Escrow Agreements and Real Estate Transactions
Escrow comes into play whether you are buying or selling real estate. In fact it is among the important components of your transaction. It is also among the most confusing. Most people have little more than a vague impression of what escrow means, why it is important, and what role it plays in a real estate transaction. To help take some of the mystery out of escrow for you, here is a brief overview.
What is escrow and why is it important?
Very simply defined, escrow is
a way to transfer money and/or
property from one person to
another through an independent
third party. In this
process, funds or documents are
held “in trust” by that neutral
party until needed to fulfill an
obligation related to your
transaction. This unbiased
process is extremely important
in real estate because your
transaction takes time to
complete and involves large sums
of money and sensitive
documents. You want both to be
handled with the utmost
confidentiality and impartiality
while your transaction is in
progress. And, no matter
which party you are in the
transaction, you also want the
assurance that neither funds,
documents, nor property will
change hands until all of the
conditions mutually agreed to in
the purchase contract are
satisfied. Escrow offers
that assurance.
When will you hear the term escrow?
The first mention of escrow is typically at the time the earnest money deposit is made. This deposit accompanies a buyer’s purchase offer and is intended to demonstrate serious intent to buy the property. Once the buyer and seller mutually agree to the terms and conditions of the purchase contract, the earnest money check is deposited into a trust or escrow account. This account can be held by the seller’s real estate brokerage or by another independent party such as a real estate attorney, title insurance company or another closing agent. At closing, the deposit is credited to the buyer. If the deal falls through, the money is disbursed in accordance with the terms of the purchase contract. Either way, the earnest money remains “in escrow,” protected by a third party, until it is time for disbursement.
You will also hear escrow in
conjunction with the third party
handling the closing
transaction. Called the
escrow holder or escrow agent,
this party essentially acts as a
common depository where both
buyers and sellers entrust funds
and legal documents until it is
time for disbursement or
transfer. Entities
providing escrow services
include title companies,
mortgage bankers, attorneys,
real estate brokerages,
independent escrow companies,
and banks and savings and loan
institutions.
The escrow
holder receives written
instructions from both the buyer
and seller, and it is the escrow
holder’s job to see that those
instructions are carried out to
the letter. All
instructions, which are based on
the terms of purchase contract
and the lender requirements,
must be met before the
transaction is complete.
Thus, the interests of both the
buyer and seller are protected.
In addition, the escrow holder
discusses matters only with the
parties directly involved in the
transaction. This ensures
confidentiality in addition to
fairness.
How long does the escrow process last?
The length of escrow is determined by the terms of the purchase contract. It can range from a few days to several months, but typically is anywhere from 30-60 days. During the time that funds and documents are in escrow, activities required to successfully complete the transaction are being completed. For instance, the buyer secures financing to make the purchase, a title search is completed, a home inspection is conducted, as well as any other tasks that either the buyer or seller must complete before the transaction can progress. When all the escrow instructions have been carried out, all contract terms and conditions met, and all funds collected, closing of the escrow can take place. The closing signifies the release of the home purchase funds to the seller and the legal transfer of the property title from seller to buyer. Documents such as the deed are recorded and any final documentation is forwarded to the appropriate parties. Escrow is successfully closed and your real estate deal is officially done.
Back to more home buying and real estate information
To teach and learn money skills, personal finance, money management, business,
careers, and life skills please go to the Money
Instructor home page.
