lien or interest in the real estate.

Competent escrow officers and closers in title insurance operations must have technical knowledge relating to many phases of the title insurance business. In connection with the insuring of the title, a closer is confronted with many questions regarding the validity and sufficiency of instruments presented at the closing. Before filing the documents and issuing the title policy, the closer must be certain that the instruments effectively create the estate, lien or interest in the real estate that is intended by the parties.