If you’re planning to buy or sell a property in the near future, an escrow agent is likely to be a factor in that equation.
Depending on the situation, either the real estate agent or the lender will open escrow once the sales agreement is executed.
Then, the buyer’s agent will place the earnest money deposit in escrow.
As a neutral third party, the escrow agent is there to help you navigate the process.
Here’s what you should know about their role.
1. What is an escrow agent?
An escrow agent is a person or entity that holds funds in trust for third parties while a real estate or financial transaction is finalized, or a disagreement is resolved.
The role of an escrow agent is often played by an attorney or title company who has the fiduciary responsibility to both parties of the escrow agreement.
While escrow agents are often associated with real estate transactions, they can also be used in other situations where funds will be passed from one party to another.
2. What is the role of an escrow agent?
Escrow comes into play when both the buyer and seller sign the purchase agreement.
Soon after, the earnest money will be put into the escrow account, and the escrow agent will begin working to get everything in line for closing.
This includes holding onto the earnest money deposit, aligning all documentation for ownership transfer, conducting a title search, and issuing a title insurance policy.
The title search is an essential piece of this puzzle, which aims to uncover any issues with or claim against the property’s title.
The individual who conducts the search will look through public records for liens or unpaid taxes attached to the property.
They’ll also ensure that the seller is the rightful owner of the home and that they actually have the right to sell the property.
When all of this is done, the closing will be completed, and all contractual obligations will be fulfilled.
The final step will be the escrow agent releasing the escrow account funds to the parties they belong to and filing the deed with the appropriate government office in your municipality.
3. Who does the escrow agent work for?
The escrow agent is a neutral third party, meaning they do not work for the buyer or the seller.
Their job is to serve the contract and ensure that all terms of the contract are followed.
Everything they do is in the best interest of both the buyer and the seller.
4. What’s the difference between an escrow agent and a trustee?
If you’re familiar with trusts, you may be drawing a parallel between trustees for trust accounts and escrow agents for real estate accounts.
Although they are similar in some respects (for example, money is being held by a third party until certain conditions are met), there are some differences that separate these two things.
In a trust, the third party who manages money or assets within the trust is known as a trustee.
The trustee is the person who has a fiduciary responsibility to the trust’s beneficiary.
This is the individual who will receive the assets in the trust once the conditions are met.
In escrow, the agent acts as a neutral middleman between both parties in a contract (buyer and seller).
The fiduciary duty is to both parties rather than just the beneficiary.
5. When is an escrow account necessary?
Here are some of the circumstances under which an escrow account is necessary.
Real estate transactions: In these transactions, escrow accounts are commonly used for down payments and closing costs or to cover environmental cleanup costs.
Mergers and acquisitions: In these situations, escrow accounts often have a cash holdback requirement as part of the underlying purchase agreement.
Court case settlements: This is another transaction that can be held in escrow.
Proceeds from the sale of like-kind property: These transactions can be held in escrow when a seller replaces one investment property with another (i.e., Section 1031 like-kind exchange).
6. What should I look for in an escrow agent?
A good escrow agent is both accurate and quick.
They should be able to complete necessary tasks in an accurate and timely manner as some escrow transactions may need to be established in as little as a single day.
Here are some examples of what the tasks include:
Determining and setting up the appropriate escrow structure
Negotiating the escrow agreement
Collecting the necessary compliance documents
Accepting deposits and investing them in accordance with the agreement
Reporting taxes and disbursing funds
7. How is an escrow account serviced?
To service an escrow account, your escrow company and its team of professionals will help in the following areas:
Compliance
New account management
New account processing
Escrow and legal functions
They’ll oversee all details and ensure that your transaction is handled in a timely manner.
Having an escrow agent in your corner can be particularly useful if you’re dealing with a complex, cross-border transaction that will require a higher level of security.
Compliance is often a big concern as well since the Patriot Act and other laws require full disclosure of both corporate and personal information.
8. Where is escrow money kept and for how long?
Escrow money is kept in an account until the closing.
It’s often placed in an FDIC-insured account or investment vehicles such as short-term treasuries or money market mutual funds.
When you’re deciding where the money will be held, be sure to consider the credit rating of the financial institution where you’ll be depositing the money.
9. Why is this important to me?
Here’s the bottom line.
Engaging an experienced agent early in the escrow process can help you achieve the best outcome for everyone in the exchange.
They play a vital role in property sales and purchases and serve as a neutral third party who will ensure everything is being conducted according to the contract.
10. What happens if one of the parties defaults on their obligation under the transaction?
If one of the parties defaults on their obligation, then the non-defaulting party typically has its rights and remedies, including even the right to terminate the contract altogether.
