It has been said that Escrow is a real estate investor’s best friend. There are many reasons for this, but the most important can be summed up with the word protection. Escrow is really nothing more than an impartial third party bank account. The purpose is to provide protection to both parties in a real estate transaction. The escrow holder, in most instances a title company, controls and disperses monies and documents associated with a transaction. The escrow holder clears payments and performs the duties necessary to settle the accounts between the two interested parties. They also handle the issuing of title insurance, the recording of the county documents and closing of the property between the buyer and lender.
Once escrow has been opened, a preliminary report is always issued. This report shows the ownership details of the property, as well as title liens and defects. If there are restrictions or conditions on a prior deed, those will also be listed. The purpose of the report is ultimately to allow the buyer to seek adjustments and or removals to the contract prior to purchase.
Escrow is particularly important in rent to buy real estate transactions and when rent prorations are necessary, such as the selling of a rental property. Because rental income and security deposits are normally prorated as of the date of the close of escrow, the seller is responsible for making payments on the property and can collect rents until the title transfer takes place. After closing escrow, the payments and income are turned over to the buyer. Escrow in this case, provides protection to the buyer by keeping an account of all monies paid to the seller in the form of rent and security deposits so that when escrow closes the income can be credited properly.