What Is An Escrow Company?
An escrow company is integral to almost every real estate transaction. Acting as a neutral third party, an escrow company helps manage the exchange of documents and funds between the buyer, seller and even the lender. It verifies signatures and transfers funds. An escrow company also sees to it that money is correctly disbursed . Cash, check, personal or business checks along with certified checks, traveler’s checks and other forms of payment are held in escrow until conditions of the sale are met. An escrow company also holds funds that will be used to pay the deed recording fees and all title fees.
What Is A Title Company?
What is a title company? A title company is a financial institution that administers the escrow. They are considered third-party entities that guarantee the completion of a real estate contract. Since they are neutral parties, it is their duty to ensure that all details are completed before the transaction is finalized, including the appropriate closing costs and payment to other entities involved. They help facilitate the entire process.
The title with a real estate property is a legal document that provides the proof of ownership of that property. Any person or entity (ex. bank) that lays claim to the property separates that claim with a lien. Title companies create a guarantee that protects the buyer and lender in the case of old debts or other liens being discovered on the property. If that occurs, then the title company is responsible for resolving the issue.
Protection from title claims comes from a title insurance policy. When a buyer signs a sales agreement, some companies will require that the buyer purchase a title insurance policy, and this is most likely the policy under which he or she will be covered. So, basically title companies serve as a safeguard to protect buyers and mortgage lenders from any past claims on a property.
Escrow Companies and Title Companies Compared
While the escrow and title company are commonly combined into the same business, it is important to understand that they are not the same. The title agent is responsible for identifying any title defects, clearing them, and issuing insurance to protect against loss from those defects. The escrow company, on the other hand, is a neutral party engaged in real estate transactions, and acts as an agent for the buyer, seller and lender to coordinate the closing of the transaction. Both the title company and escrow company are pivotal in the process of buying a home.
Have you ever gotten confused between what the escrow company and title company do? The two terms are often confused, yet they refer to different aspects of home buying and selling. While the escrow company tends to be the main point of contact for buyers and sellers, the title company provides a vital behind-the-scenes service that is essential to real estate transactions. Buyers, as well as sellers, need to know what the companies do in order to understand their roles in the process.
Advantages of Using an Escrow Company
Utilizing an escrow company in real estate transactions offers several advantages to the parties involved. One of the most significant benefits is the enhanced security that comes with having an impartial third-party manage the transaction. The escrow company holds the buyer’s earnest money deposit, along with other funds and documents related to the sale, in a secure and neutral environment until all the conditions of the sale are satisfied.
The neutral nature of the escrow company reduces potential conflict between the buyer and seller, as they do not have a direct stake in the outcome of the transaction. They do not have any loyalty to either party, and their only role is to follow the instructions given to them by both the buyer and the seller.
Another benefit of using an escrow company is that they take on the responsibility of ensuring all the terms and conditions of the sale are achieved before the funds or the assets actually change hands. This gives the buyer confidence that their money is secure until they receive the property, and it gives them the ability to forego actually taking possession of the property if there are issues with the transaction.
Why You Need A Title Company
Title companies are even more crucial to real estate transactions since they verify ownership rights. In addition to providing title opinions to buyers and mortgage lenders, they also offer title insurance. With some exceptions, title insurance is standard for residential and commercial closings. This isn’t the case with escrow companies.
A title search effectively answers the question: Do you own your home? It provides you with a legal review conducted by an impartial third party. If you are buying a home and working with an escrow company, you should always insist on an independent title search and title insurance. If not, you could lose your property.
Title companies conduct title searches to ensure that a property has marketable title, which means that the seller has full rights to the home. Marketable title will show the owner, the full legal description, and any encumbrances or liens. Real estate law takes a "first in time, first in right" position, so the search reveals who has the highest right to the property’s possession. Professionals use a chain of title , which is a record of each property owner in the chain over time, to create a clear timeline of ownership. They seek to find recorded deeds or documents that will prove ownership.
Although title searches can be difficult to read, professionals know exactly what they are looking for. They are looking for claims that may impact the ownership of the property, as well as liens. If the owner couldn’t convey a legal title or ownership, it could mean the home does not have marketable title. If an owner lost that right at a previous sale or due to fraud, he or she cannot sell the home. Buyers won’t purchase a home if there is an issue with the title, and it will become a burden to sellers unless the issue can be resolved before closing. Also, your lien would be wiped out if the title company went bankrupt. If your title company issues a title opinion that the title is sufficient, that opinion is protected under Uniform Commercial Code 8.73. Assuming that opinion meets the applicable standard of care, the title company will be on the hook for any losses that result from improper title being conveyed to a buyer.
Whether to Use A Title Or Escrow Company
When faced with the decision of whether to use an escrow company or a title company, the right choice depends on the specific situation of the property transaction in question. In general, escrow companies offer dedicated services for handling the financial and administrative details of a real estate transaction, while title companies primarily focus on the management and protection of the property’s title through title insurance and related services.
Using an escrow company may be the better choice for real estate transactions in which the various parties involved have few concerns about title issues. In this case, the escrow company can work with all of the relevant parties — including buyers, sellers, lenders and real estate agents — to ensure that all of the action items responsible for the closing get completed in a timely fashion. In such matters, the escrow company can simply serve as a neutral third party in the successful closing of the property transaction.
In the majority of situations, the buyer is the one who pays for the escrow services. The escrow fees can typically be split among all of the buyers, real estate agents and sellers on a pro-rata basis. However, in some cases, the escrow fee is paid for solely by the buyer.
There are some transactions that would be better served by the use of a title company, which specializes in researching and establishing the validity of title for a property transaction. For instance, it may be necessary to involve a title company in a purchase transaction if there has been a recent divorce or death in the recent chain of title for the property. Additionally, the lender may be more likely to require a title company to handle the title search in a refinanced transaction, so that sufficient title insurance coverage can be provided to lenders.
Title companies may also be called in to handle the title for a property being purchased at an auction. In such cases, it may be in the best interest of the buyer to purchase an owner’s policy for the title to protect against any issues that might arise with an auctioned property.
These are some factors to consider in determining whether an escrow company or a title company is the right choice for your specific property transaction.
Common Myths
As the lines between both entities are sometimes blurred, I think it is important to address what people commonly misunderstand about both title and escrow companies. Specifically, many people believe that since the real estate transaction is closed through a title company, there is no need for escrow. While the transaction itself is closed through a title company, they also conduct the escrow functions . Thus, both a title and escrow company are being utilized. Another misconception is that since the title insurance policy is issued by the title company, there is no need for escrow. Again, both title and escrow companies are involved and are responsible for insuring the conveyance of clear title to the purchaser as well as conducting an accurate closing. The cost for both is generally paid from the proceeds of the sale.