How Escrow is Beneficial to Both Buyers and Sellers

What is Escrow?

If you have ever dealt with buying or selling real estate you have probably heard the term escrow before. If you have never purchased a home this term may have you asking, "What is Escrow?"

Where real estate is concerned escrow is an account used as a secure holding place for important items like the earnest money check and all applicable contracts. These items are kept by an escrow company and the company stores each property's details in a separate account until the purchase deal has officially closed and finalized. 

Escrow also refers to the contractual agreement to have a third party keep all escrow documents safe through the oversight of an escrow officer. 

How Does Escrow Work?

An escrow agent, which is a third-party assigned agent usually from a closing company, is assigned to the transaction and is there to oversee the steps of the closing process to make sure things are in order and running smoothly. This can include the transfer of money and documents as well as holding assets like money and payments safely in the escrow account until they are due to be released for payment.

When all of the conditions of the purchase contract have been met and the mortgage has been fully approved, the closing costs have been paid, money has been transferred to pay off the current mortgage, and a check is written for profit to the sellers, the escrow officer will clear all records like the titles and make sure the new buyer is the new legal owner of the home.

How Much Will Escrow Cost?

The cost of escrow varies depending upon your location and who has agreed to pay for what in the real estate transaction. On average the cost is anywhere between 1 and 2 percent of the purchase price of the home. 

What is Earnest Money?

Earnest money can also sometimes be called the escrow deposit. It is a dollar amount that the potential buyer puts into a secure place overseen by the escrow officer to be held during the closing process. It is also sometimes called a good faith deposit. It is money that goes to the seller should the buyer back out of their offer for any reason outside of the stated contingencies in the purchase offer that both parties signed. 

How Excrow Can Protect Both Buyers and Sellers

Here is a specific example of how escrow can protect a buyer: if you have included an inspection contingency in the contract and find repairs need to be made to the roof and the seller agrees to make the repairs and says they are done. When you are doing a final walk through you see the repairs have not been made to the level agreed upon. Until the repairs are done properly the seller will not see the earnest money. 

How does a seller benefit from escrow? If a buyer decides they do not want to go through with the purchase of a home and it is for a reason other than one protected by the purchase contract, the earnest money then becomes like a deposit that will not be refunded. The seller gets to keep this money for the trouble of going through the closing process and having to put the home back in an active listing status. 

For more information on purchasing a home in Santa Cruz and surrounding areas please contact us any time.