How Escrow Works in California Real Estate Transactions

How Escrow Works in California Real Estate Transactions

Buying or selling a home in California? Escrow is a crucial part of the process, ensuring a safe and smooth transfer of ownership. But what exactly is escrow, and why does it matter?

In simple terms, escrow is a neutral third-party service that holds funds and documents until all the conditions of a real estate sale are met. It protects both buyers and sellers from fraud, miscommunication, or last-minute surprises.

Here’s everything you need to know about how escrow works in California real estate transactions—plus what to do if something goes wrong.

Why Escrow Matters for Buyers and Sellers

Escrow provides security and fairness to both parties. Here’s how:

1. A Neutral Middleman

An escrow company acts as an independent third party, holding the buyer’s money and key documents (like the deed) until all contractual obligations are met. Neither the buyer nor the seller can access the funds prematurely, which prevents any unfair advantage.

2. Safe Handling of Funds

Escrow ensures that money is handled properly. The buyer deposits earnest money (a good-faith deposit) into escrow, and it stays there until the sale is finalized. No one can run off with the money or misuse it.

3. Organization of Critical Documents

All paperwork related to the sale—purchase agreements, title reports, disclosures—goes through escrow. The escrow company ensures everything is in order before closing, reducing legal risks and confusion.

What’s Included in an Escrow Account?

An escrow account isn’t just a holding place for money—it manages several important financial aspects of the sale. Here’s what it typically includes:

1. Earnest Money Deposit

This is the buyer’s deposit to show they’re serious about purchasing the home. It’s usually 1-3% of the purchase priceand is applied to the total cost at closing.

2. Closing Costs

Buyers (and sometimes sellers) must cover various closing costs, which may include:

  • Title insurance (protects against property ownership disputes)
  • Escrow service fees (paid to the escrow company for handling the transaction)
  • Recording fees (to officially register the deed)
  • Transfer taxes (fees for transferring ownership)
  • Homeowner association (HOA) fees (if applicable)

3. Prepaid Expenses

Certain payments, like property taxes and homeowners insurance, may need to be prepaid and included in escrow to ensure a smooth transition for the buyer.

How Are Escrow Funds Released?

Funds are only released when all sale conditions are met. The process usually unfolds like this:

  1. All contingencies are cleared – Inspections, appraisals, and loan approvals must be completed.
  2. Final walk-through – The buyer inspects the property one last time.
  3. Signing the paperwork – Both parties sign the necessary documents, including the deed transfer.
  4. Escrow disburses funds – The seller gets their payment, and the escrow company handles any final costs.
  5. Title and deed recording – The transaction becomes official when the deed is recorded with the county.

Once these steps are completed, the buyer gets the keys, and the seller gets paid—it’s official!

What Happens if a Dispute Arises Before Closing?

Escrow should make the process seamless, but disagreements can still happen. Here are the most common escrow disputes and how they’re handled:

1. Repair Disputes

If the buyer’s home inspection reveals major issues, they may request repairs or a price reduction. If the seller refuses, the buyer may walk away. The escrow company holds onto the earnest money until both sides agree on what happens next.

2. Title Issues

If there are liens or legal disputes on the property, the seller must clear them before the sale. If they can’t, the buyer might back out, and escrow will hold the funds until an agreement is reached.

3. Escrow Company’s Role in Disputes

If a conflict can’t be resolved, escrow won’t release funds until both parties agree. If necessary, legal action or mediation may be required to settle the issue.

Need Help with a Real Estate Transaction in California?

Navigating escrow and real estate laws in California can be complicated—but you don’t have to do it alone. Whether you’re buying or selling, having a skilled real estate attorney can protect your interests and ensure a smooth closing process.

At Alex Knaub & Associates, we help clients handle escrow disputes, contract issues, title problems, and more. If you’re facing legal challenges during a real estate transaction, call us today at 951-923-2539 for a consultation.

For more information on escrow in California, check out these resources:

Make your real estate transaction stress-free—get expert legal help today!