6 Must-know Escrow Facts

March 1, 2005

In some states, escrow agents—typically an attorney or title company—handle all aspects of a closing; in others their responsibilities begin and end with the earnest money deposit. But handling the money can be tricky, so be sure you know your client’s rights.

  1. Escrow instructions should specify in writing how and under what conditions monies will be disbursed, especially if the transaction doesn’t close.
  2. Escrow is a fiduciary relationship but is limited to the duties involved in the escrow. The escrow agent is a trustee of both parties and is equally responsible to both parties for the proper administration of the escrow.
  3. If a transaction fails to close as scheduled, monies may continue to be held in escrow provided there’s no written demand from one party to cancel the contract. Monies are typically held after the closing date if the date to obtain a loan has passed but the parties still want to proceed with the transaction.
  4. If the transaction is cancelled by either party, the agent holding the escrow monies shouldn’t disburse any funds until all parties agree in writing how to disburse them.
  5. If parties can’t agree on how to disburse funds, the escrow agent may file an interpleader, which names all the parties that might have an interest in the monies and asks a court to decide how to disburse the money. Otherwise, an escrow agent may be obligated to keep funds indefinitely.
  6. If a transaction is cancelled by the parties, real estate brokers and other third-party vendors may have first claim to escrow funds. That claim would depend on procuring cause. For example, if the transaction failed because the seller backed out, but the buyer’s agent had produced a ready, willing, and able buyer, the buyer’s agent might earn a commission.

Source: Portions adapted from Going into Escrow, V.R. Oltmanns, Xlibris Corp., 2000.

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