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What is Escrow in Real Estate

Katherine Santiago

Katherine holds a Bachelor’s degree in Corporate Communications with a minor in Business from Penn State University...

Katherine holds a Bachelor’s degree in Corporate Communications with a minor in Business from Penn State University...

Jun 24 3 minutes read
Making a real estate purchase is no small task, and if it’s not done correctly, you can run the risk of losing some of your funds. This is where an escrow account comes in handy. This is a term well-understood by any good agent, and if you’re a home buyer or seller, it’s time you become familiar with this term as well.

What is escrow?

In real estate, escrow refers to a third party who securely holds onto real estate assets or funds before they are transferred to their respective party. 

How does escrow work?

Escrow works by ensuring both the buyer and seller meet the obligations of the agreement before finalizing the transaction. Once both parties have come to a full agreement and all parties sign the proper documents, the escrow account will open. The specific documents that the escrow company asks for will allow them to close the deal within the given timeframe. The escrow company works to confirm everything is resolved or completed on time.   

Certain contingencies, however, (like having to make home repairs) can cause a property to remain in escrow longer than expected. Escrow accounts proceed to close once the property is transferred to the buyer and the seller receives the funds.

Escrow accounts limit risk

Escrow accounts work in favor of both the buyer and the seller to help safeguard the real estate transaction. A scenario in which a home buyer and seller would use escrow is when one of the terms for the sale is passing the home inspection. The funds that are placed into escrow will not be transferred to the seller until this term, and others (if any), have been met. If the buyer disregards escrow and makes a check payable directly to the seller and the home does not pass the home inspection, there is nothing preventing the seller from depositing the check and transferring funds. If the buyer didn’t use escrow in this scenario, he/she would run the risk of losing their funds.

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