Title And Escrow In Real Estate 101: What Every Broker Should Understand
In every real estate transaction, ensuring a secure and legally sound transfer of ownership is a top priority for your brokerage.
Two essential components that make this possible are title and escrow. For brokers, understanding how title and escrow work can help prevent delays, build trust with clients, and ensure smooth transactions.
Last year, there were a total of four million transactions in the U.S. A title and escrow company would’ve been involved in each of these transactions.
In this guide, we’ll break down everything you need to know about title and escrow, including their key differences, common issues, and best practices for working with these companies.
What Are Title and Escrow in Real Estate?
In real estate transactions, title and escrow are two fundamental components that ensure a smooth transfer of property ownership while protecting all the parties involved.
The title search and escrow process are crucial in verifying ownership, handling funds, and ensuring the transaction is legally sound.
Let’s break down both concepts in more detail:
1. Title in real estate
Title refers to the legal ownership of a property and the rights that come with it. When someone holds the title to a property, they have the legal right to use, sell, lease, or transfer ownership of that property.
However, before a buyer can obtain a “clear title,” a thorough title search and title insurance process must be completed.
Title search
A title search is a detailed examination of public records to verify the property’s ownership history and ensure that there are no liens, claims, or encumbrances that could affect the sale.
The search involves checking:
- Deeds: To confirm the chain of ownership.
- Mortgages and liens: These are outstanding legal claims that could impact ownership.
- Judgments: Any legal claims that could impact ownership.
- Easements and restrictions: The rights of others to use the property.
A clean title ensures that the seller has the right to transfer ownership of the property to the buyer without legal disputes.
Title insurance
Once the title search is complete, the buyer usually purchases title insurance to protect against any potential future claims.
There are typically two types of title insurance:
- Lender’s title insurance: This is mandatory if financing is involved. It protects the lender’s interest in the property.
- Owner’s title insurance: Protects the buyer from unforeseen title defects, such as fraud, undisclosed heirs, or recording errors. This type of insurance is optional but recommended.
2. Escrow in real estate
Escrow is a neutral third-party service that holds and manages funds, documents, and other key elements of the real estate transaction until all conditions are met.
The escrow process ensures that no party is at financial risk before closing the deal.
How escrow works
Here’s how escrow works in a real estate transaction:
- Opening escrow: Once the buyer and seller sign a purchase agreement, an escrow is opened with an escrow agent or company.
- Deposits and payments: The buyer deposits the earnest money—a good-faith deposit that’s usually 3% of the purchase price—into an escrow account. An escrow account serves as a secure holding place until all transaction conditions are met.
- Handling documents: The escrow company collects all the necessary documents, including loan paperwork, inspection reports, title work, and disclosures.
- Satisfying conditions: Escrow ensures all contingencies—such as the home inspection, appraisal, and financing approval—are met before proceeding to closing.
- Final closing and distribution: Once all the conditions are satisfied, escrow distributes the loan funds to the seller, pays off existing liens, and records the deed with the county to finalize ownership and transfer.
Who manages escrow?
Three main parties could be involved in managing escrow:
- Escrow companies: These companies specialize in managing real estate transactions.
- Title companies: They often handle both title and escrow services.
- Attorneys: In some states, real estate attorneys manage escrow instead of an escrow company.
The Key Differences Between a Title Company and the Escrow Holder
Title companies and escrow services play crucial but distinct roles in real estate transactions. While they often work together, they serve different functions in verifying property ownership and facilitating a secure transaction.
Below is a table outlining the differences between title and escrow companies:
| Feature | Title Companies | Escrow Services |
| Primary role | To verify and ensure property ownership. | To manage financial transactions and documents. |
| Main function | Conduct title searches, provide title insurance, and resolve ownership issues. | Act as a third party to ensure all contractual terms are met before closing. |
| Protects against | Liens, ownership disputes, and fraudulent claims. | Financial risks, contract breaches, and premature fund releases. |
| Neutrality | Works to protect the buyer, lender, and seller but primarily ensures title validity. | A 100% neutral third party managing the transaction. |
| Legal ownership | Ensures clear property ownership before transfer. | Does not verify ownership but ensures all transaction conditions are met. |
| Closing role | Issues the title insurance policy and resolves ownership issues. | Oversees the closing process and fund transfers. |
Common Title Issues and Escrow Challenges Brokers Should Know About
Several title and escrow issues can arise that may delay or even derail a deal. Here’s what brokers need to know:
Common title issues
Liens and unpaid debts
One of the most common title issues is unpaid debts or liens against the property. A seller may have outstanding property taxes, contractor liens, or judgements that create a legal claim against the home.
Ownership disputes
Disputes over property ownership can complicate or stop a transaction. These disputes may arise if multiple individuals or entities claim rights to the property, such as an ex-spouse, missing heir, or business partner who wasn’t properly removed from the title.
Errors in public records
Clerical mistakes in public records, such as incorrect property descriptions, mispelled names, or missing signatures, can cause complications in a real estate transaction.
These errors can lead to title defects that must be corrected before closing.
Common escrow challenges
Financing delays
Financing is crucial to any real estate transaction, and mortgage approval delays can slow the escrow process.
Lenders may require additional documentation, appraisals, or credit checks, which can push back the closing date.
Contingency issues
As you know, real estate transactions often include contingencies, such as home inspections, appraisals, and financing approvals. These must be met before closing can proceed.
If a home inspection reveals significant issues, the buyer may request repairs or a price reduction, potentially delaying escrow.
Similarly, if the home appraisal comes in lower than expected, the lender may not approve the full loan amount.
Title or escrow company errors
Mistakes made by the title or escrow company can also lead to delays. Missing paperwork, incorrect loan amounts, or errors in closing documents may require last-minute corrections, pushing back the closing date.
Best Practices for Working with Title and Escrow Companies Efficiently
For real estate brokers, a smooth transaction depends on strong collaboration with title and escrow companies.
The following best practices can help you work efficiently with these professionals throughout the closing process:
Choose reputable companies: Work with companies known for accuracy, responsiveness, and timely closings.
Start the title search early: Encourage sellers to initiate the title search as soon as possible to address any defects before closing delays occur.
Maintain clear and open communication: Provide complete transaction details to the title and escrow officer. Confirm deadlines and follow up regularly to prevent misunderstandings.
Educate clients about the title and escrow process: Explain the roles of title and escrow companies, title insurance, and timelines.
Verify that earnest money is deposited correctly: As part of the home buying process, ensure buyers submit the deposit promptly using secure payment methods.
Ensure compliance with escrow instructions: Confirm that all contract contingencies are met, and keep track of deadlines and required paperwork to avoid closing delays.
The Ultimate Tool for Smooth Transactions
Understanding the roles of title and escrow is essential for brokers to facilitate smooth, efficient transactions.
However, managing transactions involves many moving parts, from title searches to escrow instructions.
Paperless Pipeline is purpose-built real estate transaction management software that helps brokers stay organized, track deadlines, and streamline communication, all in one central hub.
Try Paperless Pipeline for free for 14 days to see how our software can simplify your transaction management process and keep your deals on track.