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.

Categories Buying a Home

3 thoughts on “Escrow Agreements and Real Estate Transactions”

  1. So if you sign over the deed to your property prior to release of funds can the seller keep your funds?

  2. Love the article. It really helps people like me get a better understanding of Escrow and how the whole system works. I just want your opinion on the bank fees? From my experience the exchange rates were awful and the banks just act like they don’t care very much about that.

    1. You can check iCompareFX for that. They have some good explanations and tips for lowering transfer fees.

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