What is an Escrow Account?
Escrow is a way of transferring or exchanging property or money using a neutral third party. Escrow provides a means of protection in the handling of funds, assets and/or documents. Escrow enables the buyer and the seller to transact business with each other through a neutral party, thereby minimizing their risk. Escrows are established to hold original documents, real estate deeds, titles to property, money or securities until conditions are fulfilled and the items are released.
In the escrow, all parties involved give their instructions to a neutral intermediary, called the "escrow agent" or “escrow account manager” whose duty it is to assure that no funds, assets or property change hands until all instructions have been carried out to completion.
An escrow is beneficial to all parties as an escrow agent will be holding the documents, processing all regular payments, accounting for all transactions and providing the required reporting. Escrow accounts are designed to facilitate day to day business and to make seemingly complicated or “impossible’ transactions become real and performable. All this is along the lines of expensive Letter of Credit services offered by banks for international buyers and sellers, but at a fraction of the cost whilst still enhancing security in these transactions.
Why Do I Need an Escrow?
Whether you are the buyer, seller, lender or borrower, you want the assurance that no funds or property will change hands until all of the instructions in the relevant contract have been followed. The escrow agent or account manager has the obligation to safeguard the funds, assets and/or documents whilst they are in the possession of the escrow account, and to disburse funds and/or convey title only when all provisions of the escrow have been complied with.
What types of transactions go through escrow?
Most contracts that involve the transfer, lease or financing of real or personal property can be placed in escrow. You may be involved in escrow not only when you buy or sell real estate, but also when you make trade deals, sell a business or transfer stock in a privately held business. The buyer or seller can, and should, demand the protection of escrow for any transaction involving a substantial investment.
Escrow can be effective in:
- Contracts and deeds of trust between private parties
- Safekeeping of documents
- Holding and releasing of funds for subdivisions and construction
- Projects and other business transactions
- Processing of funds related to trade deals
- Holdbacks and reserves on corporate purchase transactions
- Holding earnest money and deposits on capital-raising transactions
- Mergers, acquisitions and buyouts
- Investment offerings
- Settlement of claims
How does it work?
The principals to the escrow – buyer, seller, lender, borrower, etc. – agree on written escrow instructions, sign and deliver these to the escrow agent or account manager. The escrow agent or account manager will provide all information necessary for the preparation of the escrow instructions and legal documents. Only first class banks, lawyers and accountants are used to safeguard the funds and assets of the parties to the escrow.
The escrow agent or Account Manager will process the escrow arrangement in accordance with the escrow instructions, and when all conditions required in the escrow are met or achieved, the escrow will be "closed." Each escrow, although following a similar pattern, is likely to be unique in some respects, as it deals with specific property and the transaction at hand. All the necessary paperwork will be tailored to meet your specific requirements.
What is needed to set up an escrow account?
Parties to the escrow need a properly executed agreement. On traditional escrows the agreement may be a contract for deed, trust indenture, mortgage, or a buy/sell agreement. In addition, the parties will complete a drafted Escrow Agreement which shall document the parties’ name and other important information, legal documents received, payment amount and disbursement instructions, fees, and terms and conditions of the agreement.
Example: Escrow in real estate transactions.
To finalize the sale of real estate a neutral, third party escrow agent is engaged to assure the transaction will close properly and on time. The escrow agent or account manager insures that all terms and conditions of the relevant contract between the buyer and seller are met prior to the sale being finalized, including receiving funds and documents, completing required forms, and obtaining the release documents for any loans or liens that may have been paid off as part of the transaction. This assures that the buyer has clear title to the property before the purchase price is fully paid.
The documentation the escrow holder collects may include:
- Loan documents
- Tax statements
- Fire and other insurance policies
- Title insurance policies or title guarantees
- Terms of sale and any seller-assisted financing
- Requests for payment for various services to be paid out of escrow funds.
Upon completion of all instructions of the escrow, closing can take place. All outstanding payments and fees are collected and paid at this time (covering expenses such as title insurance, inspections, real estate commissions). Title to the property is then transferred to the buyer and an appropriate title insurance or guarantee is issued as outlined in the escrow instructions. At the close of escrow, payment of funds will be made in an acceptable form as per escrow instructions.
(Information herein provided is subject to criterion change without notice)