When you choose an escrow company (or “closing agent,” the person who does the work necessary to close the transaction), you look for several qualities: competence, service, location, etc. One factor you probably don’t consider is whether the escrow company is willing to be responsible for its own significant errors.
When escrow is opened, the closing agent sends both buyers and sellers a copy of its standard escrow instructions. These instructions supplement the purchase and sale agreement and instruct the agent as to how the transaction should be closed. There appear to be only a handful of templates used by the many different escrow companies, as it is very common to see the same set of instructions regardless of the escrow company. In the vast majority of those instructions (perhaps 85-90%), there is a little-noticed sentence, typically in the “Disputes” paragraph: “The parties jointly and severally agree to pay the closing agent’s costs, expenses and reasonable attorney’s fees incurred in any lawsuit arising out of or in connection with the transaction or these instructions, whether such lawsuit is instituted by the closing agent, the parties, or any other person.” The exact language of this sentence may vary somewhat, but the gist is the same: if anyone sues the closing agent for any reason, buyer and seller will be responsible for the closing agent’s attorney’s fees and costs.
The effect of this language is to insulate the escrow company from any liability that arises out of the closing agent’s negligence. Say, for example, the closing agent neglects to pay off an existing lien on the home. When buyer takes title, the buyer will now have to deal with this lien that was incurred by the seller. A reasonably prudent closing agent would have insured that all liens were satisfied at closing, and the agent’s failure to do so probably constitutes negligence. Under normal circumstances, the agent (and escrow company) would be liable to the buyer for the harm caused by this negligence. However, if the instructions contained the above language, the agent almost certainly will avoid liability. Why? Because if buyer were to file suit against escrow in this situation, buyer would be responsible for paying escrow’s attorney’s fees and costs in the lawsuit. As anyone who has used an attorney to defend them in litigation knows, attorney’s fees can be very, very expensive. Thus, the above language is an incredibly strong disincentive to seeking compensation from escrow, even in those instances where escrow’s negligence causes harm. I believe this is simply not fair to the buyer and seller.
In my experience, most (but not all) escrow companies are willing to modify the above language so that it does not effectively bar a suit against escrow based on escrow’s negligence. It’s certainly an issue you may want to address when deciding which escrow to use in your transaction. Needless to say, an attorney can quickly negotiate a change in these instructions on your behalf. [This post does not constitute legal advice. Consult a lawyer regarding your particular situation.]
Hey Craig, This is a VERY useful post. Thanks for this information.
As a relative newbie to real estate who (luckily) has been closing about 2 or 3 deals a month this year, I’ve always wondered why anyone would use X escrow agent over Y… and why some agents are so adamant about using X instead of Y. I always thought the only difference really was the location (I hate driving to Kent, or Everett at 4 PM on a Friday afternoon for a signing) and the slight discount they give some agents. (And yes, competence, as you mentioned is a huge factor… I unfortunately haven’t been in this industry long enough to know who is competent or not, so I’ve been learning the hard way).
From your experience, would you go with a huge company (Talon Group, LandAmerica, Chicago Title & Escrow) or a smaller one (ones I’ve used recently for example being Dependable Escrow, Salmon Bay Escrow). Actually, I have one in the works that’ll be closed by a real estate lawyer. Being one yourself, does your office offer closing services?
Actually, I think I just confused myself a little bit. Is an “Escrow Company” and a “Closing Agent” the same thing? If a real estate lawyer is closing the deal for us, would that person be considered the “Escrow Company”?
The escrow company employs the closing agent, so they are essentially synonymous. A real estate attorney can also act as the closing agent (or “escrow agent” — again, synonymous) but would not be considered an escrow company because the attorney probably provides a variety of other legal services as well. At this time, I do not provide escrow services except in extremely limited circumstances.
Hi Craig,
Is this true for an escrow department of a title insurance company or just independent escrow companies?
Thanks for the informative post.
In my experience, it’s more common with the escrow departments of title insurance companies (virtually always) than with independent escrow companies (most of the time).
Craig,
Some attorney’s ARE escrow companies, like John Wagner Escrow in Seattle on Roosevelt. I am using them now for my Mt. Baker sale, because the owner turned 100 years old! while I had it listed, and we are dealing with a “convenience only”, not “durable” Power of Attorney. Also because the seller has an attorney…and as you pointed out in the FSBO post, one attorney ends up equalling two attorneys š
Just like lenders and inspectors…one size does not fit all and I have a few different escrow companies I juggle for different situations. Once in a while a buyer or seller has a specific company in mind for Title and/or Escrow, but usually they are in the industry. Buyers and Sellers who work for Title companies or Lending institutions, for example, pick their own.
That raises a point I have had trouble with. When the seller or buyer does choose, it is because they are getting a special discount. But escrow doesn’t apply the discount and then split the fee 50/50 as called for in the contract. They only apply the discount to the party in the transaction that they know. I try to tell them that this is contractually incorrect, but they don’t “get it”. They don’t want to give the discount to the party they don’t know. It’s a pain in the butt!
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