What is Escrow?
A real estate transaction involves a lot of money and valuable assets, as such a legal concept was introduced which allows a third party to be in possession of all the money, securities, fund and other assets until the transaction is concluded – this is called an Escrow. The funds are held by the third party until he receives an instruction or the obligations of the contract have been fulfilled.
Usually an escrow comes into play where two parties are completing a transaction and one is certain that the other party will be able to fulfill their obligation. For example, a seller of goods wants to be sure that he gets paid when the good are delivered. The buyer of the goods only agrees to pay for the goods if they are delivered in good condition. Here, the payment can be placed in an escrow account with an agent who is given the instructions that he should only pay the seller when the goods arrived in good state. The transaction would be straightforward and both parties would be safe from any complications.
Escrow and Real Estate
Escrow are also common in real estate transaction. It is used as an assurance that the buyer can carry out his obligation on the acquisition of the house, and the seller can also carry out its obligation to close on the purchase. For instance, the buyer and seller can agree to use an escrow account. If an inspection contingency exists in the contract, the buyer deposits the payment of the house in an escrow while the house gets inspected. This assures the buyer that the seller will do his part, and if something bad comes out of the inspection the buyer can withdraw the money. On the other hand, the seller also gets the assurance that the money will be his when all the contractual obligations have been fulfilled.
When the inspection and any other conditions of the contract have been completed, the money is transferred from the escrow to the seller’s account, and the buyer gains the title of the house.
Escrow and The Stock Market
Sometimes stocks are issued in escrow, especially those of public companies. This means once the stock is in escrow, the shareholder, although is the owner of the stock, does not have the right to dispose of it. For instance, compensations to executives can be placed in an escrow, the escrow period must elapse before they can sell the stock. This tactic was introduced to protect the stock market’s price and to keep top executives from leaving.