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What Does ‘In Escrow’ Mean?

What Does ‘In Escrow’ Mean?

When an asset is ‘in escrow’, it is in holding and cannot be released to a buyer until predetermined conditions are satisfied. Find out more here.

27th July 2020
Reading Time: 2 minutes

The term ‘in escrow’ is commonly used in financial arrangements. However, it can be confusing to understand. Keep reading to find out everything you need to know. 

What is it?

You can find this term in financial transactions. It indicates the temporary condition of an item that has been transferred to a third party. Items include money, property and assets. When an asset is ‘in escrow’, it is in holding and cannot be released until predetermined conditions are satisfied. Ultimately, the items are placed on hold until the financial transaction is complete. 

Escrow Agreement

An escrow agreement is between the parties of the financial transaction. It is important as it outlines the conditions and terms between the parties as well as their responsibilities. The escrow agent manages the items ‘in escrow’. The assets are held by the agent, who is normally a lawyer, until both parties fulfil all contractual obligations. When both parties satisfy the agreement terms, the agent releases the funds or property to the appropriate party.

Example: Real Estate

The term ‘in escrow’ is commonly found in real estate transactions. In this instance, property, cash, and title to the property are often on hold until all conditions in the escrow agreement, are met. Transfer of ownership can then take place.

The buyer may not take possession or occupy the area while a property is ‘in escrow’. There are many conditions that require property or assets to be ‘in escrow’. These conditions include:

Appraisal

The appraisal of the property must occur prior to its selling. Issues can arise if the appraised value of the property is lower than the purchase price agreed-upon. Banks will not lend money for the property if the asking price is above the appraised value. If the buyer cannot fund the difference while the property is ‘in escrow’, the transaction can be terminated.

Home Inspection

A buyer can agree to purchase a property with the condition that the home passes a home inspection. The money for the purchase of the property would be held ‘in escrow’ until the inspection has been completed. Once the conditions of the offer are satisfied, the buyer will then be obligated to sell the property and the seller can purchase the property.

Financing and Insurance

The property transaction is held ‘in escrow’ when the sale is not final until the buyer obtains the required financing from a bank. Additionally, the buyer can have difficulty arranging the required insurance needed to complete the transaction. If the buyer does not get approval for the mortgage or obtain the necessary insurance, the agent can nullify the offer to buy.

Repairs

The purchase may include guarantees that the seller would need to address repairs to the property. This could include the removal of landscape features or the reconstruction of part of a building. If the seller does not follow through with those promises while the property is in escrow, the deal may fall through.

In conclusion, the term ‘in escrow’ can be confusing at first glance but once understood it can aid one’s understanding of financial transactions. If you have any further questions please contact a lawyer today.

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Author
Liesel Millard

Liesel is a legal tech intern at Lawpath, working as part of the Content Team. She is currently in her second year of a combined Bachelor of Business and Bachelor of Laws degree at the University of Technology Sydney. She is interested in areas of sports, corporate and intellectual property law.