What Is in Escrow?

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.

"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.

Understanding in Escrow

Escrowed items are most commonly found in real estate transactions. The property, cash, and the title to the property are often held in escrow until all specified conditions, outlined in the escrow agreement, are met, and transfer of ownership can occur.

An escrow agreement outlines the conditions and terms between the parties involved in the transaction as well as the responsibilities of each of the parties. Items placed in escrow are managed by a trustee called an escrow agent. The escrow agent, which is typically a lawyer, holds the assets until predetermined contractual obligations are fulfilled. Once the agreement terms have been satisfied, the escrow agent releases the funds or property held in escrow to the appropriate party.

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 on a property before its sale. Issues could arise if the appraised value of the property is lower than the agreed-upon purchase price.

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 for the property 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. Also, the buyer could have difficulty securing the necessary insurance and other policies needed to complete the transaction. 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, which is a process of checking public records to determine the ownership of the property. The title search helps determine if there are any liens and 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 of the real estate.

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.