Main Content

Demystifying Escrow in Real Estate: What It Is and How It Keeps Home Buyers and Sellers Safe

in escrow real estate signage

Buying a home is an exciting time for anyone, but it’s also filled with uncertainties and potential pitfalls. It’s a huge investment that comes with big risks, so it’s important to put safeguards in place and make sure all parties are transacting in good faith. That’s where escrow comes in.

What is escrow?

Escrow refers to a “neutral third party that is put in charge of holding something of value, usually cash, until a transaction between a buyer and seller is complete.”  Having an escrow account ensures that funds and other payments are protected until both parties fulfill their contractual obligations.

How does escrow work when buying or selling a home?

Escrow is set up to help protect everyone involved in a real estate transaction. Upfront payments in the home buying process are held in escrow until the deal is closed.

Escrow is usually held by a third party, such as a title company or an escrow agent. This way, homebuyers and sellers are assured of impartiality when it comes to making sure both parties fulfill the conditions listed in their real estate contract. 

Some of the conditions that are in the contract include:

  • Mode of payment
  • Who pays closing costs
  • A home inspection contingency that allows the buyer to walk away if the inspection report reveals significant damage or flaws
  • Closing date
  • The time frame for the seller to move out of the home they just sold
  • Other items that the buyer’s real estate agent will be on top of

Oftentimes, the buyer and the seller split the escrow fee, which is about 1% to 2% of the price of the home, but this can be negotiated. The seller cannot access the escrow funds until all conditions of the sale have been met. Once the home buying process is completed with due diligence from both parties, the money and ownership are transferred.

The Benefits of Escrow

Being in escrow entails different things for a buyer and a seller.

Imagine this scenario: an aspiring homeowner is looking into homes for sale in Laguna Beach. Once they’ve found the property that best fits their preferences, the buyer makes a down payment that’s held in escrow until the transaction is complete.  The seller will then agree to open the house for the buyer’s inspection, a professional appraisal from the buyer’s lender,  and a  final walk-through of the property. 

During escrow, the buyer, on the other hand, will have to secure their financing, order a professional home inspection, wait for the results of the inspection (which means walking away from the deal if the house has issues, or else negotiating with the seller for repairs or discounts), make sure the title of the house is free from liens and encumbrances, buy hazard insurance, and approve seller disclosures

There are many things that can jeopardize a real estate transaction. Depending on the severity of the issues, there may be delays in closing the deal or the transaction might not push through at all. Some of the issues that homebuyers and sellers can encounter include:

  • Difficulty getting approved for a mortgage
  • Discovering problems requiring major repair during house inspection
  • Problems with the title or legal ownership of the property surfacing only during title search

If the conditions of the real estate transaction are not met, the buyer can get the down payment deposited in the escrow account. Also, if the buyer changes their mind without a legitimate reason and defaults on the purchase, the seller gets to keep the escrow money.

Work with a Trusted Real Estate Agent

Buying or selling a house can be a complicated process, especially for first timers. Home buying or selling is a major transaction that is best handled by local real estate experts with proven years of experience.

With Clarence and Jennifer of the Yoshikane-Toyama Real Estate Group, buyers and sellers of homes in Newport Beach, CA are assured of having their real estate transactions go as quickly and as smoothly as possible.  Call 714.501.7132 or contact them here to get started.

Skip to content