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Escrow Instructions

DEFINITION

Agreed upon instructions of a buyer and seller provided to the escrow company. Escrow instructions may be altered with the agreement of both parties.

EXPLANATION

Escrow instructions indicate the obligations required of a buyer and a seller in order to close escrow. Any party who submits escrow instructions is considered a principal. This includes lenders who are providing buyer financing; they will send their own instructions to escrow.

Unless given authorization by the principals, an escrow agent may only accept claims, funds, or documents laid out in the escrow instructions.

Properly drawn escrow instructions are required to be simple and easy to understand for all parties including buyers, sellers, escrow agent, agents, and reasonable parties. Proper execution of these instructions will lead to the purchase or sale of a property.

In California, principals typically use a form called the California Purchase Agreement and Joint Escrow Instructions, which include all components of a transaction on a single form. It is possible, however, to have a purchase agreement and escrow instructions that are separate from one another.

Various Type of Escrow Instructions

There are two types of escrow instructions: unilateral and bilateral. Unilateral escrow instructions refer to separate instructions for each principal, while bilateral escrow instructions refers to the same instructions being signed by both principals. Both instructions bind each principal to the terms of the agreement. Both the escrow instructions and purchase agreement are used to provide escrow with the specifics of the transfer.

If either principal wants to amend an aspect of the escrow instructions, both parties must consent. Any alteration is referred to as an amendment to escrow instructions. The escrow agent must be made aware of any changes immediately.

Should any aspect of either the escrow instructions or the purchase agreement be in conflict with one another, the most recent document generally supersedes the other. Therefore, as escrow instructions come after the purchase agreement, they typically take precedent. However, a purchase agreement may stipulate that in the event of such a conflict, the terms of the purchase agreement should supersede the terms of the escrow instructions.

To make escrow valid, both the buyer and seller must sign escrow instructions. According to the Department of Real Estate: “an escrow is not in legal effect until both parties have signed the escrow. Acceptance by the first party can be removed prior to the second party’s acceptance. The party that signs first can remove their offer including funds and doc relating to the transaction.

Components of Escrow Instructions

When both principals have signed escrow instructions, the escrow is perfected. The following are included in escrow instructions:

Names of the buyer and seller

Subject property’s purchase price

Transaction terms and contingencies

Buyer’s deposit

Vital documentation, including:

Title insurer & preliminary title report

Beneficiary statement

Deed of reconveyance

Structural reports and inspections

Lender information

Closing statements & costs

Form of title transfer

Audit

Once a contract is completed, the escrow agent will carry out the escrow instructions.

Upon signing the final purchase agreement, parties cannot amend instructions unilaterally; rather, both parties must agree to amend the terms of the agreement. One party does not hire the escrow agent. Instead, the agent performs duties for both the buyer and seller.

In the event the escrow instructions are different from the actual agreement between parties (usually the buyer and seller), the escrow agent will use the most recent agreement or instructions.

Legal Cases That Relate to Escrow Instructions

Case Review: U.S. v. Cloud (1989)

The case, U.S. v. Cloud (1989) 872 F.2d 846., involved a real estate seller who was accused of bank fraud.

An experienced real estate entrepreneur (Cloud) put his hotel and casino on the market for $18 million. A potential buyer (Perroton) presented falsified documents to the bank — including a forged sales agreement — in order to obtain the $20 million loan. Cloud had knowledge of this fraudulent behavior, but did not report it. Instead, he manipulated the escrow instructions to inflate hotel and casino’s sales price in order to cash out on the property. After the sale’s execution, the loaning bank lost in excess of $24 million

The U.S. Government sued Cloud for conspiracy to commit bank fraud, and aiding and abetting bank fraud. The Superior Court and appellate court found Cloud guilty.

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