Escrow account

Definition of "Escrow account"

Javier Cortez, Real Estate Agent Brick Road Real Estate

If escrow is the legal “moment” where assets are held by a third party (an escrow agent) hired by both the buyer and the seller of goods like real estate and insurance until the transaction is completed; it is only natural for the escrow account to be the “place” where the monies of this transaction are held.

For instance: a home buyer and a home seller go into an agreement regarding the fair market value of the house. Home buyer and home seller open an escrow account where the first will deposit the earnest money to the latter and - at least metaphorically – for the latter to store the title of the house to the first because during escrow he is not allowed to touch the house title and sell it to anyone else. They open the escrow account because, if the home inspection unexpectedly shows something unwanted, the escrow agent will be able to return the money to the home buyer, while the home seller will have the security of knowing that the home buyer has the funds to “put his money where his mouth is”. Because the dispute over the findings of the home inspection would commonly go to a “my word against his” that would lead to court battles, and, most of the times, once it was settled, the losing-part would say “well, I don’t have the money anymore” or “Well, I already spent the money”, real estate agents decided to institute a way to secure the money of the transaction, and that was a third-party temporary account: the escrow account.

Once all due diligence regarding the home is done, the escrow agent transfers the funds to the home seller and the transfer of title is done.

Being a temporary account, it gets closed right after all contract conditions in connection with the transaction are met.

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