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What is Escrow in Real Estate

By Bill Gassett | November 30, 2021

Buying and selling a home is not always as easy as it might seem, especially when you've never done it before. To make optimum real estate decisions, you usually have to dig deep into its specificity and terminology.

You might be discouraged by real estate lingo you've never heard before like, earnest money, or escrow. They describe complex principles within the property market and are essential for any good transaction.

Since escrow is a huge step during the real estate purchase process, you need to know how escrow funds work. This particular real estate topic is essential for both buyers and sellers to understand.

We'll take a look at the most essential things to understand about escrow whether you're a buyer or seller.

What is Escrow

Escrow designates a legal agreement that engages a third party in the real estate transaction. This third party gets hired to handle the property transfer between seller and buyer.

The third party is usually called the escrow officer and comes into action when buyers and sellers reach an agreement or when an offer is launched.

The third-party is involved in protecting both the seller and the buyer during the purchase procedures. The seller can trust that the buyer has enough funds for the property purchase and will receive the exact agreed amount when the transaction is concluded.

The buyer is secured against frauds or scams, against fake titles, etc. Choosing to have escrow is a great way to purchase and sell real estate when you don’t have much information on the other party.

What is escrow in real estate.
What to know about escrow in real estate sales.

What Are Escrow Funds

The escrow funds represent the amount of money brought in as a guarantee for the property transaction. The escrow officer holds the funds until the end of all procedures.

The party holding the money could be a real estate agent, an attorney, or a title company.

What is an Escrow Officer

The escrow is being managed by a third party, a neutral one. This financial officer holds all payments until both seller and buyer fulfill the legal conditions and contract requirements.

The escrow officers play an essential role during the property title transaction, so they are also known as title agents. In some states, the real estate agent is hiring such a title agent for your transactions.

So, you don’t have to search for a reliable and specialized one. Your only job is to make the money transfer to the proper account.

Choosing Your Escrow Officer

In some locations, you have no choice in who will hold the escrow funds. For example, in Massachusetts, the seller's real estate company typically holds the earnest funds.

In other states, the buyer may have some input if a title company or attorney holds the funds.

Financial Benefits of Having Escrow

The real estate escrow is a two-way financial safety tool. If you start by decoding its benefits, you will get a clearer picture of the procedures. Simply put, the role of escrow is to secure the seller, the buyer, and the lender.

So it’s about protecting the interests and money of all significant players in a real estate transaction.

The activity of the escrow officer is to verify and monitor the transfers between the parties. The primary transaction to be monitored is the property title transfer from the seller to the buyer.

As a buyer, you can make the payment without headaches, even if you have no idea who the seller is.

As a seller, you can safely deliver the property title without having to fear that you won’t receive the exact amount of money required under the purchase contract.

If the buyer does not fulfill their obligations under the contract, the funds will be turned over to the seller. Some properties will come back on the market due to a buyer issue such as losing financing.

It is also possible a buyer could have a specific contingency, but they miss the required notification date making the contingency null and void.

The Funding Procedure in Real Estate Transactions

The amount of money held by an escrow officer usually amounts to 1 to 5% of the total property sale price. This money enters the escrow account after the final offer is accepted by the seller.

The money corresponding to the property transaction is released only after the transfer of the property title. The funds remain in the care of the escrow officer for as long as the legal real estate procedures take place.

During this process, neither the buyer nor the seller has access to the money, nor can they intervene upon the escrow amount. The funds are transferred to the seller if the purchase is successfully finalized or returned to the buyer if it fails.

Tips for Escrow Process

Whether a buyer or a seller, there are some responsibilities that you get towards the escrow process.

  • You have to deposit the corresponding funds on time.
  • Read and thoroughly understand the documents. For clarification, you can ask the real estate agent or the escrow officer.
  • Respond fast to any additional requests so that the process can run down quickly and smoothly;
  • Check the property closing documents before signing the deal.
  • Keep the escrow documents safe for tax purposes.
  • The rest of the actions, including verifications, transfer monitorization, are the responsibility of the escrow officer; thus, they don’t have to concern you.

Earnest Money

The real estate industry uses yet another term in association with escrow. We are talking about earnest money. Though similar, these two terms are not identical.

The earnest money is an amount decided between buyer and seller and delivered by the buyer early on during the purchase procedure. It represents just a percentage of the final amount, and it “books” the property.

It shows the serious intentions of a buyer to go through the entire property transaction. The seller has to reserve this property for a buyer and stop negotiations with other buyers.

At the end of the transaction, the earnest money is added to the down payment or returned to the buyer if the deal is off.

Sellers can also keep the earnest money if the buyer doesn't perform under the contract terms.

Escrow Accounts For Other Purposes

Escrow accounts can also be used in real estate for other purposes besides consummating a purchase and sale.

These kinds of accounts can also designate a set up by a lender to collect insurance and tax payments from their clients.

They use these funds to cover the payments for homeowners insurance companies or the local property taxes.

Online Escrow

There are plenty of online escrow companies these days offering their services to those to transact property. They provide the same benefits as the classical escrow agents, yet they focus on the security of online real estate transactions.

Online escrow companies can help with all types of real estate transactions.

Final Thoughts

Having escrow is an integral part of buying and selling real estate. Working as a real estate agent for the past thirty-five years, I don't ever remember a time of not collecting escrow funds.

Nothing is holding a buyer's feet to the fire without escrow to ensure they follow through with making the purchase. Not having an escrow account set up is highly inadvisable.

Bill Gassett is an authority in the real estate industry with 38 years of experience. Bill is well respected for his informative articles for buyers, sellers, and fellow real estate agents to make sound decisions. His work has been featured on RIS Media, the National Association of Realtors, Inman News, Newsbreak, Credit Sesame, Realty Biz News, and his own authoritative resource, Maximum Real Estate Exposure. He has been on of the top RE/MAX agents in New England over the last two decades.
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