Escrow

Written By
Paul Tracy
Updated August 5, 2020

What is Escrow?

Escrow is a financial arrangement whereby a third party holds funds in safekeeping pending the completion of a contract or other obligation.

How Does Escrow Work?

For example, let's assume a situation where someone is purchasing a home. Instead of immediately giving the seller the purchase amount, the buyer may deposit the money into an escrow account and attach certain stipulations to the purchase agreement. These stipulations might include performing necessary repairs to the property, catching up on property taxes, or passing an inspection.

In turn, the escrow agent will not give the seller the money until they meet those requirements, and to protect the seller, the agent will not return the money to the buyer until the seller has failed to meet their obligations.

Why Does Escrow Matter?

Escrow protects both the buyer and the seller in a transaction by ensuring that both parties perform according to the provisions of the deal. Escrow fees are common costs associated with buying and selling houses and other real estate.