There are many people who are involved in the purchase of your home: agent, broker, lender, seller and an escrow agent or company. The agent and broker are responsible for providing you with a property and negotiating a deal to buy from a motivated seller. The lender, either private lender, bank, or mortgage company provides you the funds so you may purchase the property. And then there is an escrow involved. It is common knowledge that an escrow is what a deal must go through before the deal is closed and the transaction of your purchase from the seller is complete and you own the property.

But what exactly is escrow and how does it work in this situation?

Escrow refers to a neutral third party that is responsible for transferring or exchanging assets, usually property and money. There are escrow agents who are in charge of an escrow account, which is specific to a certain deal or transaction. These escrow agents usually work for an escrow company who are responsible for housing the account.

When you purchase a house, after all negotiation have been finalized and papers have been signed, the seller places the property title into an escrow account. Here, it is kept in safe keeping until the buyer transfers the money to purchase the title (property) into the escrow account. After a certain amount of time, the deal is said to close escrow in which case the buyer receives the title of the property, now officially owning it, and the seller receives the funds from the escrow account.

The escrow account is used as protection to both the seller and buyer. If something were to go wrong during the escrow period, the seller would simply get the title back from the account and the buyer is in no danger of losing the funds. This eliminates a seller losing the property or buyer losing funds, and protects the assets of both parties.

The escrow account also houses taxes and commissions that are to be paid to the state and brokers or agents involved. The escrow account or agent is solely responsible for the distribution these funds so it is done fairly and with disclosure to all parties involved. Deals can be done without escrows, but it is simply safer and smarter to go through a third party escrow so everything is performed legally and all events of the deal are accounted for. It protects all parties and ensures the broker and agent get their commissions and that taxes are paid fairly.

It is highly recommended that you always use an escrow when purchasing property. In more complicated or higher priced deals, an attorney can assist you in creating an escrow account to make sure all parties are properly taken care of.

Another tip: either the seller or buyer may choose the escrow company. Some sellers always prefer to use their own, and some buyers prefer to use their own. Excluding personal preference, as long as it a reputable company, really any escrow company will work. Because it is a neutral third party and the escrow company really does not have a personal interest in the deals that are occurring, you can consider it a safe place for your assets until the deal is complete.