Escrow

Escrow refers to the third part in buyer and seller relationship in any transaction. It means that this part possesses the money that a buyer must transfer to the seller. The whole process exists under the escrow agent supervision. The agent controls that the assets weren’t released from the escrow account before all requirements such as predefined obligations or other instructions are met. An escrow account may comprise money, funds, securities, etc.

How does Escrow work

Escrow helps buyers and sellers to secure themselves in case there are doubts about the meeting of their obligations. There are many cases in which escrow may be required, such as banking, internet transactions, real estate, etc.

For example, there is an international organization with clients all over the world. The organization offers produced goods to their clients and in order to be sure that the goods reach its buyer and the money paid reaches the organization an escrow account may be used. Also, in case purchased goods don’t correspond to the required quality or have defects a buyer has all rights not to pay for these goods.

Usually, a buyer puts the amount of money that equals price in escrow and once the goods in perfect state meet their owner, money is sent to the seller/ This is how both sides of a transaction may be protected.

Where is Escrow used

Real Estate. Escrow is commonly used in the real estate sector. A buyer puts his or her money in escrow and this may show to a seller that the buyer has strong intention to purchase the property.

There are also special escrow agreements that define terms and conditions with the help of which the purchase is going. For instance, a person intends to buy a house, but he or she wants an inspection, thus, such agreement may be made. Then the person places money in the escrow account and once the requirements that are outlined in the agreement are met, money may be transferred.

Speaking of mortgages the term escrow also may be used. In this case it refers to an escrow account, which appears right at the time of closing the mortgage. Setting up these accounts may be a requirement of the lender. Such escrow accounts consist of insurance and property tax payments. Also, it contains monthly mortgage payments and money to cover the mentioned early property tax payments. Thus, payments will be higher. However, since the money for covering taxes is already in the account, owners of such accounts don’t have to think every month about paying property tax bills.

Stock Market. It isn’t rare to issue stocks in escrow. Although the shareholders are full owners of the stock, they may face difficulties in situations where they need to dispose of the stocks. Often stock is given as a bonus to the executives in order to attract and retain them. However, executives have to wait until the end of an escrow period to sell the stock.

Online Sales. In the case of online sales, escrow also plays a protective role. A person buys goods via the Internet, sends the payments to a special service that will allow the procedure of transferring money to the online market as soon as the person gets the purchase.

Usually, escrow services are used to sell goods that are quite expensive, such as pieces of art or jewelry. Also, it should be remembered that online escrow companies are allowed to set a fee, thus, extra money may be withdrawn.

Advantages of Escrow

Escrow accounts have aspects that may be advantageous and even beneficial:

• Safety. Many transactions involve significant payments, thus, escrow accounts are extremely useful for those who worry that something may go wrong with money.
• Monthly payments. People with escrow accounts don’t have to worry about monthly payments (insurance and taxes), the procedure will be carried out automatically.
• Usefulness. Advantageous for both parties of every transaction, especially if it involves expensive goods.

Disadvantages of Escrow

However, escrow accounts are inevitably bound with a number of disadvantages:

• High payments. In case of mortgage escrow is often served for taxes and insurance, the payments for this are usually higher than mere interest payments.
• Mistakes. It isn’t rare to find mistakes in estimations for tax due.
• Online fees. Online fees for using escrow services may be extremely high.