Escrow. In the buying and selling process, you'll come across this word on multiple occasions. What is escrow? What does it mean, and how does it relate to the real estate transaction? Read on to find out more.
Escrow is a bond, deed, or other money document kept in the custody of a third party, taking effect only when a specified condition has been fulfilled. Escrow isn't just a term in real estate, either! Escrow or escrow agent is, at the base, a middle man for two parties in a large transaction. They hold onto the money until all conditions are met.
The first time you may hear escrow in the buying and selling process is when you make an offer on a home. An earnest money deposit, EMD, (money to show the seller you are a serious buyer) is given to a, usually neutral and impartial, third-party (typically your settlement attorney or settlement company) to hold throughout the process of the sale. Your money is now in escrow. This is an important step for the safety of you and your money. If you did not have a third-party holding onto your earnest money deposit, what would happen if the contract fell through and the seller still had a hold of your earnest money? You wouldn't be as protected as you are with a neutral third-party holder.
Where does the money go? If the buyer backs out of the home purchase and conditions of the contract are not met, the seller will receive the earnest money deposit that the buyer deposited*. If the seller backs out of the home purchase under conditions not met or if something is wrong on the property that had not been disclosed (ie: something was uncovered during home inspection), the buyer will receive the earnest money back that they deposited. If the home sale is completed, the money is tranferred to the seller*.
*DISCLAIMER: Each jurisdiction has different terminology in their contracts on how the EMD should be distributed in the event of being forfeited by one of the parties of the contract. It is always important to consult with your REALTOR® or seek legal advice by a qualified attorney.*
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