Your customers may have heard the term “escrow” when people are talking about buying and selling property…

But a buyer or seller may be confused on how the real estate settlement works in Colorado, especially if they’re from out of state. For real estate transactions, a settlement agent can be an escrow agent, a real estate attorney, or a representative of a title company that conducts the closing or “settlement” of a home purchase transaction.

A settlement agent is technically the one who handles the accounting of the transaction and makes sure all the money is collected, verified, and disbursed in accordance with the terms of the contract and loan documents.

Here are four Q&A’s to get you up to speed on the difference.

What is an escrow closing state?
An escrow closing state is a legal arrangement established by state statute where a third party, the escrow company, directs the closing/settlement of a real estate transaction. Whether it be between a buyer and seller or a lender and borrower, the escrow company is the neutral third party coordinating the closing of the transaction. Once all conditions are met, the documents are recorded, then the funds are released to the parties entitled to payment. This may not happen until after the closing date and a final settlement statement is provided to the parties. In an escrow closing state, the escrow company may be different from the title company; this is common in Southern California.

What does it mean to be in an attorney closing state?
In an attorney closing state, an attorney, by state statute, must take the place of the escrow/closing company. It is an attorney who facilitates the closing process and either acts as the neutral third party or represents the buyer or seller. In most states on the East Coast and the Southeast, an attorney must complete the closing process. The closing cost is substantially higher than in a table closing state, but the result is the same.

What does it mean to be a table closing state?
States that do not have a state statute establishing an escrow closing process usually are called table closing states. As the name implies, the Seller and Buyer may sit at the table together, and the loan is closed while the borrowers sit at the table with the loan officer or closer agent.

Colorado is a table closing state, not an escrow closing state, and the closing agent closes the real estate transaction and the loans. In a table closing state, usually the title company and closing company are one and the same and the closing agent prepares the closing documents, closes the loan, and handles the money. Unlike an escrow closing state, the final closing usually occurs on the day of closing and the money is disbursed that day at the table or by the end of the day of closing.

What does escrow mean in Colorado, then?
Escrow still exists in Colorado, but it works differently from closing the transaction.

There are two types of escrow accounts in Colorado:

One is with a mortgage lender who will set up an escrow account as a way to manage property taxes and insurance premiums for a property with a mortgage loan. Lenders will collect amounts for these bills as part of a monthly mortgage payment and then pay them for the borrower once they come due.

The second is a long-term escrow established to hold original documents, accept, and disburse payments on Seller carrybacks or hold funds for completion of post-closing items. If the escrow is created for a Seller carryback, the escrow agent acts much like a mortgage lender. It collects payments and disburses them as instructed, provides payoff statements, collects the payoff, and releases the Deed of Trust. This is a huge benefit for the buyer since the escrow company will send the U.S. Treasury a 1098 for the interest paid each year so it can be deducted on the borrower’s tax return and will make sure the Deed of Trust gets released when the loan is paid off.

Our sister company, Rocky Mountain Escrow, Inc., is one of the few companies in Colorado providing these services for Western Colorado. They have been in business for 37 years. Your clients may be confused by the difference in the closing process in Colorado versus the state they are from.

Thankfully, you can always turn to a trusted company, like Colorado Title & Closing Services, to help answer their questions and to keep the homebuying process smooth.