How Escrow Works

Escrow is one of those words that can intimidate some people.  They think it sounds mysterious and complicated, so they don’t try to understand it, instead letting the legal and financial experts handle everything and they trust them to know what they’re doing.

While an escrow itself can involve many complicated transactions and documents, on its own it’s actually a very simple thing.  Think of an escrow and the agent handling the escrow as an impartial middleman between a buyer and a seller.

What is an Escrow?

When you’re buying something like a house, you’re dealing with a large amount of money. You and the seller both have a great deal at stake financially. If the seller were dishonest or made mistakes, you could lose out on all or some of the money you supply to purchase the house. If the buyer is dishonest or does things incorrectly, the seller can lose money, maybe even the property, or at best can waste time on a transaction that won’t work out while they could be actually selling the house and getting paid.

The party holding the escrow account where the money is held between the buyer and the seller does more than just hold the cash, however.  All important documents and paperwork as well as instructions that are part of the sale are held in escrow as well.  The escrow officer holds these and makes sure that the money isn’t released to the seller until all the instructions have been followed.  All the sale requirements on both sides must be met, and all the proper documents must be filled out and signed correctly.  Only then will the money be released and the sale will be made final. 

The Benefits of Escrow

Escrow is often used for other things than the sale of a home.  Any large purchase or transfer of a large amount of funds is a good candidate for escrow.  Before escrow was a common occurrence in the United States the buyer would pass the money to the seller themselves or through a lawyer and even once everything was signed and completed and the money handed over, often there were things that arose in the contracts or the manner of their signing that nullified one or more contract or agreement.

In those cases, the buyer or the seller would suffer for those mistakes, and usually it was the buyer.  Escrow eliminates these problems. Not only does the escrow holder hold the funds to ensure that:

• The buyer has the proper amount of funds available for the purchase
• The seller cannot get a hold of the money until the transfer of property is complete

But the escrow holder also ensures that other conditions of the purchase are met.  Inspections, insurances, and any other negotiations must be complete, all instructions must be carried out and other obligations fulfilled before the property deed or other item that is being purchased is released to the buyer and the money in escrow is released to the seller.

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