Real Estate Lingo 101: What is Escrow?

If you have ever bought or sold a house, chances are you’ve heard the term “in escrow.” What exactly is escrow and does the term apply solely to real estate transaction? Though escrow is most commonly thought of in terms of property transfers, it can pretty much be used in the exchange of any goods or services. Escrow is an arrangement in which an impartial third party is trusted to disperse goods, services, money, or ownership in accordance with agreed-upon contractual obligations.

Real Estate Escrow

There are a couple of ways in which  escrow plays a role in real estate. When most people think of escrow, they couch their understanding in the house buying/selling term “in escrow.” After an offer is accepted, a buyer and seller are “in escrow,” and a transfer of property will occur pending the fulfillment of many details, such as loan approval as well as inspection completion and subsequent potential price negotiation. Being “in escrow” safeguards the buyers and sellers by ensuring that no property or money will transfer ownership until both parties meet all contractual stipulations. Escrow costs, as incurred during a house sale, are most commonly shared equally between both parties at closing.

Once you buy a house, your mortgage company will set up an escrow account for their annual real property taxes and home owners insurance payments that are added to your monthly mortgage bill. These escrow accounts allow people to break down yearly taxes and insurance costs into monthly payments, and they guarantee the mortgage company that the money will be there to pay these bills. When the tax and insurance payments become due, the escrow company pays the bill using funds in the escrow account.

Internet Escrow

Internet escrow is another form of escrow that is becoming increasingly common. When people exchange goods or services online, internet escrow companies help protect both parties by, for example, holding a payment until the service is rendered. Many online companies increase customer confidence by providing an escrow company as an intermediary.

Though these internet escrow companies can benefit both parties, you should be aware of the prevalence of fraudulent companies. Some websites will create fictitious escrow companies, collect your money or goods, and never uphold their side of the bargain. To ensure you’re not becoming a victim of one of these companies, check the government registry. If the company is reputable, they will have state or federal backing.

Legal Escrow

Another form of escrow, legal escrow, plays a part in many judicial proceedings. In this capacity, an escrow company will be responsible for dispensing cash settlements, most commonly in environmental lawsuits or class action lawsuits.

Although their applications range from high-value property to small internet purchases, all of these types of escrow function similarly. While you will pretty much always have to pay for an escrow company’s services, the protection they provide is often worth the cost.

Published or Updated: March 16, 2013
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. Pamela says:

    Good, and simple, description of escrow. So many people make this too confusing.

    I’d add one example that more people should know is available to them: escrowing rent when the landlord is not fulfilling his legal obligations. Many people don’t know that if their landlord is not repairing things they need to live in their apartment (like heat or water), they can escrow their rent until the repairs are completed. The attorney general’s office of each state is a good source of help.

    • DR says:

      Pamela, nice tip. As a landlord, we’ve always met our obligations. But I’ve talked to plenty of tenants who have had some really bad experiences with landlords, and putting rent in escrow can go a long way to getting things fixed.

  2. HomeList says:

    Great explanation of the escrow term. Your article will be featured in the upcoming HomeList.org real estate article carnival =)

Speak Your Mind

*