Escrow refers to funds held by a secure, trusted and impartial third party on behalf of transacting entities. During a typical real estate transaction, the buyer’s funds go into an escrow account while the buyers and sellers complete the details of the purchase contract. Some mortgage arrangements have escrow accounts, into which the buyer deposits money for the lender to use to pay expenses on the borrowed property, such as property taxes and insurance.
In real estate transactions, the term escrow applies to the closing of a transaction by a third party, referred to as an escrowee or escrow agent. This entity receives necessary funds and documents from the buyer and seller, and follows the escrow instructions specified in the purchase agreement between the parties, to complete the transaction. The escrow officer records the title transfer and conveys the title to the buyer after the buyer meets the terms of the purchase contract.
The escrow account is the actual account which holds the funds. Brokers and attorneys often have escrow or trust accounts, established by provisions under licensing laws. Strict laws apply in regards to the use of trust accounts, such as a provision forbidding commingling of funds. For example, a broker must not deposit his own money in the broker's trust account, which holds the security deposits for tenants renting property in the property manager department.
With the advent of the Internet and more consumers making large purchases online, Internet escrow services evolved, targeting online consumers. Yet, just because a website claims to be an escrow service doesn't guarantee it's secure and trustworthy. Harry Henderson's "Internet Predators" warns about phony Internet escrow companies and recommends checking out the company before using its services. Sometimes the fake escrow companies are actual fake websites, attempting to pass themselves off as an existing legitimate and respected escrow service. Henderson recommends investigating the service using traditional sources, such as Consumer Reports magazine or the Better Business Bureau, and doing an online search for complaints against the company. The website should be secure, with a URL address beginning with https instead of http.
The primary purpose of a legitimate online escrow service is to act as an intermediary between a buyer and seller, who are most likely total strangers. The escrow company takes the buyer’s funds, verifies the deposit to the seller, and transfers the funds to the seller after the buyer receives the merchandise, thus protecting the interests of both the buyer and seller.
- "Modern Real Estate Practice"; Fillmore Galaty, et al.; 2006
- “Internet Predators”; Harry Henderson; 2005