In Escrow
In financial terminology, the concept "in escrow" refers to the temporary state of an item transferred to a third party. Such items can be both money and property, and the transfer can be carried out from the buyer or seller. "In escrow" is commonly considered a form of legal account for items that cannot be released until pre-agreed conditions are met. As a rule, items remain in escrow until the completion of the financial transaction. Typically, valuable items held in escrow are real estate, funds, and securities.
What means “In Escrow”
Real estate transactions are the area where the term “in escrow” occurs most frequently. Most often, an escrow agreement contains specific terms and conditions, the strict meeting of which allows for a further transfer of ownership, such as the property, money, or title. Until then, however, the valuables are held in escrow.
An escrow agreement defines the exact terms, certain conditions, as well as the rights and obligations of each of the parties engaged in the transaction. Escrowed items are managed by trustees, also known as escrow agents.
The main function of an escrow agent, who in most cases is a lawyer, is considered to be the retention of assets until the agreed contractual obligations are effected. After the terms of the agreement have been met, the escrow agent transfers the property or funds held in escrow to the relevant party.
More about In Escrow in real estate sector
Even on the day of the transaction itself, that is, the direct purchase and sale of the object, the funds in escrow may remain blocked, since the only condition for the releasing these funds is the full satisfaction of all parties to the transaction, which are the buyer, seller and the mortgage firm, as well as their confirmation of the fulfillment of all conditions stipulated by the escrow agreement. The main purpose of holding the property in escrow is to ensure that all parties meet the mutual obligations carefully set out in the escrow agreement.
As mentioned above, the buyer does not have the right to dispose of the property while the current property is in escrow. The escrow process involves the mandatory passage of a real estate transaction through several stages.
The most common required conditions and reasons for holding valuables in escrow are listed below.
Appraisal. The sale of any property is preceded by its appraisal. When the agreed purchase price of a property is higher than its appraised value, certain difficulties may arise. In such a situation, credit institutions may refuse to lend money for the amount of property since the estimated value is below the asking ones.
In order to cover the missing part of the agreed purchase price, the buyer will either ask the seller for a price reduction or seek the required funds from various sources. The transaction can be canceled or terminated if the difference cannot be paid by the buyer at the time of holding the asset in escrow.
Home inspection. The purchase of property can be approved by the buyer after the home inspection, until the completion of which, the funds for the purchase of real estate will be kept in escrow. Obligations to buy and sell real estate by parties will take effect as soon as the conditions of the offer are met.
Finance and insurance. The sale of the object will be considered completed, at the time the buyer receives financing or a mortgage from a credit institution, such a real estate transaction can be carried out in escrow. The buyer's difficulties may also be related to obtaining the insurance policy required to complete the transaction. The purchase offer may be canceled by the escrow agent if the buyer has not received the mortgage bank’s approval or has not prepared the necessary insurance policy.
Title search. A title search also precedes the purchase of a home, as it is a procedure of checking public records to define the ownership of the property. The title search reveals the existence of liens and any claims related to the current property. The presence of an outstanding lien implies that the asset acted as a guarantee of repayment of a loan. A clear title, which means absence of liens, is needed for any real estate transaction to be carried out properly.
Zoning. If the buyer is using the property for a purpose that does not comply with current zoning regulations, the seller may reject the transaction while it is in escrow so that the buyer can continue to pursue plans after receiving full ownership of the property.
Repairs. In some cases, the purchase may include a guarantee that the seller will make any repairs to the property, such as the removal of landscape elements or renovation of part of the building. The transaction can also be canceled at the time the property is held in escrow in the event that the seller's promises to repair were not fulfilled.
