A Quick Guide To Real Estate Escrow
What does Escrow mean?

“Escrow is a legal concept in which a financial instrument or an asset is held by a third party on behalf of two other parties that are in the process of completing a transaction. The funds or assets are held by the escrow agent until it receives the appropriate instructions or until predetermined contractual obligations have been fulfilled. Money, securities, funds, and other assets can all be held in escrow.”

Escrow and Real Estate

“Escrow accounts are used in real estate transactions so that the buyer can perform due diligence on a potential acquisition while assuring the seller of his capacity to close on the purchase. For example, an escrow account can be used for the sale of a house. If there are conditions to the sale, such as the passing of an inspection, the buyer and seller may agree to use escrow.

In this case, the buyer of the property deposits the payment amount for the house in an escrow account held by a third party. This assures the seller, in the process of allowing the house to be inspected, that the buyer is capable of making payment. Once all the conditions to the sale are satisfied, the escrow transfers the payment to the seller, and the title is transferred to the buyer.” - Read more: Escrow | Investopedia

In short: The purpose is twofold, it guarantees the seller that the buyer has the funds needed for the purchase and that the money will be over once the title is transferred and it guarantees  the buyer that they won’t be scammed by a fraudulent seller who doesn’t actually hold any claim to a title for the property they are selling. Ultimately, it ensures trust in transactions that can take a while to finalize.

Escrow Agents
To set up a Real Estate Escrow, you must contact an Escrow Agent - sometimes known as a Title Agent. An Escrow Agent is a neutral party who is entrusted with holding payments until certain conditions have been met - Usually the transfer of a title. Typically, your broker or lender will facilitate the process of finding an escrow agent for you. As a principal member of the transaction, you do have the right to choose your own escrow agent though the seller typically has the final say on which company is used for escrow.

Earnest Money
Earnest money and escrow are both terms that always end up near each other, but they’re not really the same thing. Earnest money is an amount paid to the escrow account early on during the home purchase process. This is essentially to place a hold on the property for the buyer. It shows that the buyer has serious intent to purchase. This helps the sellers from having to deal with buyers putting out multiple offers on different properties. At closing, the earnest money is usually taken out of escrow and applied to the down payment.

Final Points
The Escrow amount generally ranges from 1% to 3% of the total sale price and is deposited into escrow after an offer is accepted by the seller. Whether you are the buyer or the seller is important to read through all escrow-related documents and make sure that you fully understand them. If you need clarification or have a question, feel free to ask your agent or lender to help you understand. Be available to respond to any questions and steps as the process moves forward and make sure to hold on to all your escrow related documents for tax and legal purposes.

Most of the work regarding your escrow will be done behind the scenes and the only real burden on the principal parties is to make sure they’ve fully read and understand the terms of the escrow agreement and have supplied the funds.

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