What is escrow? How does it work? Do you need it with a cash buyer?

So have you heard the saying, “We’re opening escrow?” or maybe, “Your taxes are coming out of escrow.” These kinds of sayings are common in real estate transactions when it comes to using escrow accounts and it’s not well understood by everyone. So let’s go over the definition of an escrow first.

Escrow is an account managed and operated by a third party on behalf of a buyer and/or seller that holds funds needed for a transaction to complete. These accounts are regulated and follow very specific rules. That means that when certain requirements are met, the needed transfer and payments can be made.

How does escrow work? 

First, the escrow manager is selected and an account gets created with agreements for what’s supposed to happen to the funds deposited. A lot of this is predetermined by the laws and regulations set in your area and by the purchase contract and promissory notes (if needed). Typically though, it will be a title company, like Fidelity National Title or your attorney. Earnest money from the seller gets deposited there. It’s used to show good faith in the property and those funds can be used towards your down payment, taxes and insurance, and even closing costs. Once it’s set up and has the proper agreements, it’ll be used to close on the property and remain open for paying taxes and insurance as long as there’s a loan on the property. 

The thing to know about it remaining open after closing is that it will still be managed by a third party to ensure your insurance and taxes are paid on time. And if for some reason, you’re short on bills (like your taxes went up a lot more than expected), they’ll pay it and just ask you to make up for it later. The beautiful thing about that is that you never have to worry about it. It’s like a Ronco Rotisserie machine… you set it and forget it. 

If you’re a seller, why do you need one for a cash buyer?

As a seller, you should be protected just in case your buyer doesn’t perform. Why wouldn’t they perform? Well, there are a few reasons. It’s not likely, but they could just decide not to buy the property. The most likely though is that they were never planning on closing on it in the condition and price it is. There are some shady buyers who will give you more right away to lower the price during an inspection. So if for some reason, any contingencies are cleared and they don’t close, your time isn’t wasted. They may lose the earnest money they deposited. And yes there are rules that govern when you get paid by the escrow agent. Having a third party for this keeps everyone safe and stops any issues before they can happen. If you want to learn more about escrow, check out the article from Investopedia explaining more of when it’s used and how.

Why do I bring up using escrow?

Any time you get a cash buyer who doesn’t mention using an escrow agent or a title company, it’s a sign that they aren’t a reputable cash buyer. If you’re looking for a reputable cash buyer who can close on the sale of your house, this is a small way to make sure you’re protected. That’s why it’s important we use them when we buy houses here at SILT Real Estate and Investments, LLC. And if you want to know what kind of cash offer you could get for your house, fill out the form below.

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