In real estate, as a home seller or buyer, you may wonder, “How does escrow work?” You see, during the time before the deal closes, everything including earnest money and contracts must be protected. Until the property changes hands officially, the house is considered to be under a contractual arrangement (escrow) and a third party keeps the money and documents until the escrow closes. The third party could be a real estate agent, a closing company, or a Realtor®. Regardless of the third party representation you choose, pending sales work best with an escrow.
What Does Escrow Mean?
People often ask “What is escrow on a house?” During the escrow phase of a property sale in real estate, the transaction may include a range of different parties including the home seller, the buyer, and even a lender. The escrow funds are an important part of the process thus they are protected to ensure that no funds from the lender and other property change hands until the agreement has been fully made.
Contingencies are common during the escrow process and usually include a home inspection, mortgage approval, appliance upgrades, repairs, landscaping, and more. These tasks and others must be accomplished by the home seller or buyer in order for contingencies to be met. When one step of the process is completed, it is common for the home seller, or buyer to keep track of the completion on a contingency release form, or another record. The transaction of a home sale is much easier when all of the conditions are met, and contingencies are finalized. Closing costs are a final part of the escrow process in which the money is paid to the sellers through the home buyer’s lender. During this time, an escrow officer usually clears the property title so that the home buyer can officially take possession of the house.
Why Do I Need an Escrow?
The escrow cost varies for each property seller, and with this real estate service, you can expect the amount will be between 1% to 2% of the home cost. While you may feel like the cost of escrow is something you can avoid, you may want to consider why you need escrow in the first place. You see, escrow costs may irritate you, but ultimately they are there for your best interests. The purpose of escrow is to protect the home seller and buyer during the property sale.
How Sellers Benefit From Escrow
If a seller enters into a contract with a buyer, who then gets cold feet and backs out of the sale, they could lose money on the transaction. Typically, the earnest money for a house is about 1% to 2% of the purchase price, and that money is held in escrow. However, if a buyer backs out of the sale, for no reason, the money is given to the seller of the property as a sort of consolation payment. The failure of a home sale is frustrating, and the mortgage payments, as well as other expenses, while the seller takes the home off of the market, must be compensated for in some way. Escrow not only protects the money, but it also secures other important deposits, documents, and invoices. For a seller, an escrow offers peace of mind throughout the home selling process, and usually, that is worth the small percentage of the purchase price.
How Buyers Benefit From Escrow
For example, a homebuyer can enter into a property sale and find, that after a home inspection contingency is met, the roof has a big hole. The roof repairs are the seller’s responsibility. However, if the seller does not repair the roof before the buyer’s final walk-through, they will not see any of the money. Until the roof is fully repaired, the contingencies are considered to be unmet thus, the escrow acts as a safeguard.
When a property sale is pending, it is most likely in escrow. This type of hold is sort of like a tight-rope walk with a net below you. If the buyer or seller loses their footing and the sale is not completed – that’s ok! Escrow acts as a safety net below as both parties tip-toe through the process, and just in case there is a slip-up, the funds are already set aside to compensate for the inconvenience.
Talking to a Real Estate Professional
One of the most common questions people have about real estate is “What is escrow when buying a house?” The reason that so many people do not know the answer to this question is because they may not realize what the term means. If you have any questions about selling or buying a home that is in escrow status, simply call the offices of Jeff Barchi.