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If you’re selling a property, you will likely have to familiarize yourself with the escrow process. Whether you have one home or a list of properties to sell, each real estate transaction will likely be finalized through the escrow process.

Once the transaction is closed, escrow agents will handle the release of the home to the buyer and the release of the funds for the new property sale. In this article, we explore escrow and its role when it comes to selling a property.

Escrow in Real Estate

Escrow is used in real estate when two parties are completing a transaction, but it’s not sure whether they will meet their obligations. The purpose of an escrow company like Lightspeed Escrow is to make all transactions when it comes to real estate.

When you’re selling a property, you need assurance you will receive the payment from your buyer, and the buyer will be ready to pay only if the property is in good condition. Therefore, the buyer can place the deposit in escrow with instructions to allocate it to you, the seller, once all the requirements are met.

Understanding Escrow in Real Estate

Escrow enables the buyer to do due diligence on a purchase, assuring the seller that he can complete the purchase.

Let’s say you’re selling a home. You and the buyer may agree to use escrow if there are conditions tied to the sale, like the passing of an inspection. The buyer will deposit the payment amount in an escrow account held by a third party, and you can begin with inspections, certain that the funds are there and the buyer can complete a purchase. And once you meet the conditions as the seller, the funds in escrow are transferred to you.

An escrow account can also be set up at the mortgage closing, in which case the escrow account holds future homeowner’s insurance and property tax payments, and a part of the monthly mortgage payment is deposited into an escrow account to pay for these costs.

Note that mortgagees that arrange an escrow account will have higher payments than those that don’t, but they won’t have to worry about paying property tax bills or yearly premiums since they’re already paying the monthly into their escrow account.

What Is an Escrow Agreement?

An escrow agreement is a contract that outlines the terms and conditions between the parties involved and their obligations. Often, the escrow agreement includes an escrow agent who acts as an independent third party holding assets of value until the contractual obligations are fulfilled.

How Do Escrow Agreements Work When You Are Selling a Property?

In an escrow agreement regarding real estate transactions, one party deposits assets or funds with the escrow agent until the contractual obligations are met. Once the contract is fulfilled, the agent will transfer the assets or funds to the receiver.

Escrow agreements must clearly outline the conditions between the parties involved in the real estate transaction. This helps ensure that all responsibilities are fulfilled and the transaction can be carried out safely and reliably. That said, an escrow agreement typically includes the following information:

  • The escrow agent’s identity
  • Definitions for expressions relevant to the escrow agreement
  • The escrow funds and conditions for their release
  • The escrow agent’s allowed the use of funds
  • The agent’s duties and liabilities
  • The agent’s fees
  • The venue and jurisdiction in the case of legal action

Most escrow agreements are set up when one party or more parties want to make sure the other party or parties can meet specific conditions before continuing with the transaction. In case of a property sale, a seller may set up an escrow agreement to ensure the buyer has enough funds before completing the sale. And if the buyer doesn’t have enough funds, the escrow agreement can be canceled along with the deal.

For real estate transactions, the escrow agent will often open an escrow account into which funds are deposited. While cash has been the asset people traditionally handed over to an escrow agent, now, any valuable asset can be placed into escrow, such as mortgages, stocks, bonds, patents, deeds, and checks.

Therefore, escrow agreements provide security by entrusting an asset to an escrow agent for keeping until all parties involved meet their contractual responsibilities.

Your Role as a Seller

Your duties as a seller include making your property available for appraisals and inspections, preparing various statements and forms, and meeting other contingencies you agreed to in your contract within the set time frame.

Additionally, you must be available and responsive if any problems occur. For instance, the inspection may find that your property doesn’t have enough smoke detectors. In this case, you’ll need to place more of them.

Your escrow and real estate agent will help you stay on track regarding your tasks as the seller, so keep in touch with them throughout the process.

Escrow Fees: How Much Does Escrow Cost?

An escrow agent typically charges a fee of around 1% to 2% of the property sales price paid at the sale closing. You and the buyer can negotiate who will pay the agent’s fee or split it in half.

Pros and Cons of Escrow

Escrow provides the seller and buyer security regarding real estate transactions. Although escrow agents charge a fee, they help ensure the buyer has enough funds to cover the expenses required for buying the property and the seller has met their contractual obligations.

Regarding mortgages, escrow can protect the lender and borrower from potentially underpaid property taxes and homeowners insurance. Nevertheless, these numbers are usually estimated, so people may end up underpaying or overpaying into the escrow account. This can lead to an adjustment when it’s time to make annual payments, requiring a higher mortgage payment than if it only included principal and interest.

Escrow Can Benefit You when Selling a Property

After reading this article, you know escrow can ensure the buyer has enough funds to cover the expenses of buying your property. It also protects the buyer in case you, as the seller, don’t fulfill your contractual obligations, such as passing the inspection.

While an escrow account isn’t required when selling a property, it’s typically recommended since it protects both you and the buyer.

Claire Preece