What is an escrow account?

What is an escrow account? And why is an escrow recommended?

Answer:

An escrow account is a special account where funds are held in trust by a third party (the escrow). The third party only holds the funds, they do not belong to the third party (the escrow).

Generally an escrow is arranged to help two parties complete a high value transaction such as a real estate sale, so that both parties can safely complete the transaction through the trusted third party (the escrow). Both parties are responsible for transferring their assets or money to the escrow at which point the escrow can complete the transaction. The assets are held in what is called the escrow account.

An example of why an escrow is needed is for example if a seller were to take money and then not hand over the asset. It's extremely difficult to make a simultaneous exchange of assets without an escrow. With an escrow, both parties hand over their assets before a predefined time, in the case of a real estate sale, the money from the buyer and the property deed from the seller. Once the escrow has all the items required for the transaction, at the pre-specified time the escrow will complete the transaction. Both parties are safe from any wrongdoing because of the escrow.


Views: 2818        Posted on: Jul 28 2012        Tags: Definitions