In financial transactions, the term “in escrow” indicates a temporary condition of an item, such as money or property, that has been transferred to a third party. This transfer is usually done on behalf of a buyer and seller to ensure that all conditions of the agreement are met before the asset is released.
“In escrow” is a type of legal holding account for items, which can’t be released until predetermined conditions are satisfied. Typically, items are held in escrow until the process involving a financial transaction has been completed. Valuables held in escrow can include real estate, money, stocks, and securities.
Key Takeaways
- Funds or assets held in escrow are temporarily transferred to and held by a third party, usually on behalf of a buyer and seller to facilitate a transaction.
- “In escrow” is often used in real estate transactions whereby property, cash, and the title are held in escrow until predetermined conditions are met.
- Escrow is often associated with real estate transactions, but it can apply to any situation where funds will pass from one party to another.
- Valuables held in escrow can include valuables, real properties, money, stocks, and other securities.
Comprehensive Guide to Escrow
Escrowed items are most commonly found in real estate transactions, but the concept can be applied to any transaction involving valuable assets. The property, cash, and the title to the property are often held in escrow until all specified conditions are met, and transfer of ownership can occur. Here is a full exploration of how escrow works in these transactions.
Real Estate in Escrow
While the property is held in escrow, the buyer cannot take possession of or occupy the space. Real estate deals must clear a series of stages during the escrow process. Below are some of the typical conditions that might need to be met and why assets might be held in escrow.
Appraisal
An appraisal of the property must be conducted before its sale. If the appraised value of the property is lower than the agreed-upon purchase price, issues could arise. Banks will not lend money for the amount of a property if the asking price is above the appraised value. The buyer could try to find funding to cover the missing portion of the agreed purchase price or ask the seller to lower the price. If the buyer can’t fund the difference while the real estate is in escrow, the transaction could be terminated.
Home Inspection
A buyer might agree to purchase a property with the condition that the home passes a home inspection. The funds for the purchase would be held in escrow until the inspection has been completed. Once the conditions of the offer are satisfied, the buyer or seller will then be obligated to purchase or sell the property.
Financing and Insurance
The real estate transaction could be held in escrow whereby the sale wouldn’t be completed until the buyer obtains financing or a mortgage from a bank. Additionally, the buyer might have issues securing the necessary insurance. If the buyer doesn’t get approved for the mortgage or obtain the needed insurance, the escrow agent would nullify the offer to buy.
Title Search
Before purchasing a home, a title search is performed to check public records for determining the ownership of the property. The title search helps determine if there are any liens or other claims attached to the property. An outstanding lien means that the property was used to guarantee the repayment of a loan. A clear title—meaning there are no liens—is required for any real estate transaction to go through properly.
Zoning
The buyer may have wanted the property for a use that does not match current zoning regulations. The seller might seek a variance while the property is in escrow to allow the buyer to proceed with their intended plans upon taking full ownership.
Repairs
The purchase might have included guarantees that the seller would address needed repairs to the property. This could include the removal of landscape features such as trees or the reconstruction of part of a building. If the seller does not make good on those promises while the property is in escrow, then the deal might fall through.
Releasing “in Escrow” Funds
The funds in a real estate transaction can be held in escrow even on the date of the sale and won’t be released until all parties—the buyer, seller, and the mortgage company—agree that all of the conditions in the escrow agreement have been satisfied.
The intention of keeping the property in escrow is to assure all parties that the mutual responsibilities outlined in the escrow agreement will be fulfilled.
Related Terms: escrow agent, mortgage, real estate, title search, home inspection.
