What Does Escrow Mean?

As an agent, you likely come across the term escrow nearly every day and may even use it from time to time in conversation. However, it’s one thing to have a firm grasp of the concept—it’s another to be able to explain it to clients in clear, easy-to-understand terms. This is an essential skill to have, considering almost half of U.S. homeowners don’t completely understand how escrow works.

In this article, we’ll explore escrow and its role in real estate transactions and homeownership so you can easily explain it to clients and position yourself as the expert.

What Is Escrow?

Escrow is a real estate arrangement where funds are temporarily held in a third-party account until all conditions are met for the transaction. It protects both parties by ensuring each fulfills their obligations in a contract before money officially changes hands.

There are two main ways escrow comes into play in real estate: the buying process and paying property taxes and home insurance. Let’s take a closer look at each one.

Escrow in the Homebuying Process

Once a buyer and seller sign a contract, the buyer may pay an upfront deposit (also called an “earnest money deposit”). At closing, this money counts toward the down payment, but until then, it’s “held in escrow.” A third party manages this account—usually a title company, brokerage, bank, escrow company, or in some cases, a legal firm.

If all goes according to plan, the buyer pays the remaining portion of the down payment and related fees at closing. Once again, these funds go to the escrow account and are soon transferred to the seller and other relevant parties.

However, if certain conditions aren’t met before closing, the contract is canceled and the buyer gets their money back from escrow. Some reasons could include:

• Failed home inspections
• Financing that falls through
• The buyer’s current home doesn’t sell
• Seller doesn’t make agreed-upon repairs

Some clients may find escrow’s role in this process confusing, so it’s a good idea for agents to help them keep track of related deadlines to prevent delays or deal cancellations.

Escrow for Property Taxes and Home Insurance

After closing, many lenders continue using escrow accounts to manage property taxes and home insurance fees for the buyer. In fact, over 80% of residential mortgage loans have one.

Here’s how it works. As a homeowner, if you look at your monthly mortgage statement, you’ll see your payment is split up into three parts: 1) loan principal, 2) loan interest, and 3) escrow. In this case, “escrow” includes what you pay toward property taxes and home insurance each month.

These funds sit in an escrow account until your lender pays your annual property taxes and home insurance. If there’s any discrepancy in these fees, they will send you a bill or a check and adjust the amount you pay toward escrow the following year.

The Benefits of Understanding Escrow as an Agent

Escrow isn’t merely a glossary term for agents to tuck into their back pockets. Understanding the term can have a significant impact on their businesses. Let’s explore a few reasons why.

Client Education

Chances are, most of your clients will not be experts in real estate. As a result, they’ll likely have many questions about the process, timing, and—of course—unfamiliar terms like “escrow.”

Being able to thoroughly and clearly explain those terms to your clients can help establish you as an expert in their eyes. It also enhances their overall customer experience, as clients are more likely to be happy with your guidance if they feel you comprehend even the smallest aspects of the real estate process.

Avoiding Disputes and Scams

Clients who aren’t familiar with the idea of escrow may have questions and misunderstandings, which can lead to potential disputes. For example, if a seller doesn’t understand that a buyer’s earnest money deposit goes into an escrow account, they may be concerned that they haven’t received the funds in their personal account.

Your knowledge of escrow can also protect buyers from scams. If a seller demands your buyer client send an earnest money deposit to their personal bank account instead of using a third party, you can advise your client to walk away.

Streamlining Closings

Closings and wire transfers can be delayed for a number of reasons. Understanding the ins and outs of escrow allows you to pinpoint what may have gone wrong and know who exactly to contact about a solution. Clients will appreciate your ability to address the issue promptly and get the deal back on track.