For the most part, managing unclaimed amounts in escrow accounts centers around uncashed checks. Companies managing escrow accounts for any number of transaction types normally have effective standard processes in place to close escrow when a property is sold or paid off, so balances are rarely left within accounts set up for the purpose of escrow. At the time of a property sale or other transaction, checks are cut to transfer any outstanding amount to owners and close the escrow account.
Escrowed property becomes unclaimed when the check fails to reach the owner, or the owner receives the check, but doesn’t cash it for some reason. The following are situations that could lead to escrow-related unclaimed property:
The most common driver of abandoned escrow balances is the sale of the property (or other change of ownership situation), after which remaining escrow funds are mailed to the owner at an old address. If the check isn’t forwarded, the owner does not receive the item and the check may become lost or destroyed. Because these homeowners don’t pay taxes directly, they may not be aware there is or should be a balance in the escrow account when their property is sold, so they are unlikely to track it down and ask for a check.
Because property owners do not directly track taxes and insurance paid out of escrow, they may not understand statements sent to them by the insurance company or the government. Owners with little knowledge of financial transactions might even receive a check and, not knowing what it’s for, destroy it, believing it to be junk mail.
In some cases, the escrow account owner dies and the family or estate managers don’t know about the account balance.
In rare cases, the mortgage or escrow company fails to make tax and insurance payments and doesn’t notify the borrower. The borrower then receives tax and insurance invoices, not remembering there is already money in escrow to cover it. Most borrowers don’t realize it’s their responsibility to monitor and reconcile these accounts. Escrow and mortgage companies build in redundant notification about this for owners, but owners are sometimes overwhelmed by all the activities involved and still don’t realize how the accounts work.
Unrecovered earnest money might remain within an escrow account after a buyer backs out of a deal before closing. If the escrow manager does not have correct processes in place, this amount might sit in the account for an indefinite period.
It’s very likely that many escrow checks are received and simply misplaced or accidentally thrown away and never cashed.
If, for some reason, an escrow account balance remains with the holder organization for the duration of the dormancy period and is not transferred into the form of a check sent to the owner, then that balance would be considered reportable unclaimed property.
How to report escrow balances to comply with unclaimed property laws
Fortunately, because unclaimed escrow balances almost always are converted into the form of a paper check, it is easy to manage them as part of the holder’s normal uncashed check protocols. Dormancy and due diligence considerations are generally the same as for other uncashed non-payroll checks.
Steps followed to track down outstanding uncashed escrow checks within the records of the holder organization are the same as for any other type of uncashed check. It’s advisable to isolate outstanding escrow checks in an unclaimed property tracking account with other unclaimed property types in the same organization. This allows the holder to monitor dormancy periods and transfer the amounts to a due diligence process when applicable.
Types of Escrow Transactions
Many escrow companies offer a full range of integrated escrow services for a wide variety of escrow types. The following list of escrow types, while not exhaustive, can provide clues for holders to identify potential outstanding escrow amounts.
- contractor retainers
- franchise deals
- government funds
- mergers and acquisitions
- private placements
- real estate purchases
- structured settlements