There are many people involved in purchasing your home: agents, brokers, lenders, sellers and agents or escrow companies. Agents and brokers are responsible for providing you with properties and negotiating deals to buy from motivated sellers. The lender, whether it’s a private lender, bank, or mortgage company provides you with funds so you can buy the property. And then there’s escrow involved. It is common knowledge that escrow is a deal that must be passed before the deal is closed and your purchase transaction from the seller is completed and you own the property.
But what exactly is escrow and how does it work in this situation?
Escrow refers to a neutral third party who is responsible for transferring or exchanging assets, usually property and money. There is an escrow agent in charge of an escrow account, which is specific to a particular transaction or transactions. This escrow agent usually works for the escrow company that is responsible for hosting the account.
When you buy a house, after all negotiations are completed and the papers have been signed, the seller places the property rights into an escrow account. Here, it is kept securely until the buyer transfers the money to purchase the title (property) into an escrow account. After a certain period of time, the deal is said to close escrow where the buyer received the title of the property, now officially owns it, and the seller receives the funds from the escrow account.
An escrow account is used as protection for both the seller and the buyer. If something goes wrong during the escrow period, the seller will only regain ownership of the account and the buyer is not in danger of losing funds. This eliminates the seller losing property or the buyer losing funds, and protects the assets of both parties.
An escrow account also holds taxes and commissions payable to the country and the broker or agent involved. The escrow account or agent is fully responsible for the distribution of these funds so that it is carried out fairly and openly to all parties involved. Transactions can be done without escrow, but it is safer and smarter to go through third party escrow so that everything is done legally and all events of the deal are accounted for. This protects all parties and ensures brokers and agents get their commissions and taxes paid fairly.
It is highly recommended that you always use escrow when buying property. In more complicated or more expensive deals, an attorney can help you set up an escrow account to ensure all parties are handled properly.
Another tip: either seller or buyer can choose an escrow company. Some sellers always prefer to use their own, and some buyers prefer to use their own. Excluding personal preferences, as long as it is a reputable company, absolutely any escrow company will work. Since it is a neutral third party and the escrow company has absolutely no vested interest in the transaction taking place, you can consider it a safe haven for your assets until the deal is completed.
