Escrow is a trust account that holds money or documents for safekeeping and releases upon specified conditions. In real estate, escrow is commonly used to hold funds for a property sale, Third-party escrow agents assist with this process by monitoring the transaction and releasing the necessary funds or documents at the appropriate times. Escrow services are also helpful in other transactions involving money, such as financing for expensive purchases and sales of business assets. In real estate transactions, an escrow account can help buyers, sellers and their agents reduce risk, increase trust and simplify complex financial transactions. Escrow services may cost you an upfront fee as well as a small monthly charge to maintain the account. Before you sign on with any company as your personal escrow agent, read up on what to look for when selecting one. So if your what is escrow Google search landed you here, you’re in the right spot! Let’s take a look.
List of Contents
What is Escrow?
The first questions people have when making a huge purchase and being told they’re in escrow naturally is what is escrow? An escrow account is a trust account that holds money or documents until the sale or purchase is complete. It can be either a “traditional” account or a “specialty” account. A traditional escrow account is where a neutral third-party company holds the documents or money for the sale until the sale is complete. The documents are not under the control of the parties involved in the sales transaction, but are held by the escrow company. The documents or funds in an escrow account can be released to a party only upon the order of the escrow company. You can use escrow accounts for a variety of financial transactions, such as real estate sales, divorce settlements, child support, business acquisitions and loans. A specialty escrow account is used for a single transaction. The documents or money in this type of account are held by the two parties involved in the transaction. The two parties jointly control the account and are responsible for managing and disbursing the funds as the transaction progresses. Specialty escrow accounts are commonly used in the sale of automobiles, where the buyer and seller hold the funds in a single account to ensure that the purchase price is paid.
Types of Escrow Accounts
The question of what is escrow is not the only part of it. Traditional escrow accounts can be either a single escrow account or a double escrow account, and either a binding or non-binding account. As the names suggest, they have different functions and are used in different real estate escrow situations.
– A single escrow account – A single escrow account is a trust account for which only one party holds the money or documents. The seller is likely to use a single escrow account when selling land that does not have an existing mortgage. In this case, a real estate agent holds the money in trust until the sale is complete. The buyer uses a single escrow account when purchasing a home with an existing mortgage. The buyer and seller put the money in the account so that it can be disbursed when the sale is complete.
-A double escrow account – A double escrow account is a trust account for which both parties hold the money or documents in equal amounts. The real estate agent holds the money in a double escrow account until the sale is complete so that the seller and buyer each have an equal amount of money in the account. The buyer uses a double escrow account when purchasing a home with an existing mortgage. The buyer puts the money in the account so that it can be disbursed when the sale is complete.
– Binding escrow account – A binding escrow account is where both parties have an obligation to perform. The seller must deliver the property and the buyer must pay the purchase price. The seller is not allowed to back out of the sale and the buyer is not allowed to change the terms of the purchase price. This type of escrow account is commonly used when a seller is trying to sell land that has no existing mortgage. A binding escrow account is also commonly used when a buyer is purchasing a home with no existing mortgage.
– Non-binding escrow account – A non-binding escrow account is where both parties have the understanding to perform. The seller can back out of the sale if the buyer does not perform his or her obligations, and the buyer can change the terms of the purchase price if the seller does not deliver the property as promised. This type of escrow account is commonly used when a seller is selling a home that has an existing mortgage and the buyer is trying to purchase the property with a loan from a lender.
When Is an Escrow Account Used in Real Estate?
After being asked what is escrow, real estate agents (or attorneys in some areas) often recommend the use of an escrow account when a buyer purchases a home or a seller sells real estate (including land) with an existing mortgage. The money for the sale is placed in the account so that it can be disbursed when the deal is complete. This gives both buyers and sellers greater assurance that the other party will fulfill their commitments. In some jurisdictions, real estate agents are required to use an escrow account when a buyer purchases real estate with a mortgage. This is to ensure that the payment to the seller is made once the mortgage company has released the funds.
Benefits of Using an Escrow Account During Real Estate Transactions
– Documentation – All transactions involving a real estate escrow account are documented and logged in the account. This ensures that both buyers and sellers can see how the money was distributed and provides a record of the transaction. It is not uncommon for the escrow agent to request a written agreement from both parties detailing the terms of the sale before the transaction is logged into the account.
– Protection – If a party does not meet their obligations or if a party tries to back out of the transaction, the money in the escrow account is protected. The party who does not perform as promised does not get the money, and the party who does not get their share of the money can take legal action.
– Money management – The money in the escrow account is managed by the escrow agent. The agent disburses the money to the appropriate party when the deal is complete and provides a record of how the funds were distributed.
– Trust – Both buyers and sellers appreciate the use of an escrow account when completing a real estate transaction. The money is held in a trust account that is not under the control of either party until the deal is complete. The agent in charge of the account provides assurance that the funds are safe and will be distributed as promised when the sale is finished.
Possible Roadblocks When Using an Escrow Account During Real Estate Transactions
– Delay – The money in the account is not available for use until the transaction is complete. If the sale is very time-sensitive, the money might be tied up in the account for days or weeks.
– Loss of interest – Interest that would be earned on the money in the account is lost. This is a consideration when setting up the terms of the escrow account.
– Uncompleted sale – If the sale does not go through, the money in the account is likely to be lost or returned to the parties who deposited it into the account.
Is an Escrow Account Worth it?
The short answer is yes. If a buyer and seller are purchasing real estate where the seller has an existing mortgage, then an escrow account is definitely worth it. In this case, the seller’s lender will require the funds for the sale to be deposited into an escrow account. It is a good idea to set up an escrow account even if the rules don’t require it. This will give buyers and sellers the added protection and security of knowing the sale will be completed according to the terms of the contract. In some cases, an escrow account might be required by a lender. In others, an escrow account can be helpful in managing a complex sale, particularly if it involves a financing component. If you are buying a home, you can also benefit from an escrow account if you want to ensure the seller will deliver the property as promised.