Here’s what escrow means in real estate

In real estate, agents speak of the term “escrow” often. They casually mention the word escrow like clients automatically understand the term. Oftentimes, they don’t. What does it mean? What exactly happens when it occurs?

Defining the term

Escrow relies on a third party officer, company, or group to handle a money exchange, property title transaction, document reviewing/finalizing, and more until the obligation is complete. The third-party is objective and neutral in handling sensitive transactions to shield both parties from scams. 

In real estate, escrow is transferring home ownership from one party to the other. It begins when both the seller and buyer agree to the offer. Next, the funds remain in a third party account untouched. Then, there are requirements buyers and sellers fulfill during escrow, and there’s no particular order to complete them. Escrow lasts between a few days and a few months depending on transaction complexity. It closes after the transaction is successful, including signing all the documents, exchanging keys, and receiving the deed in your name. 

Being in escrow

1. While in escrow, a paid title search is proof that the home is free of issues. Examples include liens and contentious beneficiaries. Buyers can purchase title insurance in case the title search didn’t resolve everything.
2. Buyers must do a home inspection. Select an insured and licensed inspector with no ties to the real estate company to inspect the home. Pay the inspector. Conversely, the seller must inform the agent and buyer of known home problems. Failure to do so results in severe consequences.
3. Purchase home insurance. Mortgage buyers and cash buyers can start with existing car and life insurance companies for home insurance coverage.  Not only is it as a basis to find eventual adequate coverage, but most companies offer savings for bundling coverage.
4. Mortgage buyers need to finish the lender requirements during escrow. Examples of requirements include an appraisal, mutual fund statements, pay stubs, loan terms/points, interest rate, and down payment.
5. Commercial clients interested in turning the home into rental property need to read HOA documents. Because there are several documents to review, it’s best not to rush reading through them. Complete any requirements needed to fulfill the document. 

What causes escrow to go south?

The term “falling out of escrow” exists for this situation. Bad things can and does go wrong during escrow. When it fails, these are the main reasons. 

• The appraisal is less than the selling price, which is insulting to the buyer and lender.

• The escrow officer or agent failed to do his or her job correctly.

• A problematic issue in the home inspection arises, the buyer informs the seller, and the seller refuses to repair it.

• The buyer cannot secure home financing from a mortgage company or after a mortgage company rejects the buyer.

Who gets the escrow money in a bust deal?

It’s important to read the agreement. Each state handles escrow transaction failures differently. Generally, the buyer receives the escrow money back. In some cases, the seller may receive the escrow money if the buyer backs out without a good reason. However, lenders will punish buyers for not following through with the sale. In other cases, the seller gets in trouble for backing out of a sale once escrow is in play. 

Sandwiched between successful bidding and closing, the escrow process is temporary, yet crucial to homeownership. The seller and buyer must do their part to submit mandatory information on time. Have peace of mind knowing the escrow professionals will make the transfer seamless. Buyers and sellers can rest when the escrow process is complete. 

(Featured image by DepositPhotos)

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DISCLAIMER: This article expresses my own ideas and opinions. Any information I have shared are from sources that I believe to be reliable and accurate. I did not receive any financial compensation for writing this post, nor do I own any shares in any company I’ve mentioned. I encourage any reader to do their own diligent research first before making any investment decisions.