What Does it Mean When a Deal is “in Escrow”?

You’ve found the house of your dreams, put in an offer that was accepted, and are ready to make the big move. But even though both you and the seller have agreed on an offer, the deal isn’t done quite yet. It’s at this point in the real estate deal where your contract will enter “escrow.”

But what exactly does it means when a home is “in escrow?”

What is “Escrow?”

The actual term “escrow” essentially means to put something of value – money, in the case of real estate – into trust with an independent third party.

In terms of real estate, the main purpose of escrow is to have a trusted entity hold onto the seller’s deed to the property to transfer the title in a deal. The deed would then be delivered to the buyer only after the stipulated monies have been distributed accordingly and any other sale conditions have been fulfilled.

The escrow phase starts after the seller accepts the buyer’s offer on the home. At this point, all pertinent funds and documents will be deposited into an account. These items will stay in this account until the buyer and seller involved have met their conditions of the sale.

Why is Escrow Important?

The reason why escrow exists in real estate deals is that it protects the monies involved in the deal as well as all parties involved.

If the seller doesn’t hold up their end of the bargain, for example, the money that the buyer put forth won’t be handed over until the conditions are met. Escrow also protects the buyer by proving that the seller has the legal right to sell the house and that the property has a clear title without any liens on it.

Likewise, if the buyer doesn’t meet their conditions, the title won’t be transferred.

Even the lender is protected thanks to escrow. For instance, the escrow account helps to make sure that the buyer is financially capable of securing a mortgage and coming up with the funds needed to see a real estate deal through. It keeps things fair and prevents any party from being taken advantage of.

Who Carries Out the Escrow Process?

The escrow process is carried out by a neutral escrow officer who has no vested interest in the property or the deal. The escrow officer obtains the sales contract, the earnest money deposit, and any other instructions involved with the real estate transaction.

The buyer will then typically request a title search and purchase title insurance in case there are any liens or claims on title that they may not have been aware of that can throw a wrench in the deal.

Escrow only begins after a purchase price is agreed upon, all requested inspections are completed, the mortgage has been approved by the lender, and all documents have been signed by all involved. Once everyone is ready to go into closing, the escrow process begins.

The escrow officer will be instructed with what is still required to transfer the title from the seller to the buyer. Until all of these instructions have been fulfilled, escrow cannot close.

The Bottom Line

Escrow is an important part of the real estate process. Coming to an agreement with a seller is a big step, but there’s still quite a bit of work left to do in a real estate transaction. To make sure all goes well, be sure to team up with a seasoned real estate agent and verify that the escrow company involved is a sound one.