Escrow involves depositing funds and instruments with instructions to neutral third parties to carry out the provisions of a contract or an agreement. Escrow is often used in real estate transactions that involve the purchase of a home.

In all escrow settlement procedures, both the purchaser and the seller have responsibilities.

What Are Escrow Accounts?

As previously noted, escrows are arrangements that include parties that are not involved in purchasing or selling the home. In other words, they are not the buyer or the seller.

Escrow is used during real estate transactions to hold the funds which are associated with the transfer of the title. It also maintains documents as well as contracts.

Escrow is very important because it ensures that a neutral third party that is uninvolved in the transaction will handle all of the documents and finances which are associated with the sale or purchase of the real estate. Escrow also assists in making the real estate transaction safer for all parties involved so that if one of the parties fails to uphold their portion of the contract, the other party does not automatically obtain the funds.

Escrow also ensures that funds are not exchanged between the buyer and the seller personally, which is important for the safety of all parties. The funds typically include amounts that are dedicated to:

  • Closing costs;
  • Settlement costs; and
  • Any other costs which are related to the closing process.

The funds in the escrow account are distributed as needed. The account is used to ensure that the broker or title agent maintains financial accountability for the funds which are being held for the client.

The bank acts as a neutral third party that safeguards the funds in the escrow account so that certain issues can be avoided, such as:

  • Breach of contract;
  • Fraud; or
  • Other issues which may arise.

Escrow accounts may also be referred to as real estate trust fund accounts.

Who are the Parties Involved in Escrow?

There are typically three parties which are involved in escrow during a real estate transaction, including:

  • The buyer;
  • The seller; and
  • The escrow agent or third party.

The purchaser, or promisor, in a real estate contract is an individual who agrees to purchase the piece of property. The seller, or promisee, makes an agreement to transfer title to the purchaser in exchange for the agreed-upon amount or purchase price.

A buyer has a defined amount of time to perform on the contract, which varies according to the contract. The seller has the title to the property.

A seller also has a defined time in which to perform their obligation under the terms of their contract. The escrow agent, or third party, as noted above, is a neutral party.

In certain states, an attorney will serve in the place of the escrow agent. The escrow agent’s job is to hold any funds and documents which are a part of the transaction until both parties have performed their obligations under the contract.

Once both parties have satisfied their obligations under the contract, the escrow agent will coordinate the closing. Escrow accounts are accounts which title companies or brokerage companies set up with their clients.

Generally, an escrow account is at a bank. It is utilized to hold the funds which a client deposits related to the real estate transaction.

How Does Escrow Work?

In the majority of cases, the escrow process proceeds as follows:

  • The buyer and seller agree to the terms of the sale or purchase of real estate;
  • Either the buyer or the seller opens escrow;
  • Both parties send all contract documentation to escrow;
  • The buyer will deposit their earnest money deposit into escrow;
  • The escrow agent keeps up with all pertinent dates per the terms of the purchase contract;
  • The escrow agent holds all deposits or additional monies deposited in escrow to be disbursed at the end of escrow;
  • The escrow agent will coordinate the signing of final closing documents by both buyer and seller to transfer the deed of title into the seller’s name;
  • Escrow receives documentation from the buyer’s lender and receives purchase funds from the lender; and
  • Escrow will disburse the money from the buyer’s lender to the seller’s account.

What Are the Seller’s Responsibilities During Escrow?

The seller’s legal responsibilities during escrow may include:

  • Obtaining a title insurance policy;
  • Paying escrow service fees;
  • Paying for drawing the deed and for drawing or recording the reconveyance deed(s);
  • Paying notary fees;
  • Paying county, and possibly city, transfer taxes; and
  • Paying any additional charges which may have been agreed upon in the contract.

What Are the Buyer’s Responsibilities During Escrow?

The legal responsibilities of the buyer during escrow may include:

  • Obtaining a standard or owner’s policy of title insurance, which varies from area to area;
  • Paying escrow fees;
  • Paying fees for drawing the first deed or second deed;
  • Paying notary fees;
  • Paying fees for recording the deed; and
  • Paying any additional charges which the parties agreed to in the contract.

What Are Prorated Responsibilities?

Prorate responsibilities are responsibilities which can be performed by either the purchaser or the seller. These responsibilities are prorated, or divided up, between a buyer and a seller when they write the contract.

Prorated responsibilities may include:

  • Real estate taxes;
  • Association fees, or assessments;
  • Improvement assessments;
  • Any liens or judgments needed to clear title;
  • Unpaid and paid rents;
  • Security deposits;
  • Impound accounts;
  • Real estate broker’s commission; and
  • Any other prorations that were agreed upon in the contract.

What Are Some Legal Issues Associated with Escrow Accounts?

There are numerous legal issues which may arise when using an escrow account. Title agents or brokers are tasked with opening and maintaining escrow accounts for clients.

Because of this duty, these agents have responsibilities which are related to the escrow account. Issues that may arise related to an escrow account may include:

  • Commingling funds;
  • Utilization of funds for personal purposes;
  • Breach of contract; and
  • Fraud.

Title agents or brokers are not permitted to mix their personal funds in escrow accounts, called commingling funds. Escrow accounts are only to be used to hold client’s funds until they are distributed.

In addition, title agents or brokers are not permitted to use escrow funds for a personal purpose or for financial gain. Escrow accounts must be used in a manner which does not breach the escrow agreement.

The legal consequences for breaching escrow agreements are similar to those used in cases of breaches of contract. If an escrow agreement is breached, an aggrieved party may be permitted to file a lawsuit to recover the losses caused by the breach, which may include requiring delivery of the property.

Fraud is another issue which may arise related to escrow accounts. Because of this, it is important for all parties to maintain transparency and be represented by an attorney when necessary.

Do I Need An Attorney if the Buyer or Seller in a Real Estate Transaction has Failed to Perform One of Their Legal Responsibilities?

Yes, it is essential to have the assistance of a real estate attorney if a buyer or a seller in a real estate transaction has failed to perform one of their legal responsibilities. If you are the purchaser or the seller of a piece of property and you believe the other party has failed to perform or has unfairly refused to perform one of their legal responsibilities, you should seek the advice of an attorney.

Your attorney can review your case, advise you regarding whether a party has failed to meet any of their obligations, and advise you of the possible remedies. If necessary, your attorney will help you file a lawsuit and represent you in court.