Escrow is an arrangement including a party who is uninvolved in the buying and/or selling of a home, in other words, not the buyer or the seller. It is used in real estate transactions to hold the funds associated with the transfer of the title and maintains documents and contracts.

Escrow is important because it ensures a neutral party uninvolved in the transaction handles all documents and finances associated with the sell or purchase of real estate. It assists in making the transaction safer for all parties because if one party fails to uphold their part of the contract, the other party does not automatically get the money. It also ensures monies are not exchanged between the buyer and seller personally which is important for the same reason mentioned above.

There are usually three parties involved in escrow in a real estate transaction:

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

The buyer, or promisor, in a real estate contract is the individual who agrees to purchase the property. The seller, or promisee, agrees to transfer title to the buyer in exchange for an agreed-upon amount, or purchase price. The buyer has a defined amount of time to perform, which varies by contract.

The seller, or promisee, sells the real estate to the buyer and has the title to the property. The seller also has a defined time to perform their obligations under the terms of the contract.

The third party, or escrow agent, is a neutral party. In some states, an attorney serves in the place of an escrow agent. The job of the escrow agent is to hold any documents and money that are a part of the transaction until such time as both parties perform their obligations under the contract. After both parties satisfy their obligations, the escrow agent coordinates the closing.

An escrow account is an account that a title company or brokerage company sets up with their client. It is generally at a bank. It is used to hold funds that the client deposits related to the real estate transaction. These funds usually include amounts dedicated to closing costs, settlement costs, and any other costs related to the closing process. The funds are distributed as needed.

The escrow account is used to ensure that the title agent or broker maintains financial accountability for the funds they are holding for the client. The bank acts as a neutral third party to safeguard the funds in the escrow account in order to prevent any breach of contract, fraud, or other issue that may arise. An escrow account can also be known as a real estate trust fund account.

How Does Escrow Typically Work?

The escrow process usually proceeds in the following steps:

  • The buyer and seller agree to the terms of the real estate purchase;
  • Escrow is opened by the buyer or seller;
  • All contract documentation is sent to escrow by both parties;
  • The buyer’s earnest money is deposited into escrow;
  • The escrow agent tracks all pertinent dates per the terms of the purchase agreement;
  • The escrow agent holds all deposits or monies deposited into escrow to be dispersed at the termination of escrow;
  • The escrow agent coordinates the signing of closing documents by the buyer and seller to transfer the title into the seller’s name;
  • The escrow agent receives documentation from the buyer’s lender as well as purchase funds from the lender; and
  • The escrow agent distributes the funds from the buyer’s lender to the seller’s account.

What Are Some Legal Issues Associated with Escrow Accounts?

There are some legal issues that can arise when using escrow accounts. The title agent or broker is entrusted with the task of opening and maintaining the escrow account for the client as needed. Because of this duty, the agent has certain responsibilities related to the escrow account. Issues that may arise related to the escrow account may include:

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

A title agent or broker is not permitted to mix their personal funds in the escrow account. This is known as commingling funds. The account should be used only for holding the client’s funds until they are distributed.

The title agent or broker is not permitted to use the escrow funds for personal purposes or financial gain. As mentioned above, the account is only to be used for holding client’s funds until they are distributed in relation to the real estate transaction.

The escrow account must be used in a way that does not breach the escrow agreement. The consequences for breaching an escrow agreement are similar to those for a breach of contract.  If the escrow agreement is breached, the aggrieved party may be able to file a lawsuit for recovery of losses caused by the breach. A remedy may include requiring the property to be delivered.

Fraud is another issue that may arise from the use of an escrow account. In order to prevent misrepresentation and similar issues, full disclosure and transparency are needed in relation to escrow accounts.

Escrow agents have liability for their responsibilities. An escrow agent may default in their duties if they:

  • Fail or refuse to deliver the instrument or property entrusted to them after the delivery conditions are satisfied;
  • Deliver the item to the buyer or seller prior to the specific conditions being satisfied;
  • Lose the instrument or property entrusted to them; and/or
  • Embezzle the instrument or property entrusted to them.

Should the escrow agent fail to perform their duty before the seller is entitled to funes, the buyer incurs the loss since it is still their money. Should the escrow agent fail to perform their duty after the seller is entitled to the funds, the seller incurs the loss because it would be considered their property.

What Are the Remedies for an Escrow Account Violation?

Legal remedies are available for violations of escrow account rules. In most cases, the remedies will include a monetary damages award intended to reimburse the party who suffered a loss due to the agent’s breach. 

Other remedies may be available in some cases such as the redistribution of assets and/or assigning a different agent to the escrow. Remedies will depend on jurisdictional rules, local and state laws and terms outlined in the escrow agreement.

Do I Need a Lawyer for Help with an Escrow Account?

Escrow accounts are a necessary and vital part of the closing process in a real estate transaction. They may, however, be complex because they involve many parties, each with separate interests in the transaction. A real estate transaction can be delayed or cancelled if a problem arises with the escrow account. 

A real estate lawyer can help with all aspects of an escrow account. If the escrow agent in your real estate transaction fails to perform their duties, it is important to contact an attorney to protect your rights and monetary investments. Escrow attorney fees may occur during closing for conducting the closing of the real estate transaction.

A real estate lawyer is not normally used as an escrow agent, but can be involved at other stages of the real estate transaction. The attorney can assist with account negotiations, account set up, and any other account issues. Should any issues arise from the escrow account, the attorney can review the case, advise you on steps you should take, file a lawsuit, discuss possible remedies, and/or represent you in court proceedings. An attorney can also assist in drafting and finalizing an escrow agreement.