What Does Escrow in Escrow Mean and How Does It Work
Ariel Courage is an experienced editor, researcher, and former fact-checker. She has performed editing and fact-checking work for several leading finance publications, including The Motley Fool and Passport to Wall Street.
"In escrow" indicates a temporary condition of an item, such as money or property, that has been transferred to a third party in financial transactions on behalf of a buyer and seller.
"In escrow" is a type of legal holding account for items that can’t be released until predetermined conditions are satisfied. Valuables held in escrow can include real estate, money, stocks, and securities.
Key Takeaways:
– Funds or assets held in escrow are temporarily transferred to and held by a third party to facilitate a transaction.
– "In escrow" is often used in real estate transactions where property, cash, and title are held until predetermined conditions are met.
– Escrow applies to any situation where funds will pass from one party to another.
– Valuables held in escrow can include real property, money, stocks, and securities.
Escrowed items are commonly found in real estate transactions. The property, cash, and the title are held in escrow until specified conditions are met for ownership transfer.
An escrow agreement outlines the conditions and terms between the parties involved as well as the responsibilities of each party. Items placed in escrow are managed by an escrow agent, typically a lawyer, who holds the assets until contractual obligations are fulfilled. Once the agreement terms are satisfied, the escrow agent releases the funds or property to the appropriate party.
While the property is in escrow, the buyer cannot take possession or occupy the space. Real estate deals must clear stages during the escrow process. The typical conditions that might need to be met and why assets might be held in escrow are:
Appraisal:
– An appraisal of the property must be conducted before its sale. Issues could arise if the appraised value is lower than the agreed-upon purchase price.
– Banks will not lend money if the asking price is above the appraised value. The buyer could try to find funding to cover the missing portion or ask the seller to lower the price. If the buyer can’t fund the difference while the real estate is in escrow, the transaction could be terminated.
Home Inspection:
– A buyer might agree to purchase a property with the condition that a home inspection is passed. Funds for the purchase would be held in escrow until the inspection is completed. Once the conditions are satisfied, the buyer or seller will be obligated to purchase or sell the property.
Financing and Insurance:
– The real estate transaction might be held in escrow until the buyer obtains financing from a bank or secures necessary insurance. If the buyer doesn’t get approved or obtain insurance, the escrow agent would nullify the offer.
Title Search:
– Before purchasing a home, a title search is performed to determine ownership and check for any liens or claims attached to the property. A clear title is required for a real estate transaction to go through properly.
Zoning:
– The buyer may have intended a use that doesn’t match current zoning regulations. The seller might seek a variance while the property is in escrow to allow the buyer to proceed with their plans upon taking full ownership.
Repairs:
– The purchase might include guarantees for the seller to address needed repairs. If the seller doesn’t fulfill those promises while the property is in escrow, the deal might fall through.
The funds in a real estate transaction can be held in escrow until all parties agree that the conditions in the escrow agreement have been satisfied.
Keeping the property in escrow assures all parties that the mutual responsibilities outlined in the agreement will be fulfilled.
