What The Hell Is Escrow!

Does buying or selling a home make you nervous? Well, there are a lot of good reasons to be concerned. Many things can go wrong during the home-buying and home-selling process. However, real estate escrow is here to make things less stressful.

In the real estate world, the escrow process is often overlooked. Many people dream of getting into their first home, which can be overwhelming with all the steps needed to be taken, making escrow one of those steps most buyers would like to skip.

Rather than skipping this step, find out more about the escrow process. Everyone knows about escrow, but no one really knows what escrow is. We will break down the daunting real estate escrow process below into easy-to-follow steps. 

What Is Escrow In Real Estate?

So, what the hell is escrow? It’s a legal arrangement whereby a third party (an escrow agent) can hold a property, assets, or funds on behalf of the seller and buyer (or two other parties) for a limited time. 

How long? Until the transaction has been completed successfully or a particular condition, such as fulfilling the contractual requirements or a home-purchasing contract, is in place. 

Real estate escrow has a two-fold purpose. It’s meant to guarantee that the homebuyer will not be deceived by fraudulent sellers while ensuring that the seller will receive funds after transferring the title. 

Thus, it ensures trust between parties in high-stakes transactions. This way, escrow can help reduce stress when you sell or buy a home.

How Does Escrow Work in Real Estate?

The process may seem complicated for many people, but that doesn’t mean you should give up right away. There are two basic steps for a prospective buyer to benefit from having escrow in their contract:

• Step 1: Make an offer on the house you want to buy. Did the seller accept your offer or make an acceptable counteroffer? If so, congratulations! Now you can discuss the sale contract.
• Step 2: You will need to make a good faith deposit that will sit in an escrow account until the deal closes. Once everything is signed, the cash is applied to your down payment. This protects both the seller and the buyer during the process.   

Don’t worry; your money will be in an escrow account all the time— until closing the deal.

As you can imagine, there are many things to handle throughout the escrow process. This is where escrow agents come in handy. They can do everything from transferring property ownership to collecting and filing the necessary documents. 

Most importantly, the escrow agent will take care of the money transfers and ensure both parties get what they’re owed. 

What Are Escrow Accounts?

Apart from cash and securities, your account may include a variety of escrow fees. It may also hold money for homeowners insurance and taxes for mortgage loans. There are two types of escrow accounts in real estate:

1. Accounts for purchasing a house
2. Accounts for insurance and taxes

Not every homeownership expense is covered by escrow accounts. For example, it doesn’t cover homeowners association (HOA) fees, supplemental taxes, and utility bills.

Who Will Manage Your Escrow Account?

There could be various third parties who handle escrow accounts. Depending on your demands and the type of escrow, your account can be managed by an escrow agent, escrow company, or mortgage service provider. 

Escrow Agents & Escrow Companies

Sometimes an escrow company or agent serves as a title company. In addition to managing the buyer’s deposit, the escrow company might also hold on to the documents and deeds associated with the home sale. 

Like the agent’s commission, their service fees are typically divided evenly between the seller and buyer because they work for both parties. Escrow agents act as neutral entities or persons who complete real estate transactions and hold payments temporarily. 

The buyers are usually not required to secure their own agent. They just need to put money in escrow while their lender or broker is responsible for facilitating the process. Some buyers prefer to select their own escrow agent instead of who their realtor recommends.

Mortgage Companies

These companies manage the escrow accounts and mortgages from closing until the loan is paid off. They also maintain the payment records and collect mortgage payments. Sometimes mortgage providers can double as lenders too. 

Your mortgage company can save you the hassle of handling insurance and tax bills. However, if you decide to change your insurance policy or provider, you’ll have to inform the mortgage provider of your updated data.

Advantages & Disadvantages of Real Estate Escrows

More than 140 million housing units are currently on the market in the United States. It can be challenging for sellers to stand out from the crowd with so much competition unless they get into a seller’s housing market like Sacramento real estate. 

Just because there are more potential buyers than homes for sale doesn’t mean you shouldn’t be interested in escrow. The same goes for buyers. Whether you plan to sell a house or buy a new one, escrow can protect you throughout real estate transactions. 

Many people avoid escrows despite the benefits they can reap from those accounts. So what’s the catch? Some disadvantages discourage buyers from holding their funds in an escrow account, such as:

Pros

• It’s helpful for buyers and sellers in the event of high-ticket assets
• Escrow protects sizable real estate transactions when buying a house
• It allows for the monthly tax and insurance payments

Cons

• Hight escrow fees for online transactions
• Incorrect estimates for the taxes involved
• Higher mortgage payments 

Wrapping Up

Are you selling or buying a home? Whether you’re a first-time buyer or a real estate veteran, try to find free resources that will help you through the process. Pay particular attention to escrow, as it could be a tricky part of your contract.

Many find themselves debating whether to hire a real estate agent or do it themselves. If you want your escrow to run smoothly and save yourself a headache, work with an experienced agent. 

Contact us today to find out how you can benefit from escrow and how to avoid the most common mistakes during the home-buying or home-selling process.