What Is An Escrow?
Unless you’re a realtor, you probably don’t run into the word “escrow” as you go about your daily life. With multiple definitions and uses in the real estate industry, it’s important to know how this term applies to you as someone looking to purchase a new home.
Put simply, this word is often used to reference an item of value that is held in the custody of a third party during the home selling process until all paperwork has been signed and final deals have been made. Consider an escrow account to be like an awesome present that you’re waiting to open and share with someone else, except it’s full of checks, important documents, and deeds.
Both the buyer and the seller will have things that they need to put into this pot throughout the sales process–things that need to be out in the open without changing hands just yet. Once all parts of the purchasing contract have been satisfied, both people get their goodies from the bunch, typically with the deed going to new owners and the money going to the selling party.
Why Should I Use An Escrow?
Using an escrow is all about protecting yourself and making buying a home a safer, more convenient experience. As a buyer, it lets you pay certain amounts and submit essential items into a sort of joint account with the seller at various steps of the home buying process. Because these “items of value” are held by a neutral party until the entire transaction is complete, it helps make sure you don’t get ripped off.
A key component of escrow is that all conditions of a contract must be satisfied before either party gets their respective items of value. If conditions are not met, the deal can dissolved without the same difficulties you might run into if you weren’t using escrow.
It’s a little easier to understand how helpful escrow is by considering an example. Imagine you’re about to buy your first home and you put down a deposit into a newly opened escrow account so that you can move on to the next step. Unfortunately, while the deal is coming together, the buyer refuses to satisfy all aspects of the contract in the original offer. Luckily, as no money has actually changed hands yet, with the deposit check still being held by your escrow agent, your money is still safe. It won’t go to the seller until all contractual agreements have been made.
Hold-Back Funds
Another way that an escrow account can be used when buying homes is through something called a “hold-back fund.” This is basically money that’s held back from the seller after a final sale for a variety of reasons.
One common instance is when the seller wants to stay behind for a month or so before they actually move, termed a “rent-back” agreement. In this case, what you would typically do is charge a daily rate, but also hold back a portion of the seller’s proceeds in escrow until the home is actually handed over in the proper condition. Hold-back funds can also apply when it comes to purchasing a home that still needs repairs.
If something big like the roof or backyard can’t be fixed by the time of purchase, you’ll want to set some of the seller’s profit aside in an escrow account reserved for those specified future repairs.
How Do I Put Things Into Escrow?
To put things in escrow, you need to first set-up an escrow account.
An account typically gets opened up when the buyer puts down a deposit on a house they want. In most cases, both the buyer and the seller of the house are able to agree on an impartial third party to operate this account for them. If there’s a real estate agent involved in the sale, they’ll probably have someone in mind. Fortunately, laws are set up to prevent real estate agents from accepting referral fees from escrow service providers, meaning their recommendation is probably a safe bet. As you start your search, you’ll want to make sure that the escrow providers you’re considering have been independently licensed for the job by the DOC (Department of Commerce).
When Does The Escrow Account Close?
An escrow account closes once all paperwork involved in the transaction has been signed and all funds have been present in the pot. Once this happens, the escrow agent disperses whatever items of value they were holding to their new rightful owners, as well as oversees the official recording of documents with the county. After it’s closed, you’ll get a closing statement and a few other things in the mail. It’s important you hang onto these, as you’ll need them in the future for things like taxes.
The Bottom Line
Using an escrow account to compile all of the necessary components during the sale of a home is typically a great thing for everyone involved. Not only does it offer protection to both the buyer and seller, it also helps the entire process go faster and more smoothly. Next time you’re looking at purchasing a home, remember the benefits of an escrow account and use yours to your advantage.
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