What Does Escrow (in Escrow) Mean, and How Does It Work?

What Is 'In Escrow'?

In financial transactions, the term "in escrow" indicates an item, such as money or property, is being held by a third party until legal conditions have been met to transfer it. This transfer is usually done on behalf of a buyer and seller.

Typically, items are held in escrow until the process involving a financial transaction has been completed. Valuables held in escrow can include real estate, money, stocks, and securities.

Understanding 'In Escrow'

Escrowed items are most commonly found in real estate transactions. The property, cash, and the title to the property are often held in escrow until all specified conditions, outlined in the escrow agreement, are met, and transfer of ownership can occur.

An escrow agreement outlines the conditions and terms between the parties involved in the transaction as well as the responsibilities of each of the parties. Items placed in escrow are managed by a trustee called an escrow agent.

The escrow agent, which is typically a lawyer, holds the assets until predetermined contractual obligations are fulfilled. Once the agreement terms have been satisfied, the escrow agent releases the funds or property held in escrow to the appropriate party.

Real Estate In Escrow

While the property is held in escrow, the buyer can't take possession of or occupy the space. Real estate deals must clear a series of stages during the escrow process.

Escrow can also refer to an escrow account that is set up at the time of mortgage closing. In this case, the escrow account contains future homeowners insurance and property tax payments, held separately from monthly principal and interest payments being made by the mortgage holder. The escrow account usually remains for the life of the mortgage.

Below are some of the typical conditions that might need to be met and reasons why assets might be held in escrow.

Appraisal

An appraisal of the property must be conducted before its sale. Issues could arise if the appraised value of the property is lower than the agreed-upon purchase price.

Banks won't lend money for the amount of a property if the asking price is above the appraised value. The buyer could try to find funding to cover the missing portion of the agreed purchase price for the property or ask the seller to lower the price.

Home Inspection

A buyer might agree to purchase a property with the condition that the home passes a home inspection. The funds for the purchase would be held in escrow until the inspection has been completed. Once the conditions of the offer are satisfied, the buyer or seller will then be obligated to purchase or sell the property.

Financing and Insurance

The real estate transaction could be held in escrow such that the sale wouldn't be completed until the buyer obtains financing or a mortgage from a bank. Also, the buyer could have difficulty securing the necessary insurance and other policies needed to complete the transaction. If the buyer doesn't get approved for the mortgage or obtain the required insurance, the escrow agent would nullify the offer to buy.

Title Search

Before purchasing a home, a title search is performed, which is a process of checking public records to determine the ownership of the property. The title search helps determine if there are any liens and other claims attached to the property. An outstanding lien means that the property was used to guarantee the repayment of a loan. A property can be held in escrow while the title search is being conducted or resolved.

Zoning

The buyer may have wanted the property for a use that doesn't match current zoning regulations. The seller might seek a variance while the property is in escrow to allow the buyer to proceed with their intended plans upon taking full ownership of the real estate.

Repairs

The purchase might have included guarantees that the seller would address needed repairs to the property. This could include the removal of landscape features such as trees or the reconstruction of part of a building. If the seller doesn't make good on those promises while the property is in escrow, then the deal might fall through.

Releasing 'In Escrow' Funds

The funds in a real estate transaction can be held in escrow even on the date of the sale and won't be released until all parties—the buyer, seller, and the mortgage company—agree that all the conditions in the escrow agreement have been satisfied.

The purpose of keeping the property in escrow is to assure all parties that the mutual responsibilities outlined in the escrow agreement will be fulfilled.

The Bottom Line

Items put in escrow are most often part of real estate transactions. The property, cash, and the title to the property are routinely held in escrow until all conditions outlined in the escrow agreement are met, and transfer of ownership can happen. An escrow agreement outlines the conditions and terms agreed to by the parties involved in the transaction along with the responsibilities of each. Items placed in escrow, ranging from valuables such as cash to property to securities, are managed by a third-party trustee called an escrow agent.