Escrow is an arrangement with a third party who is uninvolved with the buying and selling of a home (ie. neither the buyer nor the seller). In real estate transactions, escrow holds all funds associated with the transfer of title and maintains all documents and contracts.
Escrow is important in real estate transactions because it ensures that a neutral third-party handles the documents and finances associated with the transaction. In that regard, it helps make the transaction safer by making sure that both the buyer and seller meet their obligations.
Escrow also ensures that finances are not exchanged between the buyer and seller personally, such that if one party fails to perform on his or her obligation, the other party does not automatically receive the money.
There are typically three parties involved in escrow in any real estate transaction, as follows:
- Buyer: The buyer, also known as the “promisor” in a contract (party who makes a promise to perform), agrees to buy real estate in a real estate contract. In exchange for an agreed-upon sum, known as the purchase price, the seller (promisee) agrees to transfer title to the buyer. The buyer has a specific amount of time to perform his or her end of the bargain per the terms of the contract. This amount of time varies by contract.
- Seller: As stated above, the seller, also known as the “promisee,” is the party who has title to the real estate and sells the property to the buyer. Like the buyer, the seller has a specific amount of time to perform his or her end of the bargain per the terms of the contract.
- Third Party (Escrow Agent): The neutral third party is often the escrow agent. (Note that in some states, an attorney is used instead of an escrow agent.) The agent’s job is to hold the documents and monies that are part of the transaction in escrow until both parties perform their required tasks within the contract. Once the specific duties are completed by both parties, the escrow agent coordinates closing.
Technically, either the buyer or the seller is allowed to open escrow. However, in typical transactions, the party who pays the escrow fees can choose where to open escrow. Whether the buyer or the seller pays the escrow fees depends on the state where you reside.
In most instances, the escrow process is as follows:
- Buyer and seller agree to terms of the sale/purchase of real estate;
- Either the buyer or the seller opens escrow;
- Both parties send all contract documentation to escrow;
- The buyer deposits his earnest money deposit into escrow;
- The escrow agent keeps track of all pertinent dates as per the terms of the purchase contract;
- Escrow agent holds all deposits or additional monies deposited in escrow to be disbursed at the end of escrow;
- Escrow coordinates 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 buyer’s lender and receives purchase funds from the lender; and
- Escrow disburses the money from buyer’s lender to seller’s account.
A real estate attorney is typically not used as an escrow agent, but is often involved at other stages of a real estate transaction. Real estate agents are familiar with the escrow process and generally have pre-designated escrow agents that they prefer to work with. If your escrow agent fails to perform his duties during the escrow process, then contact a local real estate attorney immediately.