What Is Escrow in Real Estate?

Escrow is commonly associated with real estate but it’s not exclusive to it. Escrow is a neutral third party used to hold and distribute money or property once contractual obligations are met. Escrow is used across many fields of business such as banking, the buying and selling of intellectual property, and in mergers and acquisitions of large companies. But let’s talk more about how it’s used in real estate.

What is Escrow in Real Estate?

Now maybe you have heard the term but you’re not exactly sure what escrow does in a real estate transaction. In simple terms, escrow in real estate is a neutral third party that protects the integrity of the transaction.

Important note: The exact closing process can vary by state. In some states, an escrow company commonly handles closing. In others, a title company and/or a real estate attorney may run the closing (sometimes still referred to as “escrow” or “settlement”). Either way, the core purpose is the same: a neutral party helps ensure the agreed-upon terms are completed and funds/documents are handled properly.

So what does this mean? Let’s explore how escrow in real estate plays a part in that.

So Where Does Escrow in Real Estate Start?

It starts with you as a real estate agent getting a buyer and a seller together. That can be to either acquire or sell a property depending on who you are representing. When everyone is happy and in agreement, both parties will enter into a legal and binding purchase agreement (this may be called different names depending on your state—such as the RPA (Residential Purchase Agreement) in California).

The purchase agreement is integral to the transaction because it covers all the terms, conditions, and stipulations that have to be met according to what the buyer and seller have agreed upon. It acts as the blueprint for escrow (or the closing/settlement team) to carry out.

When Does Escrow Step In?

When you have a fully executed contract that’s when escrow steps in. A “fully executed” contract means that the buyer, seller, and their respective agents have all signed off the purchase agreement as well as any other addendums or amendments that include the conditions of the sale.

The main purpose of the escrow/closing team is to now take the contract and make sure that all the conditions are met in the transaction. As a matter of fact, escrow will not close until that happens. Not only will they make sure that all the stipulations are met, but they are also responsible for keeping everything on schedule and accounting for every penny.

Earnest money (escrow deposit)

In most transactions, the buyer submits an earnest money deposit shortly after the contract is accepted. Those funds are typically held in an escrow account (or trust account) by the escrow holder, title company, or attorney—depending on the state and local custom—until the deal closes or the contract is canceled according to the terms.

So what happens if you’re going through escrow and a condition has not been met? What happens then? Does escrow still close? As we just discussed it’s escrow’s responsibility to make sure that all conditions are met. Let’s talk about how escrow handles the situation when they aren’t.

Meeting all Conditions in the Contract

So, let’s say we have opened escrow and so far everything has been on schedule. All items have been accounted for, we’re nearing the close and everyone is happy. Escrow is reviewing their final paperwork to make sure all stipulations have been met and they happen to notice that the seller agreed to give the buyer a termite report (or another required inspection/disclosure). It was never ordered.

Now we have a problem.

Or do we?

A missing report could be considered a minor issue. This is not an expensive report and can be obtained fairly easily. Should escrow worry about it or just close the deal?

Knowing what you do up to this point, what do you think needs to happen? If you said, “Get the report done,” then you are right! Why? Because it’s in the contract. So even though you may have been near the end, everything has to stop. It’s a stipulation and all stipulations need to be met before escrow can close.

Remember, escrow will uphold the integrity of the transaction regardless of whether the stipulation or condition is small or large. This is escrow’s primary purpose. So what else is escrow responsible for?

Other Escrow Responsibilities

Let’s talk about the other aspects that escrow is responsible for in a transaction. Aside from the stipulations that have to be met, they are involved with other areas of the transaction such as:

PROPERTY TITLE

What is the property title? The property title is the transfer of ownership from the seller to the buyer. Escrow is in communication with the title/closing side of the transaction to get the property information and to make sure that all the information is accurate.

THE DEED (DOCUMENT THAT TRANSFERS OWNERSHIP)

The deed is the document used to transfer ownership from the seller to the buyer. The exact type of deed can vary by state (for example, a grant deed or warranty deed may be common depending on location). The closing team coordinates preparation and signing of the deed, and at close, they ensure it is properly recorded according to local requirements.

FINANCIAL MATTERS

During escrow, they will receive and hold funds related to the transaction and coordinate with the buyer’s lender to ensure everything with the loan is on track. This also allows escrow to be aware of any issues that may arise to prevent the closing of escrow.

They prepare the final closing/settlement statements for the buyer and seller. This is an accounting of funds to the seller (including proceeds) and to the buyer (costs and credits). This is prepared before the transaction formally closes and the closing funds are distributed.

Escrow is an excellent resource for both you and your client. All you have to do is reach out to your escrow officer (or closing/settlement contact) and they can let you know everything they can do for you.

Final Thoughts on Escrow in Real Estate

As you can see, escrow is a vital part of the real estate process. Because they are a neutral third party, you can be assured that everything is on the up and up in the transaction. Escrow makes sure that everything in the contract is honored and frees up the real estate agent to do what they do best: getting more deals!