What exactly is Escrow and how does the process work? These best practices help keep your money safe.
Escrow is one of the most important, yet often most confusing parts of buying and selling real estate. What exactly is Escrow? How does the escrow process work? What best practices can help keep you and your money safe?
What is Escrow?
The easiest way to think about and define escrow is as a neutral third party who holds the keys, title and money until the time of closing, so everything is exchanged safely, fairly and simultaneously.
You don’t want to pay the seller of a home until they are ready to hand over the keys and ownership, right? As the owner, you wouldn’t think of handing over the title to your property and keys until you get paid, right? An escrow company is the key to making sure no one gets short changed in the process.
How the Escrow Process & Real Estate Closings Work
Escrow for Buyers
An escrow company, via an escrow officer, holds your earnest money deposit from signing the contract to closing. They are meant to be a neutral third party, who will abide by the laws of the contract if there are any disputes, or the transaction is cancelled. Buyers will traditionally wire the balance of any additional funds due at closing to the escrow company, to be held in their escrow account in the last few days before closing. Any mortgage loan proceeds you are borrowing will also be held in escrow until all closing documents are signed. This way you are never just gambling that the seller will hand over what they are supposed to after receiving your money.
Your escrow officer makes sure that the seller credits you with any amounts due for property taxes for the year, and that all liens, such as mortgage loans, are paid off. You don’t want to just trust the old owner will pay off that million dollar mortgage instead of running off to the Maldives. The escrow company handles this, so you don’t have to worry.
Escrow for Sellers
Escrow is a tool for giving sellers confidence in the process and contract. You can verify the buyer has put up the agreed upon earnest money deposit, and all funds are cleared before signing the deed transfer, and giving the buyer access to the property.
In some cases there may be ‘dry closings’ where you sign the closing documents, but may have to wait a few days to get your proceeds. This typically happens when closing by mail, on a holiday, weekend or at the end of the day.
Escrow for Real Estate Agents
Escrow serves three main purposes for real estate agents:
While most real estate brokers and brokerages will push for you to get buyers to place deposits in their in-house escrow accounts, this can create extra steps for the agent and the escrow officer when it comes time to complete the transaction. Those funds will have to be verified and transferred to the escrow company handling the actual closing.
The Pros, Cons & Best Practices for Escrow
Each party is typically looking out for their own interests in a real estate transaction. If a biased party controls deposit money, it can be harder to get your hands on it if the deal falls through. For this reason listing brokers would rather hold the money, and buyers agents would rather hold the money too. Too often this can end up with the funds being whisked away to the first party who claims them in a dispute. As a buyer it is always safer and smarter to have a third party escrow company hold your funds. It dramatically increases your odds of getting them back if needed.
One of the potential cons for buyers at closing is the impact on cash required to close, as a result of impounds for property taxes and insurance coverage. Depending on what day and month you are closing, the escrow officer will collect several months’ worth of payments to ensure these bills are paid. You can talk to your escrow officer about how to minimize this amount and the impact on cash due at closing.
As a buyer, seller and agent, you should receive a copy of the Closing Disclosure, three days before the closing is scheduled. Make sure you review it carefully, ask questions until you understand it, and ensure all funds needed to close are liquid and available.
One of the biggest risks in this process today is wire and escrow fraud. Hackers and cyber criminals have been increasingly targeting real estate agents and their clients due to the large sums of money in play. They will often hack and spoof email accounts, sending fake wire instructions or hijacking bank accounts. Be sure to triple check where money should be sent directly with your escrow officer through a trusted line of communication, prior to sending.
The whole process of signing physical documents, wiring money, and holding money for days or weeks during the process is definitely outdated. New technology, electronic signatures, online money transfer systems and blockchain, for instantly recording a sale and transfer of an asset will all help modernize, speed up, and secure the process of buying and selling real estate. As these things become integrated in the industry, make sure you do your homework and select a title and escrow company with a good reputation and who will work on your behalf in the transaction.
Endpoint is one example of such a company, we would be honored to show you the value of our platform in facilitating the escrow process. Get in touch with us for more information and a live demo of our product; [email protected].