Escrow exists to protect both parties in a transaction. In its simplest form, escrow is when a neutral party holds money until specific conditions are met during a transaction.
Escrow exists for the protection of both parties in a transaction, and ensures that no money changes hands prematurely. For example, during the purchase of a home, the buyer and seller sign a purchase agreement and the buyer places a deposit, or earnest money, into escrow. An escrow agent processes the escrow according to the terms of the agreement, and once all conditions are met the escrow is closed.
Depending on the location in which a transaction occurs, the neutral third party that handles the escrow process might be an independent escrow company, a title agent or a real estate broker.
Because the escrow process is unfamiliar to most buyers and sellers, it’s not uncommon for an escrow agent to be chosen based on a lender’s or real estate broker’s recommendation. However, before making this choice it is important to understand how an escrow agent is licensed.
In California, the Department of Business Oversight licenses and regulates independent escrow companies and audits them annually to ensure they comply with escrow law, holding them to the highest standards of the industry. Non-independent escrow agents, including title agents, real estate brokers and banks are not licensed or regulated by the Department of Business Oversight and are subject to widely varied laws and regulations. For more information on the licensing and regulation of escrow agents, please visit the California Department of Business Oversight website.