An escrow agent acts as a neutral third party that holds money in trust for two parties involved in a transaction. It is used to establish a legal framework that ensures trust between two parties, by utilizing a third neutral one as an intermediary. An escrow agent is helpful in both real estate and financial transactions to ensure the protection and best interests of everyone involved.
Ultimately, our success depends on our ability to work together. However, building trust can be a challenge, particularly in business. The escrow process provides an elegant solution.
An escrow agent serves as a neutral third party or go-between in a transaction. Though an escrow agent is primarily used in real estate, third-party agents may also be found in larger business transactions. Keep reading to learn more about the role an escrow officer plays and you might need one more than you think.
What is the role of an escrow agent?
An escrow agent acts as a neutral third party that holds money in escrow for a transaction through an escrow agreement. An escrow agreement is a contract between two entities that stipulates funds related to the agreement should be held by a third party. This allows money to be sent by one party for the transaction while ensuring absolute security for the funds until all the contract contingencies are resolved.
An escrow agent can be an individual, company, or entity that allows both parties to use them as an intermediary. In real estate transactions, the escrow agent can be a lawyer or title insurance company.
Escrow agents in the real estate market
Real estate purchases are notoriously complicated. Especially in today’s hot housing market, both buyers and sellers take extra precautions to ensure the transaction proceeds smoothly. This is why some sellers require earnest money as a deposit to buy a home. However, since the buyer does not know the seller, they won’t wire the earnest money directly to the seller’s bank account.
This is where the escrow agent comes in. To break this tension, the buyer and seller use a neutral third party and receive instructions for wiring to escrow accounts. The buyer sends their earnest money and the seller sends proof of the property title to the escrow agent. If the real estate transaction meets all contractual requirements, the agent releases the escrow funds to the seller and the keys to the property to the buyer.
How does an escrow agent work?
Let’s say you’re interested in purchasing a property for $1,000,000. You’ve already provided an earnest money deposit of $50,000, which you placed into an escrow account. Now, you want to make sure the property’s title is free and clear of any liens the seller didn’t mention.
The escrow agent performs a title search on the property and ensures both the buyer and seller comply with all contingencies. This includes working with the buyer’s lender to confirm that the mortgage financing is in place. Once all contracts are signed and contingencies are met, the escrow agent releases the funds and property to the respective parties.
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Escrow agents in business and finance
Although mostly associated with real estate, escrow transactions are also found in the business world. For instance, in the world of mergers and acquisitions, there is a tremendous amount of due diligence that needs to be done.
Suppose a company is coveted by many investors. In that case, interested parties must commit money upfront to ensure the buying party exclusivity on the deal while they conduct their due diligence. It also gives the selling party the peace of mind to ensure that the buying party has a vested interest in purchasing the company. These funds go to an escrow agent, where they remain until the agent ensures both parties complete the transaction.
Is an escrow agent different than a trustee?
Although an escrow agent and trustees have similar roles — protecting the money or assets of someone else — they have one key difference: neutrality.
A trustee is hired to act in the interest of only the beneficiary, usually to ensure they receive the trust funds after a certain event occurs. An escrow agent, however, has a fiduciary responsibility to both parties. They act as the arbiter of the contract and the legal structure around it.
Do you need an escrow agent?
While you don’t need an escrow agent for legal reasons, it’s still a good idea to hire one for large transactions. Not only do they secure transaction funds, but escrow agents also check to make sure that all contractual obligations are met. That can make a big difference for both parties involved in the transaction.
Who can’t be an escrow agent?
You can’t be an escrow agent if you are partial to one party over another. For instance, the buyer’s real estate agent could not be an escrow officer because they obviously have the buyer’s best interests in mind.
You also usually can’t be an escrow agent unless you are legally licensed, but this isn’t required in all states.
How does escrow work when buying a house?
When buying a home, the buyer will send all of the funds, including earnest money, mortgage funds, and closing costs, to the escrow agent. The escrow agent then releases the funds when all requirements and contingencies of the home purchase are met.
- An escrow agent acts as a neutral third party in a transaction between two people or companies in which money and assets are involved.
- The escrow agent has the fiduciary duty of protecting the money and assets until all requirements and contingencies of the contract are met.
- In real estate, a title company or solicitor usually acts as an escrow agent. They secure the monies of the buyer and the assets of the seller while ensuring that all the legal paperwork is completed properly.
- In business and finance, an escrow agent can act as an intermediary in a transaction until all of the due diligence is done and contract contingencies are met.
- An escrow agent is not the same as a trustee. An escrow agent acts as a neutral third party, whereas a trustee acts on behalf of the beneficiary.
View Article Sources
- Escrow Agents and Officers Frequently Asked Questions — Washington State Department of Financial Institutions
- Idaho Escrow Agency — Idaho Department of Finance
- How to Buy a House — SuperMoney
- What Is a Mortgage Statement? — SuperMoney
- How Mortgage Brokers Rip You Off — SuperMoney
- What is Earnest Money and How Much Should I Put Down? — SuperMoney
- Family Trusts — SuperMoney
- Best Mortgage Lenders | May 2022 — SuperMoney