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  • Writer's pictureJeff Sorg

What is Escrow and How Does it Safeguard Your Real Estate Transaction?

Updated: 5 days ago

Buyer and seller shaking hands after a successful rea estate transaction

Escrow is a crucial process during a real estate transaction that ensures a secure and smooth exchange of property. But what exactly is escrow, and how does it work?

Escrow Explained

  • Escrow is a process in which a neutral third party holds onto something valuable, such as money or documents until certain conditions that the buyer and seller have agreed upon are met. 

  • In real estate transactions, the escrow holder is usually a title company. 

  • The escrow holder holds and safeguards crucial items, such as the buyer's earnest money deposit and other funds and the seller's property deed.

  • Escrow ensures that the buyer and seller fulfill their obligations before funds are released to the seller or the deed is released to the buyer.

The Stages of Escrow

  • Opening Escrow: After the buyer and seller agree to the purchase terms and sign a purchase agreement, the buyer usually needs to deposit earnest money into an escrow account along with the sale agreement. The sale agreement should include basic escrow instructions and details of the terms both parties have agreed upon. As the transaction progresses towards completion or "closing," additional mutually agreeable instructions may be added to the escrow account by the parties.

  • Clear Title Verification: The escrow company thoroughly investigates the property's title to ensure it is clear of any liens, encumbrances, or ownership disputes the buyer has not agreed to assume responsibility for.

  • Financing and Inspections: The buyer applies for a mortgage loan and orders inspections, while the lender orders a property appraisal to ensure the property's value is adequate to safeguard their mortgage loan. These conditions that must be met to the buyer's or lender's satisfaction are referred to as contingencies.

  • Closing: After fulfilling all the necessary contingencies, the day of closing finally arrives. On this day, the buyer and seller sign the final closing documents. The buyer pays the remaining balance owed under the sale agreement, including the down payment, mortgage loan funds, loan closing costs, and other expenses the buyer agreed to pay. The seller pays off any underlying liens and signs over the property deed to the buyer. Then escrow releases the purchase funds to the seller and records a new deed in the buyer’s name, making them the official owner of the property.

Benefits of Escrow

  • Security: Escrow protects both the buyer and seller by securing the buyer's money until they receive a clear title and ensuring the seller receives payment upon fulfilling their obligations.

  • Efficiency: Escrow simplifies the process by handling various tasks, ensuring a seamless and well-organized transaction.

  • Impartiality: The escrow holder is an impartial intermediary between the buyer and the seller, ensuring equitable treatment and fairness throughout the transaction.

Who Pays for Escrow?

  • As outlined in the purchase agreement, fees associated with escrow are typically divided between the buyer and seller. 

  • Examples of fees include title search fees, escrow company fees, and recording fees.

It's important to understand the concept of escrow when dealing with real estate transactions. This process provides protection for your investment and helps to make the transaction smoother, ensuring a secure and successful home-buying or selling experience. It is strongly recommended that an escrow holder be involved in any real estate transaction, regardless of how well the buyer and seller may know each other.


(C) 2024 Jeff Sorg



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