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What is Escrow?

Updated: Jul 28, 2023

Escrow is a financial arrangement commonly used in real estate transactions and other situations involving the exchange of large sums of money or valuable assets. It acts as a neutral third-party intermediary that holds and manages funds, documents, or assets until all conditions of a transaction are met, at which point the escrow is closed, and the assets or funds are released to the appropriate parties.

In a real estate context, the escrow process typically works as follows:

1. Offer and Acceptance: The buyer and seller reach a purchase agreement, which includes the terms and conditions of the sale.

2. Earnest Money Deposit: The buyer provides an earnest money deposit to demonstrate their serious intent to purchase the property. This deposit is held in escrow.

3. Inspections and Due Diligence: The buyer conducts inspections and performs due diligence to ensure the property is in the expected condition.

4. Contingencies: The purchase agreement may include contingencies, such as obtaining financing or satisfactory inspection results. These conditions must be met for the sale to proceed.

5. Escrow Holder: An independent escrow company or a title company acts as the escrow holder, ensuring that the terms of the agreement are met by all parties.

6. Closing: Once all contingencies are satisfied, and any necessary paperwork or funds are provided, the escrow holder prepares the final closing documents.

7. Transfer of Funds and Title: The escrow holder receives the purchase funds from the buyer and disburses them to the seller. Simultaneously, the title of the property is transferred to the buyer.

8. Escrow Closure: After all the necessary steps are completed and all funds have been appropriately disbursed, the escrow is closed, and the transaction is considered complete.

Escrow provides security and peace of mind to both the buyer and the seller by ensuring that the terms of the agreement are met before the transfer of funds and assets takes place. It helps prevent fraudulent or failed transactions and protects the interests of all parties involved.

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