How Escrow Can Protect Both Home Buyers and Home Sellers

How Escrow Can Protect Both Home Buyers and Home Sellers


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EscrowIt seems like it would be nice if a real estate transaction would just happen quickly. If you could just make an offer to the seller, shake on it, hand over the cash, and take possession. Unfortunately, and fortunately, that’s not the way it works. Instead there is something called “escrow” that protects buyers and sellers while they work through the process of buying and selling.

How does escrow work?

During a real estate transaction, there will be an escrow officer. This will be a third party, and is usually a closing company, title company agent, or attorney.

The escrow officer protects both the buyer and the seller by assuring all conditions are met before the money or property exchange hands. They will hold the funds, like the down payment, and the documents until the deal is ready to close.

Every task that is completed on the closing list will work through the escrow officer. This includes the contingencies, like a home inspection or appraisal. When each step is complete, the seller or buyer sign off on it and the officer is notified. Then the process moves on to the next task.

When all of the steps have been completed, the escrow officer transfers the money to the seller and then clears the title, thus transferring the house to the buyer.

Is there a cost to escrow?

Like most things in the real estate process, there is a cost to escrow. However, how much will vary, as well as who is responsible for paying it.

The total cost is usually around 1 percent or 2 percent. Who pays this fee can be negotiated or it can be split between both parties.

Why you need escrow

While it seems like escrow is somewhat of a hassle, there are a number of reasons why it is a good thing. When the buyer places the down payment, it goes into the hands of the escrow agent instead of directly to the seller. That means if anywhere along the process the seller fails to uphold their part of the deal, then the down payment can be returned to the buyer.

When you are the seller, escrow helps protect you in case the buyer doesn’t uphold their end of the deal. If they back out anywhere along the process for reasons that are not listed as contingencies in their offer, then you are able to keep their earnest money deposit. This is usually around 2 percent of the purchase price of the house.

If the buyer bails then the seller gets to keep that earnest money deposit to help make up for the time their house was off the market.

Most real estate transactions will move along without a problem. However, it can be reassuring to know that if something does go unexpectedly wrong then you have escrow in place to protect your interest.

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