Finance and capital markets
Escrow is a way of holding monies in a third-party account until all of the necessary aspects of a transaction have been carried out. In this video, learn about the role of escrow in real estate transactions, how escrow accounts work, and what an escrow agent is.
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- does the title itself go into the escrow account? it would seem very unfair to me if the buyer had to put in a down payment and financing yet the seller doesn't have to put the title in the escrow account.(15 votes)
- Well It’s The Borrower That Is In Debt,And All Of This Is Because The Borrower Borrowed Money,Own Choice,Own Consequence.(2 votes)
- Whats happens in a situation when the buyer relializes that there is still ownership conflicts on the house but he has put all money in the escrow account and the date is arriving soon?(7 votes)
- Then the sale will not close and the escrow money will be returned(6 votes)
- what happens if the "trusted third party" turns out to not be trustworthy and as soon as everything is in they take it all for themselves leaving both the buyer and seller out of luck? I know it would be a crime but I am asking if there is some type of "security" in a way.(8 votes)
- Offer contracts are also called purchase agreements yes?(6 votes)
- If the buyer doesn't follow through they can lose their $9k deposit. But what generally happens if for some reason the seller doesn't follow through after a signed contract on $300k?(5 votes)
- So the downpayment goes into the escrow account, would the escrow then pay that to the bank and then the bank puts the loan amount into the escrow account?
It sounds like the 'deposit' goes to the seller. Why? Or is the deposit of 9000$ in this case just going to the escrow account as a sign of good faith, and it is later transferred to the bank as part of the down-payment on the home loan?(3 votes)
- If the offer is made and accepted there is now a valid offer. Perhaps though the buyer pays for a due diligence period so he can have the house inspected. If the buyer backs out before the end of the due diligence period the buyer gets his deposit back. But if the buyer does NOT back out before the end of the due diligence period then there is now a contract to buy the house. If the buyer decides then that he doesn't want to go through with the purchase, he has breached the contract, and the deposit goes to the seller.(3 votes)
- How does escrow work in markets where auctions are more common than traditional home sale?(5 votes)
- I understand that a home buyer who has saved up for a down payment of 20% on the house (this includes the 1-2% deposit of "good faith") will deposit that into the escrow account. In the video Sal talked about getting approved for a mortgage from the bank and using the lended money from the bank which in this case would be 240k and put that into the escrow account? Can someone knowledgeable in real estate confirm if this is true or not?(4 votes)
- Why do you need to pay a closing cost?(3 votes)
- Can the escrow agent use the money trusted to him to ,say, earn some interest? Is that legally allowed in the contract it signs with both sides?(I am assuming it does sign a contract with both buyer and seller) Is it ever specified in the contract as to what the escrow can or can't do with the monies?(3 votes)
- [Voiceover] So the house that's you are interested on the market asking 310,000, you offered 300,000, and so you make an offer contract, you dated, you give all the right information, you say what your offer is, you give a deposit to show that you're an earnest that you're serious about this. But then you list your contingencies and, "Hey look, I want to buy this house "unless it doesn't pass inspection, "unless I'm not able to get financing, "unless I'm not to be able to get insurance. "Unless the title is somehow not clear, "but if all of this does happen in a favorable way, "then we're going to close two months in the future." Now the seller has three options, they could accept your offer. They could say, "Okay, you know I agree "to this offer contract, and then you all "we'll both sign it. So this is you know you could put your signature, and the seller would put their signature and so everyone agrees to this happening, and then, and the your deposit will essentially be taken and we'll talk in a second about where that deposit goes. Another option is that the seller might just outright reject your offer. Says, "No, no, no, no, this is an insult, "this house has been in our family forever. "310,000 is my bargain basement price, "I don't even want to, I don't even want to give "credit to this offer by even "you know doing anything else." So they just reject it out, right? And then the third options is that they could give a counter offer. They'll say, "Okay, this is close, "but I'm going to issue a new counter offer contract, "where instead of it being 300,000." Now it's the seller we're talking about, they'll say, "How about 305,000? "Or how about fewer contingencies? "Or how about a closing date that is closer, "closer to the period we're talking about. "Or how about the buyer takes on more "of some type of closing cost "or some other type of thing that's actually going on." So the seller is trying to give a counter offer that's in some way more favorable to the seller than the buyer might look at that and either turn it down or take it on and on and on and on. But let's just say for the sake of this video, that this offer contract is accepted. So if the offer contract is accepted, then, then the buyer signs it, the seller signs it, and they move forward, the transaction will move forward. And this essentially releases a whole series of things that are going to go on. So let me see if I can diagram that out. So we are talking about a world where the offer, the offer is accepted. And so the first thing that is going to happen is that we're going to have, you're going to, you have an opening of escrow. Opening of escrow. Opening of escrow and I know what you're thinking. What is escrow? And I know you're thinking that because I remember the first that I was involved in a real estate transaction, and I thought that myself, this word escrow kept popping up over and over again, and I have never seen the word until I started to having to deal with this real estate transaction. And the whole idea of escrow, let me scroll this up a little bit, is, if you have, so if you have a buyer and a seller, and escrow actually applies beyond to just real estate, but the idea becomes useful anytime you're making a major transaction for something that's quite valuable, maybe the transaction is a little bit involved. So the buyer, if you have a buyer and a seller you might just say, you know the buyer might say, "Hey, give me keys to the house. "Give me the keys, give me the keys, "and then I will give you the money. "Then I will give you the money." But the seller might say, "Hey, hey, hey, I'm not going to give