Escrow instructions
Written directions that authorize a neutral third party, such as a closing or escrow agent, to complete a transaction according to the terms the parties agreed on.
Key Takeaways
- Escrow instructions are the written directions that authorize a neutral closing agent to complete a transaction on the terms the parties agreed to.
- The purchase and sale agreement is the contract between buyer and seller, while the escrow instructions are the operating orders for the closing agent.
- Washington builds its statutory definition of escrow around those instructions: a third person holds money or documents until a specified event occurs, then delivers them in compliance with the instructions.
- A Washington real estate broker may handle escrow duties incidental to a sale the broker negotiated only if no compensation is received for the escrow services.
What It Means
Escrow instructions are the written directions that tell a neutral third party how to close a transaction. Buyer and seller have already agreed on price and terms in the contract. The instructions turn that agreement into a list of orders for the closing agent: what to collect, what to pay off, what to prorate, what to record, and what has to be true before any of it happens. The closing agent holds the money and the documents, including the Earnest Money, and releases them only when the stated conditions are met. Neutrality is the whole point of the arrangement. The instructions come from both sides, so one party cannot call and redirect the file alone. Washington bakes the same idea into its statutory definition of Escrow, which describes a third person holding an instrument, money, or evidence of title until a specified event happens or a prescribed condition is performed, then delivering it in compliance with the instructions under which that person acts. If the Purchase And Sale Agreement is the deal, the instructions are the plan for carrying it out.
How It Works in Washington
Washington regulates the people who follow these instructions. Chapter 18.44 RCW, the escrow agent registration act, is administered by the Department of Financial Institutions. RCW 18.44.011(7) defines escrow as a transaction in which a person, for the purpose of effecting and closing the sale, purchase, exchange, transfer, encumbrance, or lease of real or personal property, delivers any written instrument, money, evidence of title, or other thing of value to a third person to be held until the happening of a specified event or the performance of a prescribed condition, when it is then delivered in compliance with instructions under which that person acts. RCW 18.44.011(8) defines the escrow agent as the person who performs those duties for compensation, and that word compensation is what pulls a business into licensing.
The same word answers a question brokers ask. RCW 18.44.021 exempts a real estate company, broker, or agent from escrow licensing while performing acts in the course of or incidental to sales handled or negotiated by that broker, provided that no compensation is received for escrow services. Charge a separate escrow fee and the exemption disappears. Lawyers have their own exemption, conditioned on the escrow work being performed in the practice of law and the funds being held in a trust account that complies with the Washington Supreme Court rules governing lawyers.
Example
Dana Whitcomb is buying Ray Ortiz's house in Everett for $585,000, with $10,000 of earnest money already deposited with the closing agent and a closing date of October 15. The signed escrow instructions tell the closing agent what to do with every piece: hold the $10,000 and credit it to Dana at closing, order a payoff statement on Ray's loan, prorate the property taxes to the closing date, record the deed, and disburse only after recording.
On October 15 the payoff comes back at $312,400 and the total brokerage commission is $29,250. After another $2,100 in seller closing costs and prorations, Ray nets $241,250. The closing agent works the instruction sheet line by line. When Ray calls on October 12 asking to have the earnest money released early because he is confident the loan will fund, the answer is no. The condition named in the instructions has not happened, and the Escrow Officer answers to the instructions rather than to one party.
Common Mistakes and Exam Traps
- Escrow instructions and the purchase and sale agreement are different documents. One binds buyer and seller to each other, and the other directs the closing agent.
- The closing agent is neutral. It cannot release funds because one party asks, because the item is held until the specified event happens or the condition is performed.
- A broker who charges a separate fee for escrow services loses the RCW 18.44.021 exemption and is acting as an unlicensed escrow agent.
- Escrow agents in Washington are licensed by the Department of Financial Institutions, while real estate brokers are licensed by the Department of Licensing.
Where you'll learn this
Frequently Asked Questions
Who prepares the escrow instructions?
The closing agent usually drafts them from the signed purchase and sale agreement, and the buyer and seller sign them. They have to track the contract, because the closing agent has no authority to change what the parties agreed to.
What is the difference between escrow instructions and the escrow account?
The instructions are the directions. The account is the trust account where the money sits while the closing agent carries those directions out.
What happens if the buyer and seller start fighting after escrow opens?
The closing agent holds. It cannot pick a side, so the file waits until the condition in the instructions is satisfied, until both parties sign new written instructions, or until a court resolves the dispute.