By Mel Dorman, May 30, 2019
In real estate, an escrow account is a secure holding area where important items like the earnest money, checks and contracts are kept safe by an 3rd party until the deal is closed and the house officially changes hands.
Usually, the escrow officer maintains money and documents until the deal is done and escrow acts as a contractual arrangement between home buyers and the sellers.
How escrow functions
An Escrow Agent is someone from the real estate closing company, an attorney, or a title company agent (customs vary by state).
The Escrow Officer and Escrow maintain the money and documents until the deal is usually done in accordance with the contractual arrangement between home buyers and the sellers. Escrow cannot dictate the terms of the contract, they can only enforce them.
A third party ensures everything during the transaction proceeds smoothly, which also helps in the transfer of money and documents. Escrow provides protection to all the relevant parties in a real estate transaction by ensuring that no money changes hands from the lender to property until and unless all conditions in the agreement have been met.
All of this takes place once all conditions are fulfilled, including removal of contingencies like home inspection, repairs and other tasks that need to be accomplished by the buyer or seller. And every time one of those steps is completed, the buyer or seller signs off with a contingency release form or addendum; then the transaction moves on to the next step and one step closer to closing. After everything is complete, the Escrow Officer clears (or records) the title, and buyer is now officially the new owner of the house.
The earnest money deposit and cost of escrow
Usually, the cost of earnest money is 1% to 2% of the cost of the home. This amount is kept with escrow after the contract is accepted as security that will compensate the seller if the buyer breaches the contract and fails to close. This is usually deposited with escrow within 3 business days after mutual acceptance.
How escrow protects you
Escrow protects buyers by protecting them with the risk of not getting the repairs done before closing. It also helps sellers if the buyers decide to bail on the transaction after due diligence, because the buyer could forfeit their earnest money to the seller by breaching the contract. In Oregon, Escrow and Title are the same company. Title is responsible for making sure all interested parties in a property are released from title prior to sale. Interested parties could be mortgage loans, spouses, heirs, ex-spouses, contractors, or tax liens. They also provide title insurance should someone make a claim on the property after closing.
Escrow, in other words, keeps everyone safe as they move forward in real estate transaction and acts as the unbiased middle party.
Mel Dorman
Broker | OR & WA
She/They
Ten years ago, Melissa was living in a slum in Kolkata, India, helping over 200 women escape sex trafficking by providing alternative work at a social business...
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