What is escrow?
A quick escrow definition would be to say that it is when money or assets are transferred to a third party who holds them until a transaction between the two original parties has been completed.
When people define escrow, they often use a property transaction as an example as that is where escrow is most commonly seen. Buyers, of a property, transfer their funds to a third party so that the owner of the property has confidence that the funds for the purchase do exist. However, they are held in escrow until the buyer has carried out all the surveys and due diligence on the property to ensure they are happy with the purchase going ahead.
However, escrow can be used in many other types of transactions. For example, stocks are often placed in escrow but many online sales are increasingly using escrow to help protect both buyers and sellers. It can stop fraud or lack of payment in many instances.
How does escrow work?
Escrow works by transferring funds or assets into an account held by a third party. When it comes to real estate escrow transactions, an escrow account will hold the funds (as previously mentioned) for the housing sale. This will be done if there are certain conditions that must be met for the house sale to go through. It is only when those conditions have been met that funds are released to the seller and the buyer then owns the property.
However, sometimes a mortgage company may insist that escrow is used. In these cases, funds for home insurance and property tax payments are also placed into the escrow account. This will often be the case when mortgage payments are higher - but that is because those mortgage payments also include home insurance premiums and property tax amounts.
When it comes to stock, if stock is placed into an escrow account, the shareholder still owns it, but will have limited ability when it comes to selling the stock. For that reason, transferring ownership of stock through an escrow account is often done as a form of payment to executives of a company. By limiting their ability to sell stock, companies still provide them with an asset, but the executives still have to stay on for a period of time to be able to sell the stock for financial gain. It’s a good way of retaining top staff.
When it comes to escrow and online sales, funds are held in escrow until a product has been delivered. Importantly, that product must be of the standard it was advertised.
Advantages of escrow
The most notable advantage of escrow is that it provides protection to both parties. Given the size of transaction that real estate can be, such protection is often a big comfort to those involved. It works in favor of both sides and helps sales go through that may otherwise not be entertained by those involved. It can therefore be used to help stimulate real estate sales and ecommerce.
Contractbook and escrow
If escrow helps support legitimate transactions, we’re all for it. Escrow clauses in contracts can help promote a business agreement being forged that will provide value to both sides. For example, in our property management agreement we outline that the manager should keep all security deposits in an escrow account. That’s important as it means that the deposit protects both the manager, should the tenant cause damage to the property, but also for the tenant who knows that they can immediately get the deposit back once they vacate.