you the keys." And when I really say keys, I'm really meaning title to the house, that's actually the important thing. Keys, locks can be changed. "But give me ownership of the house, "and then I'm going to give you money." And then the seller says, "Hey, hey, hey, "no, no, this is a major asset. "This is my largest asset I have. "I'm not just going to give you title "until I get the money first." And then the buyer says, "No, no, no, this is like all the money I have, "I'm not going to give you the money "until I, until I get the title to the house, "until I get ownership to the house first. "And by the way I don't want to give you the money "until all of these other stuff happens, "until I can, until I could inspect the house "and do all of these other things." And then the seller says, "Hey wait, I don't want to let you "get all these strangers into my house and inspect it, "unless I know for sure that you're going to buy it." So you can see that this can be, this could be a little bit of a law jam. They want to transact, but maybe they don't trust each other, or maybe they trust each other, but they're just afraid that maybe you know the one person might take the title and run or one person might take the money and run, or they might not be serious. And so what society has developed to solve this problem, and it's not just for houses, it's for any major transaction, it could be for businesses, or anything that could be fairly complex is they turn to a third party, a trusted third party. So let me write this down. A trusted, a trusted third party, third party that is called the escrow agent. So this right over here is the escrow agent. Escrow, escrow agent. And when we're talking about escrow, we're talking about putting something into, I guess you could say a third party bucket, an account, and everything is going to be placed there. The buyer is going to put all the things that they need to place there. The seller is going to be placed everything that they placed there. And then the trusted third party can verify that both parties have met their obligations and then it can give the seller what the seller needs, and give the buyer what the buyer needs, and then essentially close that escrow account. So, right when you start this, when we say opening of the escrow account, that means that, let's say this, so this is the escrow agent, and they're essentially going to manage the escrow account. Escrow, escrow account. So as soon as the offer is accepted, you open an escrow account, and that deposit that we talked about that goes into the escrow account. So let's put that in. So that deposit, that $9,000 that was in the offer contract that goes into the escrow account. Why is it important to put it in the escrow account? Well if you give that deposit to the seller, well maybe the seller just cashes the check, but then later refuses to proceed or doesn't allow the inspector to come into the house or whatever else it might be. And so this is a way the buyer can feel sure that, "Okay, I'm writing this check, but you know, "it's just not going to disappear "without me knowing about it. "$9,000 is not a small amount of money." And this way the seller feels good, "Okay, I trust this third party, "the buyer has an earnest. "Put the deposit there, I know the deposit is there. "So now I can let the transaction proceed. "I can let inspectors come into the house, "feel good about it, et cetera, et cetera." And so as we go through this period, as we go through this period between the time that the offer was made, this two month period, it's not always two months, and the closing date, the closing date. And the closing really is the closing of the escrow account. Once all of the parties have met their obligation. But in that two month period, all the stuff is going to happen. And so you're going to have, you're going to have the inspection. So house passes inspection, passes inspection, the house passes inspection. The financing comes through, and the rest of the money for the house gets placed here. So financing, financing, and, so the financing, so let's say this person is putting 20%, so this was the 9K deposit. Actually, let me put some details here, so there's the 9k deposit. Now in order to actually have the transaction, we have to have a whole 300,000 in there. And so let's say this buyer is going to put 20% down on the $300,000 house. So that's going to be $60,000. They've already put 9K. This is often, this deposit is usually towards the down payment, and so they will want to put another 51K down payment. 51K, 51K down payment. And then the financing comes through, so this is going to be the remaining, this is going to be the remaining $240,000. $240,000 from the bank. And there might be some other cost on either side. So these are kind of closing, what we call the closing cost. And we'll do a whole videos on all the different types of closing cost. But these might be paying the agents, paying the mortgage brokers, paying for the escrow services, the title services, the title searches et cetera, et cetera. So both sides are going to put in their closing cost. So from the buyer and the seller. And we could talk about in different states, there might be a different conventions, or even different transactions might have different conventions for closing cost. And so on 12/15, let's say you go all the way to 12/15, or we're assuming this is happening in 2015, you have your closing date. And so the trusted third party, this escrow agent is going to say, "Okay look, the buyer has put everything that, "that they need to put in, in order to buy the house. "The seller has met all of their obligations, "and the house has passed all the inspection, "all of these contingencies, "all of these contingencies have been met." So on the closing day, on the closing day, this trusted third party, the escrow agent will actually disperse the money. So we'll actually disperse the $300,000 to the seller, and we'll actually issue the title which is the ownership to the buyer, and also pay everyone else who has to be paid here. They might have to pay themselves because they're one of the, they're one of the services as part of this, so that will be involved in the closing cost, though it might pay the mortgage broker, the agents, all of the other people who are party to this transaction. And as we see in the video on titles, the title is really about filing a deed, so filing a deed with the county or with the city. So this right over here would, would be a deed which essentially gives the new owner, the buyer proof that they now own the property. So the big idea here, is this, the whole idea of escrow is just a way for, a place to collect all of the obligations of the different parties, so that they can trust each other, and then on the closing date, and that's really the close of escrow, because you don't need this escrow account anymore, it disperses the different things of the different parties, so that the transaction is complete.