What is Escrow?
You may have heard of the term “escrow” and been aware that it’s a topic related to real estate. But for many people, that’s where their escrow expertise ends. If you remain unsure about what escrow is, read on to find out what it is and how it is used to help buyers and sellers during a home sale.
Defining Escrow
Escrow is a secure, third-party holding account where important money and documents are kept. In real estate, people also use the term “escrow” to refer to the time between when a seller accepts the purchase agreement and when the sale officially closes. When all of the conditions of the sale are met, the third-party escrow officer transfers payment to the seller and delivers the title to the buyer.
The Importance of Earnest Money
Usually, the “earnest” money for a home sale goes into escrow. Earnest money is a deposit, typically between one and three percent of the offer, that demonstrates the buyer’s good faith to the seller. The buyer writes a check for the earnest money to the escrow officer. If the sale doesn’t go through — as a result of a bad inspection, for example — the escrow officer refunds the money. When the sale goes through, the money goes toward the purchase amount. If the buyer fails to meet any requirements, they forfeit the deposit, and the escrow officer sends it to the seller.
Protection for the Buyer
Escrow is a process designed partly to protect the buyer during the home buying process. It shields purchasers against dishonest sellers, preventing unscrupulous people from being about to immediately cash checks. Earnest money confirms the buyer’s intention to purchase the home, and indicates to the seller that they are safe to take the home off the market, and stop taking offers. This way, the buyer has time to perform due diligence on the home, before the closing deadline. Common contingencies for the closing of a real estate sale include inspections, repairs, disclosures, and objections. If the seller fails to meet all conditions, such as making the agreed repairs promised after inspection, the buyer can decide not to proceed with the purchase the home. If the buyer still wants the home, they can arrange to delay closing until the seller meets all of the requirements.
Shielding for the Seller
Escrow is not only to protect buyers — it is also essential for seller safety. Earnest money being placed into escrow assures the seller of the buyer’s willingness and capacity to close the sale. The buyer can’t pull back out of the sale without forfeiting their earnest money deposit. If the buyer does pull out of the deal, the seller at least gets the earnest money as compensation for the time lost in the escrow process. Escrow need not be a mystifying or daunting step in a house sale. It’s simply the safeguard process for both parties as a house sale deal proceeds. Everyone want the sale process to run quickly and smoothly. Escrow is just one step that serves each party’s best interests, providing necessary security and reassurance.
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Sources Investopedia The Balance Realtor.com