by Aaron Lloyd

Believe it or not, this is one of the most common questions I am asked. Simply put, escrow is a disinterested (and licensed) neutral third part which holds funds and/or collateral pending the completion of the terms of an agreement or contract.

Most commonly implemented in real estate, escrow may also include the transfer of high-value personal property (such as jewelry, boats and/or luxury vehicles, mobile-homes), child-adoptions, interests in a corporation and intellectual property (such as software code, music or movie financing syndications).

Historically speaking, escrow was originally adopted by merchants in France and England as a safeguard against theft, embezzlement and non-performance. 

During the Great Depression (1934), escrow became formally institutionalized in the United States under “mortgage payment escrows”.  Mortgage payment escrows were a means of safeguarding the interest of homeowners and mortgage lenders. As is true today, most property tax amounts exceeded the normal monthly income of the homeowner and failure to pay them would subject the property to forfeit at the behest of the local/state/federal government. The solution was to allow the homeowner to pay in smaller, more manageable amounts over time, and defer the responsibility of paying the bill, on time, to the mortgage lender. This compromise provided assurance to the homeowner and lender that their respective interests were secure. 

Over time the complexity of agreements began to require the legal expertise of attorneys. Since an attorney is employed by one of the principles, no one could fully trust the other to act impartially while control rested in the hands of the other.

Many states continue to require the services of an attorney to transfer real property. While understandable, albeit unnecessary, that number has been on the decline in recent years as regulation and commerce have demanded impartial, trusted, third-parties. California, well-versed in legal precedent and a common front-runner for change, decided long ago that a legal representative employed by a principal cannot constitute an impartial third-party. As a response to the increasing problems associated with real property transactions the State provided the means for a regulated and licensed “Escrow Agent”.

In California there are three different types of escrow companies. The first, being the strictest and most reliable, is the “Independent Escrow Agent”. The second and third, which cannot be reasonably classified as “independent” due to control and/or management structure, are title companies and real estate brokers. The nuances and differences are too many to be listed here. For a clear explanation as to the differences please visit our site at http://www.sunsetoneescrow.com/blog and click on “Escrow Agent Matrix” linked below the most recent article.

Armed with this knowledge I would encourage anyone, most especially the Real Estate Professional, to take the time to select a licensed Independent Escrow Agent the next time you are looking to buy, sell or refinance.  No reasonable person would go to the doctor for a dent in their bumper, nor should they go to someone who doesn’t provide only that specific service you need. It can, and will, make all the difference. And remember to keep your business local as often as you can.

Aaron Lloyd is a Senior Escrow Officer of Sunset One Escrow. They are located at 24630 Washington Avenue, Suite 202 Murrieta, CA 92562 and can be reached at (951) 200-3331, or by visiting their website at www.sunsetoneescrow.com.