Understanding Escrow



By Caroline Kirby

If you’ve bought or sold a home before then, you’re likely familiar with the term escrow. Need a refresher? Escrow, simply put, is a legal concept that was created to facilitate the sale or purchase of the property. Most of the time, people hear of “escrow” when discussing buying or selling a home. It’s important to recognize that the rules hold the same when it comes to the sale or purchase of land. Looking to buy or sell some real estate? You’ll want to get clear on escrow.

Understanding Escrow

Escrow is an arrangement that involves an impartial third party (the escrow holder) who will hold on to legal documents and funds until the buyer and seller reach an agreement and provide instructions for the holder to distribute.

Who are the parties involved in escrow?

• The buyer
• The seller
• The escrow holder
• Sometimes a lender

What does “in escrow” mean?

This is probably a phrase many of us have heard before without a clue to what it meant. “In escrow” just means that the funds and documents are being held by the escrow agent until the conditions of the contract are fulfilled.

Why do we need escrow?

When it comes to property, escrow can add a layer of security to protect the buyer’s good faith deposit and to hold the homeowner’s funds for taxes and insurance.

How does escrow fit into the land buying/selling process?

Although most information you’ll come across online may be specific to the home buying/selling process, escrow is also part of the land purchasing process. Whether you’re the buyer or seller, you will likely encounter an escrow account as part of your process.

When engaging in a land contract, a buyer makes installment payments to a seller; it’s common to have a title company or escrow account service provider to handle the monthly payments. This can guarantee that the contract is moving forward as agreed upon so that all parties are protected.

Remember, the escrow account provider or escrow holder is a neutral third party with no interests in either the buyer or seller. Both parties will pay escrow for their work. Escrow doesn’t last forever when the payments made equal the contract sales price or the contract terms are met; the escrow agent will facilitate the transfer of the property.

What exactly does the escrow holder do?

When broken down into simple terms, it may seem like the escrow agent is getting paid to do, well, not much, but the truth is your escrow provider has a lot of tasks to accomplish. Some of the most important to-do’s include:

• Open order for title insurance and get buyer approval
• Prorates insurance, taxes, rents, etc.
• Receive and disburse funds
• Prepare a final statement for each party
• Record deeds and loan documents before delivering to buyer and seller

Escrow can last the length of your loan, but each lender will have its own requirements for removing escrow. This process is beneficial for all involved and can make a stressful transaction run more smoothly.

Escrow can even be used for much more outside of real estate, like online transactions or stocks. Escrow accounts are not always required but can be especially useful for those looking to break up payments into smaller amounts.

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