What the Heck is Escrow, and Why Is It Important?

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Escrow accounts are sometimes misunderstood by buyers and sellers. Basically, an escrow account is a deposit of funds held in trust, which is disbursed only when certain conditions are met. It’s a surety instrument to make sure that all parties move forward on the same terms, conditions, and timelines as their contract stipulates.

Escrow is started when a seller accepts a purchase agreement from a buyer, and it’s terminated when the buyer finally gets the keys to their beautiful new home! Escrow accounts are tightly regulated by banking and housing rules, and escrow agents (those who manage the fund) are closely scrutinized regularly by banking authorities. The fee of the escrow service will typically total about 1-2% of the cost of the home.

Buyers Responsibility to an Escrow Account

The first step of the process will begin with contractually going into the escrow process by opening an escrow account. After the buyer and seller agree to the terms of the purchasing agreement, the agent will collect the earnest money check from the buyer, and put it into a new escrow account opened specifically for that transaction.

Earnest money is a deposit made to a seller showing the buyer’s “good faith” in the transaction at hand. Earnest money allows the buyer more time when seeking financing. The escrow agent, usually the same office doing the closing of the loan and sale, will act as a third party in the transaction, neutralizing the playing field.

Why An Escrow Account Is Needed

Escrow accounts are commonly used in real estate transactions. Regardless whether it is the seller, buyer, lender, or borrower in a real estate transaction, everyone will want the comforting assurance that no funds or property will change ownership until all of the instructions in the transaction have been followed properly. Each player involved in the escrow (buyer, seller, lender, borrower) follow the instructions of the escrow, which are laid out in documents and then signed and delivered to the escrow officer.

The Realtor can give the escrow officer the correct information for the preparation of the escrow instructions. After the conditions required in the escrow can be fulfilled, the escrow will be closed. Each escrow account will be unique from others, since the terms/conditions of real estate transactions are different from one another.

The escrow holder is selected from an agreement between the principals. The real estate broker may also have positive past experiences with escrow holders from prior transactions and can recommend certain holders. At the end of the day, the principals have the right to choose an escrow holder who they mutually agree on.

Opening and funding an escrow account is only the first step in the complicated transaction of buying a home. Next up, of course, is approving the seller’s disclosures, obtain the proper home inspections (general home inspection, pest inspection, environmental inspection), have a survey of the property taken, secure insurance, and so much more.

The las two things that happen before the home purchase closes is reviewing the HUD-1 (“settlement statement”), which is lawfully required to be furnished to the buyer and seller at least three days before the scheduled closing date. The statement is an official review of the final statement including the loan terms, fees, closing costs, etc.

The escrow company along with your agent will walk you through the process, so there is no need for concern. Real estate transactions along with the escrow process require clients to put a lot on the line financially, so it is worth taking the time to research reputable escrow holders.

Follow John Satriale:

John Satriale is the sales coordinator at Copeland & Co. Real Estate in West Palm Beach. He is a currently enrolled in Palm Beach Atlantic University, and it enjoying learning the business of real estate.

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