What is Escrow?

WHAT IS ESCROW IN REAL ESTATE?

“Escrow” is most often used to describe a buyer’s deposit in the sale of real estate. It is also used to refer to the actual neutral third party holding that deposit money. For a residential sale, buyers will typically pay an earnest money (also called “good faith”) deposit at the time of, or within 3 days of a sales contract becoming effective. This timing is outlined in the contract.

This neutral third party is typically either a title company or an attorney. When the sale closes, the money is applied to either closing costs or down payment as needed to complete the transaction.

What is ESCROW in a real estate transaction?

Escrow is one of the most important parts of a real estate transaction. Typically, escrow refers to the arrangement where a buyer will pay a deposit in a certain agreed upon amount to a third party to hold, while the sales transaction takes place. This deposit is typically held by the title/closing company but also commonly held with an attorney.

This amount of money be paid towards the balance owed for the sale at closing, by the closing agent.

Being “in escrow” typically means both a buyer and seller are tied to a contract in large part by this amount of money. It’s important that this money is held by a third, impartial party so that in the event a term of the contract isn’t met, the buyer nor the seller can simply decide where this money should go. Once the closing takes place, and “escrow” is closed – this means all monies have been disbursed, and the transaction is complete.

Typically, buyers will submit a purchase offer to a seller indicating they will pay a deposit for a certain amount to be paid within three days of the offer’s acceptance. That range is most commonly between $1000 and $5000. The amount is often strategic, depending on the size of the property, if there are potentially multiple offers and this amount could make the contract more attractive to the seller, etc.

This is an earnest money deposit for purposes of the purchase contract. This is NOT down payment money for financing. All money will go towards financing and closing costs, but these amounts are separate line items on a contract.

What are Common Escrow Amounts in Real Estate Contracts?

Disputes Over Money

If the intermediaries holding money are a neutral third party, like a title company or attorney, they will require both parties to submit written instructions on what to do with the funds. If there are conflicting demands, it is a dispute., The third party may try to work with both parties towards a resolution. However, generally disputes between parties that don’t come to a mutual agreement over deposit money, become a legal matter and the money is turned over to a court.

Usually buyers and sellers prefer to avoid this final step, as legal fees and court costs can end up amounting to a large portion (and sometimes more than) of the original amount of money in dispute. If parties proceed to this step, they must explain to the court why they are entitled to the money. Both parties will do this, and one party will normally win at that point. It is often advisable to avoid this last step, and costs associated, and simply come to an agreement with the other party when the escrow money is first called into question.

IF instead, the escrow/deposit money is being held in a real estate brokerage escrow account, any conflicting demands for the money will be reported to the Florida Real Estate Commission (FREC) within 15 business days of receiving the conflicting demands/dispute. This helps protect both parties from the money being paid out without proper oversight and legality. Once the dispute is reported to FREC, there are several resolutions that could take place including mediation or arbitration, interpleader (civil court) or EDO (escrow disbursement order).