What Is Escrow in Real Estate?
Escrow is a neutral account that holds money and documents during a real estate transaction. It ensures both buyer and seller meet their obligations before funds and ownership transfer at closing. Hereβs how it works and why it matters.
β What Escrow Means
- Neutral third party: escrow holds funds and documents until all conditions are met.
- Good-faith protection: earnest money deposits are safeguarded until contingencies clear.
- Settlement tool: ensures payoff of loans, transfer taxes, and proper disbursement at closing.
π¦ Who Manages Escrow?
In some states, title companies act as the escrow agent. In others, closings are handled by real estate attorneys. The escrow holder is responsible for holding funds, ensuring documents are signed, and releasing funds once all requirements are satisfied.
π When Does Escrow Open?
- Escrow opens once a purchase agreement is signed.
- Buyer deposits earnest money into the escrow account (usually within 1β3 business days).
- Escrow holder tracks contingency deadlines, loan documents, title work, and payoff demands.
- At closing, escrow disburses funds to seller, pays liens, and records the deed.
π How Escrow Protects Buyers and Sellers
- For buyers: ensures clear title, contingencies, and loan approval before releasing funds.
- For sellers: ensures buyerβs funds are verified and secured before transferring ownership.
- For both: provides a neutral process that prevents either party from being at risk mid-transaction.
π‘ Escrow After Closing
Many lenders set up escrow accounts after closing to collect monthly amounts for property taxes and homeowners insurance. These accounts ensure bills are paid on time and reduce risk for both borrower and lender.
π Escrow for FSBO Sellers
If youβre selling For Sale By Owner, escrow is essential to manage buyer deposits, confirm payoffs, and close safely. Brokerless listings include all necessary contract details so escrow or closing attorneys have clear instructions.
π Related Resources
β Escrow FAQs
Is escrow required in every state?
No. Some states use attorneys instead of escrow/title companies, but the function is the same: a neutral party handles funds and documents.
How long does escrow last?
Most escrows run 30β60 days, depending on financing, inspections, and contingencies. Cash sales can close much faster.
What if buyer and seller disagree about escrow funds?
Escrow cannot release funds without mutual agreement or a legal order. Clear contract language helps avoid disputes.