What is Escrow?

by | Jul 14, 2022 | Lease-To-Own, Rent-To-Own | 0 comments

In escrow? Under contract?  


You’re on the hunt for a property or just getting to know the market, and so you’re going to come across some terms and jargon that are commonly used but may lead to confusion.  


What is escrow?  


It’s a financial agreement between two parties that is held by a neutral third party who protects the integrity of the transaction. The third party’s role is to hold the contract and any money or property until the conditions outlined in the agreement are met.  They hold and maintain the funds or property and then verify that each agreed stipulation in the contractual parties is fulfilled. It’s their job to ensure all boxes are checked and parties have met their obligations.  


 Effectively, escrow protects the assets and contractual parties in the property purchase.  


 However, the term ‘escrow’ is also commonly used in reference to the time period between when a property’s contract is executed and when the sale closes.  



When does escrow start?  


 Escrow starts as soon as the buyer and seller execute a binding contract. This happens when a valid offer is made to a seller, who accepts and signs the contract. At this point, an escrow company with an escrow officer is designated. The escrow officer’s sole role is to act impartially and ensure the contract is carried out per its terms and conditions.  



What is an escrow account?  


 Part of a binding contract is financial consideration in the form of an initial deposit, also known as an earnest money deposit. This deposit is meant to show that the buyer is making an offer in good faith with a serious intention to purchase the property. Depending on the contract agreement, these amounts can be as little as $100 or a designated percentage of the deal (often 5%). The deposit is not directly paid to the seller but placed in the trust of the escrow company in an escrow account to protect the buyer’s funds.  



Are there any requirements of a buyer or seller during escrow?  


 Yes! Just because you’ve signed the contract doesn’t mean that the deal is guaranteed.  


 During escrow, the escrow company will put together packages for both the buyer and seller to complete as part of their contractual obligations. For the seller, this will include escrow instructions, possible commission instructions, tax forms, a grant deed, and payout forms. These packages must be completed timely so that the escrow and title company (although sometimes they are one and the same) can push forward.  During a traditional sale, the escrow period also gives the buyer time to complete their due diligence inspections they are entitled to in their contract. Home inspections can include any inspection, including a pest, foundation, roof, sewer inspection, etc.  

It’s important to know that if a contract specifies that a specific inspection is required, it must be completed unless agreed to otherwise in writing by all parties. So, for example, if a contract states that a pest inspection is required, the escrow will not close the sale until the pest inspection is complete.  


Unless the buyer has agreed to purchase a property “as is,” an inspection unveils any costly maintenance or required repairs, the buyer can negotiate repairs or compensation with the seller. In an “as is” sale, buyers can conduct pre-sale inspections. However, they cannot use their findings as justification or cause to negotiate or withdraw from their contractual obligation.  



What else takes place during escrow? 


 In most traditional home purchases, the buyer must obtain financing. The escrow gives them the allotted time to arrange their financing and meet their bank’s requirements.  The finance process can be timely and document-heavy, so buyers need to have their bank involved as early in the purchasing process as possible. With the current lending environment, it’s not uncommon for buyers to obtain the property finance they need.  

Lastly, before the close of escrow, the title company will complete a title search. Most contracts stipulate that a property must be transferred free and clear, meaning that no loans or encumbrances are transferred to the new buyer. 


 To recap, escrow is an impartial party that holds the contract and earnest funds in safe keeping while ensuring that all elements of the contract are fulfilled. For buyers and potential sellers, it’s also important to remember that it’s a term applied to the period between executing a binding contract and completing its sale.  


If you still have questions about escrow or are looking to purchase a property but are unsure how to make the numbers stack up, contact a team member. We provide custom housing solutions and specialize in Rent-to-Own. Already know that rent-to-own is the right fit for you? Complete our application now!  


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