What is Escrow?

What is escrow?

1 Answer

Escrow is the term used to describe the situation wherein a neutral third party holds money and documents during the course of a transaction. In the real estate context, an escrow agent does this, and usually much more. Often an escrow agent works through a title company, so the escrow agent is also title insurer. After the proper documents and monies have been exchanged, and title insurance issued, escrow closes. The close of escrow is synonymous with the completion of the transaction.

Escrow opens with the deposit of earnest money and the signing of escrow instructions by each party. Escrow instructions tell the agent what to do to carry out the transaction. Usually escrow instructions are generalized and provide information such as the deadline for making deposits of money, and the tentative closing date and dates for the performance of due diligence. The escrow agent will also pay the various third parties required to complete the transaction such as home inspectors and exterminators. Each party will have to provide certain documents to the escrow agent so that he or she can carry out the transaction, and the parties will have to provide to the escrow agent proof that they have completed whatever tasks they must to close the transaction such as making buyer repairs or securing financing.

One of the major duties of an escrow agent is to ensure that the seller has marketable title and is able to transfer that title to the buyer. This is done by performing an extensive title search and issuing a title insurance policy based on the results of the title search. Often, the escrow company and the title company are the same company. This allows escrow agents to perform this important duty fairly cheaply and easily.

Escrow closes with the exchange of money for signed title. The escrow agent actually closes escrow, but the real estate agents for each party are also present to ensure the interests of their parties. After the exchange of money for title, the escrow agent informs the title company so that title insurance can be issued to the buyer and the lender and the agent sees that the deed is recorded in the public records.

An escrow agent is not the only person who can take a property sale through escrow. In many states only an attorney can close a real estate transaction, and in most places a real estate agent can close escrow without the aid of an attorney or an escrow agent.