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What Is Escrow?
In its most basic form, a real estate escrow can be thought of as a trusted, impartial third party’s account. It holds the funds for the purchase of the property.
Documents or funds are often kept in this account until a number of predetermined requirements are satisfied. Throughout the purchasing process, this usually refers to "earnest money" deposits, down payments, "clear title" cheques, and property deeds.
You can also encounter a different kind of escrow in real estate that has to do with your lender. Once the house has been purchased and your mortgage payments have begun, this will usually take effect. Monthly tax and insurance payments will be held in this account throughout the year, and your lender will pay them off at the conclusion of the calendar year.
How Is It Used in Real Estate?
You’ll often hear escrow being described once you get closer to closing on a property. As a buyer or seller, if you’re using a trusted real estate agent, they will have the facilities in place to manage escrow accounts and set it up for your deal.
It’s used in real estate to make sure both parties follow through on their ends of the transaction. Once both parties fulfill their obligations, funds are remitted to the seller and the title is transferred to the buyer. This prevents someone from walking away with the money without repercussions.
Example
Jim is buying a home in New Westminster. He has found the perfect home for himself and his new family. Jim has proposed a set of subjects and conditions for inspections on the home before he finalizes the offer.
The seller is fine with the conditions and agrees to the price after some negotiations. The deal is on its way to close. Next step: escrow!
Jim’s money from his mortgage lender funds the escrow account. The seller then goes through all the buyer’s requirements, allowing inspections that Jim has requested in this deal.
Once Jim’s subjects have been removed, and several of the other buying and selling escrow details have been completed, the funds will be released to the seller and the buyer will have possession of the title.
Is escrow required in real estate?
While not legally required, escrow is an essential part of keeping all parties safe during the real estate transaction. While it may seem like a headache in getting the deal done, it can be a lifesaver if something were to go wrong with the other party. And when you’re dealing with hundreds of thousands of dollars, you’ll want that reassurance.
