Escrow

Key Takeaways

• Escrow is a holding arrangement in which a neutral third party keeps the money and the documents until every condition in the contract has been met.
• The escrow holder serves both parties at once and takes direction from the signed written instructions, not from whichever side calls first.
• In Washington, escrow is a regulated business: performing escrow duties for compensation requires a certificate of registration under the Escrow Agent Registration Act (RCW 18.44).
• Client money in escrow must be kept separate from the escrow agent's own funds and deposited no later than the first banking day after it is received (RCW 18.44.400).

What It Means

Escrow is the safety mechanism that sits between a signed contract and a completed sale. Rather than handing money and a deed directly to each other, the buyer and the seller deliver them to a neutral third party, who holds everything until both sides have done what the contract requires. Only then does the holder release the money to the seller and the deed to the buyer.

The company doing the holding is the escrow agent, and the individual who runs the file day to day is the Escrow Officer. An escrow agent is not on anyone's side. Their authority comes from the written escrow instructions the parties sign, which normally track the terms of the Purchase And Sale Agreement. If an instruction is not in writing, an escrow agent cannot act on it.

Escrow also solves a timing problem. A buyer will not release funds before title is clear, and a seller will not sign a deed before the money exists. A neutral holder lets both of those things happen at the same moment, which is why the arrangement survives even in transactions where the two sides never meet.

How It Works in Washington

In Washington, escrow is a licensed activity rather than a courtesy. RCW 18.44.011 defines escrow as delivering money, documents, evidence of title, or another thing of value to a third person to be held until a specified event happens or a prescribed condition is performed, and it defines an escrow agent as anyone who performs those duties for compensation. RCW 18.44.021 makes it unlawful to engage in business as an escrow agent without a valid certificate issued by the director, and the implementing rules sit in WAC 208-680.

The money rules are strict. RCW 18.44.400 requires an escrow agent to keep client funds separate and apart from the agent's own funds in escrow trust accounts at recognized Washington depositaries, to deposit those funds no later than the first banking day following receipt, and to disburse only against deposits already received for that account in an equal or greater amount. A real estate firm that holds a deposit before escrow opens works under a parallel rule for its own Trust Account (RCW 18.85.285).

Most Washington residential sales close through a registered escrow agent or a title company rather than through an attorney, which is why brokers hand the file to escrow once the parties reach mutual acceptance. Our article on what to expect at a first closing walks through that sequence.

Example

Dana agrees to buy a Spokane condominium from Marcus for $415,000 and puts up $8,000 in earnest money. The parties open escrow on March 3. The escrow agent receives Dana's deposit on March 4 and places it in the escrow trust account on March 5, the first banking day after receipt.

Over the next four weeks the escrow officer gathers the payoff figure for Marcus's loan, the title commitment, Dana's $340,000 loan documents, and the rest of Dana's money: $67,000 of down payment still owed after the $8,000 deposit is credited, plus $9,200 in closing costs. Nothing is released until every piece is in the file. On April 2, the day of Closing, the escrow agent records the deed, pays off Marcus's lender, and wires Marcus his net proceeds. Had Dana's financing failed and the agreement allowed her to terminate, the same escrow agent would have returned the $8,000 exactly as the instructions directed rather than deciding who deserved it.

Common Mistakes and Exam Traps

• Escrow and title insurance are different products. Escrow is the neutral holding and closing service; title insurance is a policy that pays if a defect in the title surfaces later.
• An escrow agent represents neither side, so any answer describing the escrow agent as the buyer's agent or the seller's agent is wrong.
• An escrow agent does not decide who wins a fight over the deposit. Without written authority from the parties or a court order, the money stays where it is.
• In Washington, escrow agents and real estate firms follow different statutes. Escrow agents are governed by RCW 18.44, while a firm holding client money is governed by RCW 18.85.285.