The money that was placed into escrow becomes idle and the escrow agent is normally instructed not to release or refund any of the money until the dispute is settled.
The way this should occur will likely be spelled out in the purchase contract.
In thorny situations, the escrow agent may file what is called an interpleader action when they are at risk of being liable in a dispute between the two parties.
This action requires the intermediary to place the money into the court’s custody and then the escrow agent is dismissed.
The defending parties will litigate and argue for the rights to the money among themselves.
The court will ultimately decide what happens to the escrow money and documents.
The escrow agent is, however, entitled to recover the costs and attorney fees incurred while filing the interpleader action.
If this occurs, then a knowledgeable attorney will be a valuable tool throughout this process.
11. Are written escrow agreements required?
Written escrow agreements are not required in all cases, but someone who is considering an escrow transaction should consider requesting an agreement in writing.
The agreement should set forth the following:
The names and addresses of the depositor, the escrow agent, and the beneficiary
The amount of the escrow deposit
The name and address of the bank where escrow money will be deposited as well as the title and number of the bank account
Whether the escrow agent is required to use an interest-bearing account
If it is an interest-bearing account, how the interest earned on the deposit will be distributed
The conditions that must occur or be performed before the escrow agent can release the escrow fund
The time limits for the performance of these conditions
The names and addresses of all persons who will be paid with the escrow fund
The duties of the escrow agent in the event that the conditions of the escrow agreement cannot be met
Be sure to have a lawyer review your escrow agreement and request a copy of the written agreement and periodic status reports from the escrow agent regarding the current balance in the escrow account (if any) and its location.
12. Are escrow agents paid for their services?
It depends.
Escrow agents can serve with or without compensation.
Your escrow agreement should set forth any fees and reimbursements of expenses that your escrow agent expects to be paid for administering an escrow account.
13. Are interest-bearing accounts required for escrow deposits?
Not always, but escrow agreements should require interest-bearing accounts when escrow funds can generate significant interest for one or more parties.
Having said this, there are some circumstances when interest-bearing accounts aren’t used.
For example, in New York lawyers are permitted by state law to use so-called “Interest on Lawyer Account Fund (IOLA)” accounts for small and short-term escrow deposits.
Interest earned on these IOLA accounts is pooled and used to finance civil legal services for the poor.
If you create an interest-bearing bank account, then the escrow agent and bank may require a Social Security or Federal Tax Identification number for federal and state income tax purposes.
14. Can escrow agents keep bank interest?
No, all the money that is earned on the escrow deposit should be paid out in accordance with the escrow agreement.
Sometimes, this will be to the party whose money generated the interest.
It would be a conflict of interest for the escrow agent to keep the bank’s interest as compensation for services rendered.
15. If an escrow deposit is stolen, who bears the loss?
Unless the escrow agreement states otherwise, the loss of an escrow deposit typically falls on the party who owned the escrow property at the time of its theft.
Usually, in the case of a stolen down payment, it is the buyer who may be asked by the seller to replace the down payment before the title closes.
However, you should check with your lawyer to see what the regulations are in your state.
If you’re dealing with a dishonest escrow agent (see next section for more information), then any injured party will have the right to seek damages.
16. What should you watch out for to protect yourself?
Consumers can protect themselves against losses in an escrow agreement.
Any deposit of money with an escrow agent should be made by certified check and not cash.
The check should then be deposited in a special bank account identified in the escrow agreement.
The depositor should review the endorsement on the check to ensure that the escrow agent has made the proper bank deposit.
The beneficiary of an escrow agreement should also be wary if an escrow agent delays releasing the escrow property.
Additionally, a bounced check from an escrow agent is a signal that the money may have been misused.
If you’re experiencing any of these occurrences, then you should promptly consult a lawyer to protect yourself.
Final thoughts
There you have it!
Everything you needed to know about the role of an escrow agent before you head into escrow yourself.
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Disclaimer: we are not lawyers, accountants or financial advisors and the information in this article is for informational purposes only. This article is based on our own research and experience and we do our best to keep it accurate and up-to-date, but it may contain errors. Please be sure to consult a legal or financial professional before making any investment decisions.
Prior to starting Gokce Capital, Erika received a Bachelor of Architecture from the University of Southern California and a graduate degree in Urban Policy from Columbia University. She worked as both an architectural designer and engineer in New York before joining the New York City Department of Housing Preservation and Development.
Erika currently lives in the New York Metropolitan area with her spouse, daughter and cat. She is originally from Chicago and still considers herself a midwesterner at heart.
Erika also loves to read, write and travel (fun fact, she has visited all 50 states and more than 30 countries!). Her new book, Land Investing Mistakes: 11 True Stories You Need To Know Before Buying Land, is now available on Amazon.