This article explains explicitly the role of escrow in real estate transactions. Understanding how escrow accounts work, their benefits, and how they protect buyers and sellers in property transactions.
The use of Escrow has vast applications in a wide range of situations, with its primary function applying to events in which funds are being transferred between two parties involved in a transaction. The escrow process has steadily developed overtime, providing a secure method of completing transactions of valuable items such as jewelry, art and the likes.
Generally, escrow is defined to be a financial agreement between two parties involved in a transaction that is usually undertaken to prevent the possibility of either party not fulfilling his respective responsibilities or obligations.
It usually involves the use of a third neutral party, usually a legal practitioner, who holds the funds and assets to be transferred and ensured they reach their intended beneficiaries once the necessary contractual conditions and obligations are met. Complex transactions such as banking transactions, real estate, law matters, intellectual property etc are common examples of situations that might require escrow.
Let’s say a business organisation markets its products across international borders. Such a business will need to ascertain that it will receive the full payment after delivering its goods to buyers. And the buyers on the otherhand will also need an assurance that the goods being paid for are in excellent condition.
To resolve this predicament, the buyer can deposit the payment via an escrow with specific instructions to release the funds to the selling company once the goods are verified to be in suitable condition.
This way, the interests of both transacting parties are protected and the transaction can continue.
The Role of Escrow in Real Estate Transactions
Within the context of real estate, escrow is a financial process where a third party known as an escrow agent or holder holds unto the funds and important property documents until the contractal terms and conditions are met for finalizing the estate transaction.
This concept of escrow being implemented into real estate transactions serves to facilitate trust and improve assurance, particularly in large-money transactions.
The involvement of escrow will ensure that all payment transfers can be properly accounted for, the appropriate documents and contracts being signed and keep all involved parties on the same page before completing the transaction.
It protects both parties from potential risks of miscommunication patterns, fraudulent activity or unplanned delays.
In real estate, apart from the protective cover provided by escrow for both the buying and selling parties involved, escrow also plays an integral role in ensuring that additional fees such as property tax payments, home insurance are properly managed ensuring no additional costs are incurred that cannot be accounted for by either transacting party.
In this article we would be discussing common terminologies associated with escrow, how the escrow accounts work, types of escrow accounts and how they can be effectively leveraged to protect buyers and sellers for estate property transactions.
Common terminologies associated with escrow in real estate
1. Escrow holder
This is a third, neutral party whose sole responsibility is to keep hold of funds and estate property documents until the contractal transaction is finalised. A licensed organisation or just a single estate attorney can function as an escrow holder to provide escrow services for estate shareholders.
2. Escrow agent
Their primary function is to ensure all necessary paperwork is signed before releasing funds to the appropriate beneficiary.
This is common especially in the cases of organizational escrow holders, who require intermediaries between themselves and the transacting parties.
3. Escrow fraud
This is a type of deception which occurs when a fraudster poses and acts like an escrow agent or holder, tricking unsuspecting buyers into transferring funds into malicious accounts.
This is a huge, potential risk of using escrow in transactions, hence it’s important to verify the legitimacy of the escrow service you use. It’s always advisable to double-check account details when transferring funds and appropriately documenting them.
4. Escrow account
This is a type of account that is set up as a deed, that is used to keep track of the deposit of monetary payments and other assets that is due to be delivered between transacting parties upon completion of specific contractual obligations.
This account is usually managed by a third independent party, the escrow holder, guaranteeing the protection of the interests of involved parties.
Types of escrow accounts
1. Mortgage Escrow account:
Alternatively referred to as impound accounts. This type of escrow account is set up by a mortgage lender to collect, pay and settle estate property related expenses which is usually periodically collected in the form of house insurance and property taxes.
This escrow account is usually created to handle mortgage payments of landed property in agreed installments with additional taxes and levies.
In this type of escrow arrangement, the mortgage lender will transfer these periodic installments into the escrow account. After which the escrow holder/agent will use the accumulated funds to settle your bills appropriately when they are due usually once or twice per annum.
2. Real estate Escrow accounts:
These accounts are used by third party escrow holders to hold instructions, paperwork and even payments funds necessary for finalizing the sale of the real estate property.
It usually bears important information such as details of down payment, property deed, contract agreements that are key-essentials to completing the transaction.
3. Escrow holdback account:
This is a special type of escrow account that is used to record a certain amount of the sale price that has been withheld. This will ensure that certain contractual obligations are met after the transaction has been finalised, making sure that each party adheres strictly to stipulated terms and conditions.
How to effectively use escrow in real estate transactions
The integration of escrow into real estate transaction processes commence when both parties come into agreement on the terms and conditions of sale.
Listed below are the steps to follow when using escrow to facilitate a real estate transaction effectively.
1. Open the escrow account
In an estate transaction, once the buyer and seller have come to terms on the sale of a landed property, the next step should be opening an escrow account. This is usually done by contacting competent escrow holders/agents whose specialty is handling these transactions.
The buyer then displays his seriousness in securing the property by making an initial deposit into the escrow account. This usually indicates to the seller that the buyer is fully committed to finalising the property sale.
2. Proper documentation and review
After the deposit has been made, the seller should provide necessary documentation that would acknowledge the payment. This document should be well detailed and provide necessary information related to the property title, amount paid, signature of both parties, ownership proof and the likes.
In addition, this process also involves the escrow holder collecting all necessary documents pertaining to the transaction deal such as title documents, deposits slips and receipts, property purchase agreements and so on. These documents are properly reviewed by the escrow holder to ensure both parties are aware of their obligations and responsibilities.
3. Effective management of tax funds and insurance
Another key role for the escrow holder is to manage the concurrent costs associated with the landed property. Such costs are usually in the form of property tax and insurance.
Though most times, these costs are usually pre-included in the periodic mortgage payments of the buyer using a mortgage escrow account. It is now the obligation of an escrow holder to ensure that these tax levies are paid promptly at the appropriate time.
This will ensure that the buyer is protected from any lapses that might result from inconsistent property tax or insurance coverage.
4. Meeting contractal contingencies
A good contract agreement might usually come with pre-included contingencies such as property surveys, repairs, loan arrangements that must be observed before the landed property in question can be finally sold. It is the responsibility of an escrow agent to ensure that these terms are fulfilled before both parties can proceed with finalising their transaction.
5. Final verification and approval
Once all the conditions are met, including the contractual contingencies, the next step the escrow agent takes is to recheck and verify all documents and ensure that all transacting parties have met their requirements . Once these obligations are met, the transaction is then granted approval for closing.
6. Closing the transaction deal
This is the end stage of the escrow transaction. This involves transferring money to the seller while transferring ownership and property title to the buyer. This officially marks the end of the estate transaction.
In some cases however, the escrow holder might continue to oversee the payment of property taxes and insurance levies on behalf of the new owner in case of mortgage arrangements.
Conclusion
Overall it’s very easy to identify that escrow play a critically essential role, while offering a good level of protection for both buyers and sellers in a real estate transaction. They provide a secure, transparent method to properly handle money, documents and facilitate fast payments in any property buying process while minimising the risks of errors and lapses.
While it’s worthy to note that the entire process can be time-consuming and stressful, it will prove to be ultimately important in managing the whole estate transaction process, hence emphasizing the need for a competent escrow holder who is highly reliable.
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