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What is Escrow and How is It Used

Not all transactions are alike. Some are faster to close than others. This is usually due to the efficiency of both parties to comply with their obligations. Doing this is often easier for everyday deals.


It is quite different, however, when buying properties such as land or a condo unit. There are a lot of details involved before a transaction can be completed. A seller must have a title as evidence of ownership, have the ability to transfer it to the buyer, and settle any outstanding taxes over the property. On the other hand, the buyer must be able to pay for the property in question in accordance with the agreed-upon terms. Accomplishing these requires some time and a good amount of trust.


Of course, purchasing real estate involves a lot of risks. The owner might not have full ownership of the property upon selling, there is the lack of ability to transfer title upon payment of the price, or there are outstanding taxes owed on the property.


A buyer could likely end up paying for a piece of property that is loaded with all sorts of problems. Fortunately, escrow may be used to guarantee that obligations are performed while a transaction is pending. This should ideally lead to a consummated sale.


What is escrow?


An escrow is essentially an agreement between the principal buyer and seller to employ the services of a third party to hold their assets for them. This third party keeps such assets, be it title of ownership or cash, until further instructions are given by either party for its release. It is an arrangement that keeps the assets of the parties safe, and shows serious intent to proceed further with the transaction.


An escrow occurs once the parties come to an agreement regarding the performance of an obligation and arrange for their assets to be placed under the possession of a third party. This usually takes place when it comes to real estate or other large transactions. It is usually employed to increase trust and reduce the occurrence of fraud.


These assets are now safely out of the hands of the participating parties and under the possession of a third party. Each would now have to accomplish their end of the deal. Any such cancellation on either side could merit penalties, fines, or even legal action.


Everything begins with the parties agreeing to enter into a real estate transaction with each other. From here, an escrow company or agent is selected to hold their assets for them. An escrow then functions in separate stages. These are divided into collecting the assets, holding them for a specified period, and eventually disbursing them.

Who are the parties involved?


There are usually three parties concerned in an escrow: the buyer, the seller, and the escrow company or escrow agent. This is all that is necessary for an escrow transaction to work.


In some cases, the buyer may need another escrow for their loan. In this case, the parties are identified as the borrower (the buyer), the lender, and the escrow agent.


An official copy of the signed agreement is usually given to the escrow agent who has the duty to verify that the contracting parties have complied with their obligations. Such agent may not proceed further along the stages on his own accord. Its responsibility is to both the buyer and the seller by inspecting and validating that each has performed their duties.


This means that the principal contracting parties are simply required to do their obligations as agreed and on time.


How is it done?


After the official agreement is signed by the buyer and seller, a copy is given to the escrow company or agent. This initiates the escrow procedure. It is usually the buyer that looks for an escrow agent to handle the transaction. Such agent then proceeds to the collection stage where the property or title evidencing ownership is received. This is also where the money is collected.


These assets are then held for an agreed amount of time while the parties perform their obligations. The escrow agent next verifies if they have fulfilled their tasks accordingly. Upon compliance, money is disbursed to the seller while ownership of title is released to the buyer.


There are some cases, however, when an escrow can be entered into during the earnest money stage. It provides a buyer with greater security that the seller will not sell the property to other prospective buyers while financing is being sought. The buyer also has less risk that the seller will deposit the funds and not push through with the transaction. On the other hand, the seller can rest assured that the buyer is serious about buying the property. The buyer cannot cancel the sale or risk losing the earnest money deposited in escrow.


ZRE Escrow Agreement Example
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