Who Chooses the Escrow Company in California?

In California real estate transactions, the escrow company serves a fundamental role in safeguarding the interests of all parties involved. This impartial third party holds all funds and documents related to the sale until every condition of the purchase agreement is met. Acting as a neutral intermediary, the escrow holder ensures a secure and orderly transfer of property ownership, managing the financial and legal aspects from accepted offer to closing.

Designating the Escrow Holder

In California, the selection of an escrow company for a real estate transaction is a matter of negotiation, decided through mutual agreement between the buyer and the seller as part of the purchase contract. This decision is often influenced by various factors, including current market conditions and regional customs.

Real estate agents often play a significant role in proposing an escrow company to their clients. In a seller’s market, the seller’s agent might frequently recommend a preferred escrow provider. Conversely, in a buyer’s market, the buyer’s agent may initiate the suggestion.

Both the buyer and seller must consent to the chosen company, writing it into the final purchase agreement. The initial suggestion can come from either the buyer or seller, or their agents. For example, a buyer might include their preferred escrow company in the California Residential Purchase Agreement. The seller then has the option to accept this choice or propose an alternative. The final selection is formalized within the contractual terms.

California Specific Considerations

California has distinct regulations and common practices that influence the selection of an escrow company, particularly concerning impartiality and consumer protection. A key federal law, the Real Estate Settlement Procedures Act (RESPA), along with its California interpretations, prohibits “anti-steering” or “anti-tying” provisions. This means a seller cannot compel a buyer to use a specific escrow or title company as a condition of sale or loan, ensuring consumers have the freedom to choose their settlement service providers.

While recommendations are permissible, any form of coercion or receiving a “thing of value” for a referral is generally prohibited under RESPA. This aims to prevent conflicts of interest and ensure that consumers’ choices are not unduly influenced by financial incentives between service providers. The California Department of Financial Protection and Innovation (DFPI) actively oversees these regulations to protect consumers in real estate transactions.

California also distinguishes between two types of escrow providers: “licensed” (independent) and “controlled” (non-independent) escrow companies. Independent escrow companies are licensed and regulated by the DFPI, adhering to strict requirements including financial stability, employee background checks, and membership in the Escrow Agents’ Fidelity Corporation, which provides fidelity coverage for client trust accounts. Controlled escrow companies are often departments within title companies, real estate brokerages, or law firms. These entities are regulated by their respective licensing bodies, such as the Department of Real Estate or the Department of Insurance, rather than the DFPI.

Evaluating Escrow Companies

When selecting an escrow company, several factors warrant careful consideration to ensure a smooth and secure real estate transaction. The company’s neutrality and impartiality are paramount, as the escrow holder must act solely on the mutually agreed-upon instructions of both the buyer and seller, without favoring either party. This helps maintain fairness throughout the process of transferring property.

Experience and reputation are also important considerations. It is beneficial to choose a company with a proven track record, positive reviews, and extensive experience handling transactions similar to yours. Effective communication and responsiveness from the escrow team are equally valuable, as they serve as the central point of contact for all documents, funds, and inquiries during the typically 30 to 45-day escrow period.

Understanding the fee structure is also important. Escrow fees in California are not state-fixed and are typically calculated based on the property’s purchase price, often around $2 per $1,000 of the sale price, plus a base fee that can range from approximately $200 to $250. These fees are commonly split evenly between the buyer and the seller, though this division can be negotiated as part of the purchase agreement.

Finally, verifying the company’s licensing and bonding is crucial for consumer protection. Additionally, assessing the company’s use of technology for secure document signing, communication, and transaction updates can streamline the process for all parties.