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How Escrow Works

In any real estate transaction, it’s important to know how escrow works so that you can confidently move forward with the sale and minimize your risk. Escrow benefits both the buyer and the seller and ensures everything proceeds just as you have agreed.

Escrow Is A Neutral Third Party

Working on behalf of both the buyer and the seller, the escrow provider is the temporary holder of all the funds, paperwork, and any other assets related to a real estate transaction. Depending on the state, the third party can be an escrow company, attorney, real estate closing company, or title company agent. While buyers and sellers of any type of asset may use an escrow service, it’s most commonly known in real estate.

Escrow Promotes Trust Between Buyers and Sellers

When buyers and sellers reach an agreement, they sign a purchase contract that outlines their terms — such as the buyer agrees to pay a specific amount by a certain time. Other terms may be the buyer inspecting the property, and the buyer providing a deposit — to name just a few. In exchange, the seller agrees to provide the property after all the terms have been satisfied. With this intention, the escrow officer drafts escrow instructions that spell out all the conditions that will need to be met before the property legally changes hands.

Escrow Keeps Real Estate Transactions on Schedule

When the escrow provider receives the purchase contract, escrow is “opened.” Throughout the agreed upon time period, the escrow officer will monitor the status of each step, provide the necessary paperwork and obtain signatures to make sure the terms of the contract are followed. For example, the escrow officer will verify that home inspections are completed, disclosures are provided, and buyer requests are addressed. When all of the terms of the contract have been met, the sale is complete. Once the funds are disbursed to the seller, and the title is recorded in the name of the buyer, escrow is “closed.”

Yet, issues may arise and cause a delay in the close of escrow. For instance, the property could not appraise for the purchase price, there could be a problem obtaining financing, or property repairs could be more costly than expected. Depending on the scenario, the buyer and seller may need to renegotiate the terms of the contract. Although escrow officers don’t get involved in negotiations, they keep all parties informed and facilitate the necessary steps in an unbiased manner.

Escrow Keeps Assets Safe

Because real estate transactions involve high value assets, it’s important to protect everyone involved. It’s the escrow provider’s responsibility to receive and disburse the funds based on the terms of the agreement. This protects the interests of both the buyer and the seller before they exchange any assets.

Similarly, lenders rely on escrow to make sure all their conditions are met before they provide funding. In some situations, lenders may also require a separate escrow account to make sure property taxes and insurance premiums are paid on time. Lenders will collect these amounts along with the monthly loan payment, hold them in the escrow account, and pay the tax and insurance bills when they are due.

Once escrow is closed, the buyer and seller receive a final closing statement and other related documents. The closing statement details exactly how the funds have been dispersed.

While there are many factors that lead to a smooth real estate transaction, the escrow provider plays a vital, impartial role in making sure the process is efficient and that all assets are transferred legally. Escrow protects both buyers and sellers and ensures everyone gets what they are due at the proper time.

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Tilden Moschetti, Esq.
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