Most of us have a cursory knowledge of real estate and how it works. Like most things, however, we should probably leave it to the professionals. At the Chernov Team, we believe in keeping our clients informed, and part of being informed is being aware of common terms used in the real estate industry. Today we will address the term “escrow.”
In short, escrow operates as a middle-man that holds funds until all conditions of the sale are completed. Once all the conditions have been satisfied, the funds placed in escrow are dispersed to the appropriate party.
How Does Escrow Work?
As mentioned above, the escrow officer is a 3rd party (this third party can be an attorney, a title company agent, or the closing company). The purpose of the escrow officer is to ensure that the process goes smoothly from start to close; this includes transfers of documents and money. Escrow is there to guarantee that no property or funds exchange hands until all conditions of the agreement have been satisfied.
As the process continues, various documentation is provided to the escrow officer at each of the critical phases of the transactions. As mentioned above, a major phase of the transaction is the satisfaction of all conditions. These conditions frequently include home inspection, repairs, etc. Each time a critical phase of the transaction is completed, either the buyer or seller provides signed documentation that the condition has been satisfied. Once every condition has been satisfied and finalized, the escrow officer records (or clears) the title. As this point, the buyer is now the official owner of the home.
How Much Does Escrow Cost?
The cost of escrow varies by company, but generally escrow costs between 1-2% of the total cost of the home. Many agreements determine whether the buyer, the seller, or both the buyer and the seller will bear the cost of escrow.
How Does Escrow protect Buyers and Sellers?
Escrow can be a thorn in everybody’s side, but it serves a very important purpose.
Example: Barry Buyer agreed to purchase Steve Seller’s home on the condition that Barry inspects the home, and Steve make repairs as requested by Barry. Subsequent to this agreement, Barry placed his funds into escrow, and Steve placed title into escrow. After inspecting the home, Barry noticed that the roof above the garage was leaking. Barry Buyer asked Steve Seller to fix the roof and Steve agreed. During Barry’s final walkthrough of the home, he noticed that the roof above the garage was still leaking. In this example, Steve will not receive Barry’s money until he fixes the roof. Had Barry simply given Steve the money, and Steve had simply given Barry title; Barry would not have received the benefit of what he had bargained for, and Steve would have obtained a windfall. The end result would be that Barry would be forced to engage in costly litigation to obtain his remedy from Steve.
In short, escrow serves the same purpose as bumpers on vehicles; it keeps everybody safe as they progress through a real estate transaction. There is a good chance that most sellers and most buyers aren’t attempting to “pull one over” on other people, but it’s important to have a safety net if something goes wrong, a safety net that doesn’t require years of litigation.