Nowadays, it seems like any large purchase brings anxiety. As the global market gets broader and open to anyone, more scammers and fraudsters are there. The feeling of untrustworthiness during any significant transaction is here to stay, but there is a way to ease the stress around it. Escrow services could help the transaction process flow more smoothly.
The idea of the escrow and the security during the transactions is not a new one. Certified and cashier’s checks have a similar purpose, but escrows are much more secure. We made an introductory article to help you understand what an escrow account is and when you can use it.
What is an Escrow?
Escrow is a legal concept valid in many asset transactions in which two parties create a joint escrow account which a third party then holds. Escrow accounts hold the assets until the transaction is finalized. Escrow assets are often money, but they could be securities or funds.
Some companies specialize in escrow services, such as Lightspeed Escrow which works with money transfers for commercial transfers but primarily real estate transactions. To put it simply, you are hunting for a house and want to show an incentive to the seller that you are able and willing to pay – but you need to do the inspection first. You sign the escrow agreement.
You would transfer the money onto the escrow account, and the third party would wait to see the inspection outcome. Once everything is set and the deal is closed, the escrow company will transfer that money to the seller. Had the inspection not been satisfactory and you decided not to buy the property – the escrow company would just transfer the money back to you.
Types of Escrows
Escrows are used in different situations and contexts. It is used in law, acquisitions, transfers of intellectual property, and so many more. Escrow agents find themselves frequently in three situations – online sales, business escrow services, and real estate transactions. All have the same purpose: the protection of both parties’ assets.
Escrow on an Online Sale
The last few years were a revolution period for eCommerce businesses. Great changes often come with great obstacles, and it is non-payment for online sales. An escrow account protects you from the misfortune of getting robbed online. A buyer needs to transfer the money to the escrow account before they order an item, and the money will be on the seller’s history once the item reaches the buyer in an agreed condition.
Escrow services are used for high-value transactions, such as jewelry, gems, and art. It is not an affordable safety net for working with low-value items, as the escrow company charges escrow fees.
Escrow on the Stock Market
Escrow on the stock market applies to the shares and stocks. An escrow adviser often holds the company’s shares until certain conditions are met. It prevents the shareholder from selling the shares and endangering the employees. Some executives receive stocks as a bonus or compensation, and it is almost always issued in escrow and limited by a period after which they can sell their shares.
Escrow on a Real Estate Market
Real estate transactions are issued in escrows because the money is often too big to risk a fraudulent transaction. Real estate professionals advise using escrow funds both for their buyer and seller clients and their refinancing clients, as well. An escrow fund protects a seller and a buyer equally because the money doesn’t belong to anyone until both parties reach a deal.
Another type of real estate escrow is an agreement between a borrower and a mortgage lender. It is when the portion of monthly mortgage payments covers expenses like property taxes and insurance so the homeowner doesn’t have to worry about yearly obligations.
Even the ‘for sale by owner’ transactions need a closing team, so many people opt for escrow to stay safe. Investors who buy real estate often use escrow and handle the fees, so they do not have to worry throughout the process.
How to Open an Escrow Account
Let’s say you are selling a house and you want to close the deal with the buyer using an escrow. After organizing the purchasing agreement, you should find the right escrow agent. Sometimes you already have an escrow provider that suits your needs, but other times the buyer wants to be involved with the search to avoid the risk of bias. The escrow will be a third party of your purchase agreement. Once the deal is finalized, your escrow service with transfer the buyer’s money to your bank account.
The central part of this process is to reach the purchasing agreement, meaning – the negotiation is over, and the buyer and the seller reach a consensus. When a buyer makes an earnest money transfer, that is when the escrow fund is officially created. Both parties have their escrow number assigned to them, and the closing papers are waiting to be signed.
Pros and Cons
The main advantage of all types of escrows is the adequate protection of both parties in the transaction. It is safeguarding your money or some other asset, and it helps the process flow more smoothly because you don’t have to rely on trust or human instincts.
Real estate escrows created for lending purposes help the borrower take care of the homeowning expenses. For example, homeowners need to pay a property tax each winter around the holidays. This comes as an inconvenience because the money you would want to spend on gift-giving, you need to set aside for this obligation. You pay monthly for that tax by opening an escrow account and adding it to your monthly mortgage payment. Escrow is also collecting your insurance installment and all other homeowning fees.
The downside of this type of escrow account is that it does eat up a home budget. It can add up to a few hundred dollars monthly, depending on the value of your home and insurance. The same goes for a purchase escrow – the fees cost between 1% and 2% of the selling price.
Do I Need an Escrow?
One party in a transaction could put an escrow as a required part of the transaction process. This often happens with companies that sell high-value goods online because the stakes are high, and the non-payments could have severe repercussions for a business. In those cases, you cannot choose whether or not you want to create an escrow fund.
When purchasing a house, an escrow payment can show the seller that you are a serious buyer, which could help you close the deal. If you had trouble in the past with people with fraudulent tendencies, an escrow will decrease your anxiety levels and help you purchase the property in a low-stress environment.
About The Author
Nicole Hinton
Nicole is a freelancer & passionate blogger. She has 4+ years of experience in digital marketing and specialize in content writing, content marketing and organic search engine optimization. She has worked with many brands from Canada as well as the USA. Currently, she manages content marketing team of freelancers and doing their business efficiently.
