What Is Escrow?

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A Clear Guide to Escrow’s Role in a California Real Estate Transaction

By Ainsley Hughes, Realtor®

Escrow plays one of the most important roles in a California real estate transaction, yet it is often misunderstood. Many people use the word “escrow” to describe everything that happens between accepting an offer and closing, but escrow itself has a very specific function. It is a neutral third party with clearly defined responsibilities that protect both sides of the sale.

Here is a clear explanation of what escrow does, how it operates, and why its neutrality matters.

Escrow’s Core Purpose

In California, escrow is a licensed, impartial third party hired to:

  • Hold funds securely

  • Carry out the written instructions in the purchase agreement

  • Oversee the proper transfer of title

  • Make sure money and documents move in the correct order

Escrow does not take sides, offer advice, or interpret the contract. Their role is to follow written instructions precisely as they are received.

Escrow’s Primary Responsibilities

1. Open the Escrow File and Follow Written Instructions

Once a contract is signed, escrow opens a file and begins working from the written terms of the agreement. Escrow only acts on instructions that are:

  • Written

  • Signed by the appropriate party

  • Clear and consistent with the purchase agreement

Verbal instructions are not accepted.

2. Receive and Hold Funds in Trust

Escrow receives deposits and any additional buyer funds and places them in a regulated trust account. These funds cannot be released until all conditions in the written instructions have been satisfied.

Escrow’s duty is to safeguard the money, not to determine whether conditions have been met.

3. Order the Preliminary Title Report

Escrow requests the preliminary title report from the title company. This report shows:

  • Ownership

  • Encumbrances

  • Deeds of trust

  • Easements

  • Liens or judgments affecting title

Escrow uses this report to prepare for closing and to identify items that must be cleared before title can transfer.

4. Prepare Escrow Instructions

Escrow provides written instructions that summarize the terms of the transaction. These instructions outline what must occur before escrow can close, including:

  • Who pays what fees

  • Required payoffs

  • Credits and charges

  • Recorded documents

  • Closing conditions

Parties review and sign these instructions to authorize escrow to act.

5. Track the Transaction Timeline (Without Enforcing It)

Escrow tracks important dates in the file so the record remains accurate, but escrow does not:

  • Enforce deadlines

  • Remind either side to remove contingencies

  • Determine whether a contingency has been met or waived

  • Provide legal interpretation

Contingency management belongs to the agents and the parties. Escrow’s role is simply to update the file once written changes or removals are received.

6. Process Payoffs, Fees, and Required Disbursements

Before closing, escrow:

  • Obtains payoff demands from existing lenders

  • Prepares prorations and fee calculations

  • Confirms property tax status

  • Ensures all liens or required payments will be handled at closing

Escrow carefully prepares the settlement statement so each charge and credit is accurate.

7. Coordinate Document Signing

Escrow arranges for buyers and sellers to sign their required documents. For financed transactions, escrow also works with the lender to prepare signing packages.

Escrow’s role is to coordinate and verify execution. They do not explain loan terms or give advice.

8. Handle Closing, Recording, and Fund Distribution

When all conditions are met, escrow:

  • Confirms that funds have been received

  • Releases documents to the county for recording

  • Waits for confirmation of recording

  • Disburses proceeds according to the signed instructions

Once recording is confirmed, legal ownership transfers.

What Escrow Does Not Do

A clear understanding of escrow also includes what escrow does not handle. Escrow does not:

  • Negotiate terms

  • Interpret contract language

  • Manage contingency removals

  • Schedule inspections or appraisals

  • Advise on disclosures

  • Give legal or real estate advice

  • Pressure either side to act

  • Represent the buyer or seller

Escrow’s neutrality is what protects both parties.

Why Escrow’s Role Matters

California real estate transactions involve multiple steps, layered paperwork, and strict legal requirements. Escrow ensures:

  • Funds are held securely

  • Title transfers correctly

  • All written instructions are followed

  • The transaction closes only when every condition has been satisfied

Escrow provides structure and safeguards, allowing buyers and sellers to move through the process with confidence.

If you ever want a deeper look at how escrow works behind the scenes or how escrow supports a smooth closing, I am always happy to share more.