What is Escrow and How does it work?
Definition of Escrow
It is a temporary pass – through an account held by a third party during the process of a transaction between two parties. An Escrow Agent is an entity that has fiduciary responsibilities in the transfer of property between two parties.
What is Escrow and Why is it Used?
Escrow Account works to reduce risks between the deals of two parties. These deals include big amounts of transactions, buying and selling properties, or any kind of contract. Its accounts might include escrow fees managed by agents who hold the funds or assets until receiving appropriate instructions or until the fulfillment of predetermined contractual obligations.
Who Provides Escrow Account Services?
Escrow account services are provided by the banks or any other third party agency.
How does it Work?
It starts with a formal contract for the process of Escrow Account between two parties. When both the parties agree to the terms of the transaction of this contract, an account is created. It implements the process to get a fair deal between the two parties. This puts an end to transaction risks and trust issues of both the parties. It looks over the security of cash, shares, property papers, and any kind of securities and financial assets. It also deals on behalf of both parties.
There are certain steps to be followed by both parties for the process of Escrow.
1. Buyer Deposits Money
The first step for the processing activity of an Escrow account is the buyer’s initiative. The buyer has to deposit the money in the account to run the deal. This is where the buyer’s keen interest in the deal develops.
2. Seller transfers the goods to a buyer
When the money gets deposited into the Escrow Account, the seller has to justify their responsibility towards the completion of this process by providing services or goods for what the buyer has paid. Without providing the said services, the funds cannot be released in the Account for the seller. Until then the buyer’s funds are safe in the account and can be returned to their account if the seller does not fulfill the obligations on the given turnaround time.
3. Escrow Account releases the funds
When Escrow gets an intimation of Step 2 then the agency or bank releases the funds to the seller. After the fulfillment of both i.e. buyer and seller, the account releases the funds.
Also Read: Home Buying Process With and Without Kagaay
How Escrow works in Real Estate Investments
Most people get their first exposure to Escrow when buying or selling the property. This term is used a lot in Real Estate.
In the context of residential real estate, it tends to be used only when one is actually buying the house. So, let’s assume, you make an offer on the house, and the seller accepts it, then your Escrow account is initiated. Finally, the property buyer places all their obligations on Escrow.
The contract could either be a money deposit, the remainder of the down payment, or the actual amount. The contract could either be a money deposit, the remainder of the down payment, or the actual amount. On the closing day of Escrow, the seller gets the money and the buyer gets the home.
RERA has successfully introduced the concept of this term as a trust-building mechanism for real estate in India. Under the Real Estate Regulation and Development Act [RERA], an Escrow account’s existence is compulsory for the deals between buyers and realtors. Moreover, the Real Estate (Regulation and Development) Act, 2016 requires all developers to get the account audited, within six months after the end of every fiscal year. This has to be done by a certified chartered accountant. The statement of accounts will only be verified if it is signed by the same chartered accountant.
Whatever is the amount paid by the property buyers for the house or any commercial property, gets deposited in the Escrow Account. For instance, a relator developing any project of Real Estate listings for sale will have buyers. Interested buyers must pay money to the realtor by some slabs. Whatever the money is, must be paid by all general buyers. This will go to the account.
As the building progresses, the builder will receive money from the escrow account. The accounts do not divert money. It avoids fraudulent cases of real estate transactions. This money is received in stages and the builder builds quickly to get the money as quickly as possible. The customer gets to own the house in less time. It ends transaction and construction risk.
In a brief note, Escrow is an option for almost any transaction where buyers and sellers want a “referee” to oversee the payment.