What Is Escrow and How Does It Protect Buyers & Sellers?

by | Jun 30, 2021 | Closing Process

Escrow is a contractual arrangement in which an escrow Agent maintains money and documents until the deal is done and escrow is closed. This earnest money check and contract are held in what is called an escrow account.

Read further to learn more about what escrow is, how it works, and how it protects buyers and sellers.

What is it?

Escrow is also known as an “earnest money deposit”, or EMD. This is the dollar amount buyers put into an escrow account after a seller accepts their offer. Think of it as a “good faith” payment. It is there to compensate the seller if the buyer breaches the contract and fails to close.

The cost varies. Whether it is either side of the party paying, it typically totals about 1%-2% of the cost of the home.

How does it work?

The escrow Agent is someone from the real estate closing company, an attorney, or a company title Agent.

This Agent is there to ensure a smooth transaction of money and documents during the home buying process. They safely hold onto the earnest money deposit until all aspects of the contract are met in agreement and the contract is closed.

Like any loan process, there are contingencies. These include home inspections, repairs, mortgage approval, and other tasks that need to be accomplished by the buyer or seller.

Documentation of contingencies is always important. Every time a step is completed, the buyer or seller signs off with a contingency release form.

How does it protect both buyers and sellers?

Escrow protects all relevant parties in a real estate transaction. They ensure that funds are not disbursed until all aspects of the agreement have been met.

This process may seem like a hassle, but it works in your favor. For example, say the buyer had a home inspection contingency and discovered that the roof needed repairs. The seller agrees to fix the roof. However, during the buyer’s final walk-through they find that the roof has not been repaired as expected. In this case, the seller will not see a dime of the buyer’s money until the roof is fixed. Talk about a save!

Sellers can benefit from escrow too! For example, let us say the buyer’s bail on the sale at the last minute. This is disappointing to the seller. However, the buyers have already put down a chunk into an EMD. If the buyers backed out with no legitimate reason, they forfeit that money to the seller.

The majority of the time, the sale is legit, and no one is fooling anyone. But isn’t it relieving to know that if something does go wrong, escrow is there to cushion the fall?