If you’ve ever talked with anyone about buying or selling real estate, at some point you may have heard the word “escrow” used in a bunch of indecipherable ways. From experience I know “escrow” is a word that everyone has heard and feels like they should know but often don’t.
Don’t sweat it. I’ll break down the key points for you.
1. What does “escrow” mean anyway?
Let’s start with the basics. “Escrow” is when a third party holds stuff on behalf of two parties to a contract. Think about it this way.
Say I’m in Hawaii and you’re in California and we don’t know each other. You advertise your car on Craigslist, and I tell you I want to a buy it from you. Naturally, I ask you to send me the car first and then I’ll send you the money.
Not being a moron, you decline the invitation to ship your car 3000 miles across the ocean to a random bald dude, and instead you suggest that I send you the money and then you’ll send the car.
We are at an impasse. That’s where escrow comes in. More specifically, that’s where an escrow company comes in.
You and I agree to hire a professional firm with a good reputation that will facilitate our deal. I will send the purchase money to the escrow company. When they have confirmed to you that they have received my money, then you can ship your car to me worry-free. Once the car arrives or is confirmed to have been put on a ship (depending on the terms of our deal) the escrow company will release my money to you. Problem solved!
2. Real estate escrow services are boring but helpful.
A very similar type of escrow service facilitates real estate purchases, with the added bonus that real estate escrow officers also handle a lot of paperwork shuffling.
For example, in a typical real estate transaction, the escrow officer does the following:
- Holds the buyer’s earnest money and down payment
- Holds the lender’s money
- Fills out and files some tax paperwork
- Pays out funds to tax authorities, the previous lender, the seller, homeowners associations, termite inspectors, and possibly other parties
- Oversees the signing of loan docs and provides notary services
- Records the new deed, new mortgage, and lien release relating to the previous loan.
3. We misuse and abuse the word “escrow.”
When a buyer makes an offer to buy a home and a seller accepts, the buyer and seller are now “under contract,” “in contract,” or “in escrow.” Those terms are synonymous.
The reason we use the “in escrow” term is because immediately after buyer and seller sign their contract, the buyer makes an earnest money deposit. Earnest money serves to assure the seller that the buyer is serious about seeing the transaction through to the end, which can take 30-60 days.
Of course, the buyer isn’t going to let the seller hold that earnest money. No buyer would go for that. Instead, the money is held by an escrow company.
So, colloquially, people will say that the buyer and seller are “in escrow.” Likewise, you may hear that a buyer and seller “closed escrow.” That means the transaction completed (wasn’t cancelled) and the buyer got his new house and the escrow company sent the seller his money.
If you hear someone say, “We fell out of escrow,” they mean that the contract between buyer and seller was cancelled for some reason.
We may also use the word to refer to the company itself, as in, “Did you send the paperwork to escrow?”
The various and sometimes imprecise uses of the word contribute to some of the confusion here.
4. “Escrow” isn’t the same as “title.”
With respect to real estate, “title” refers to the ownership of a property. If you have title to a property, you own it. To make sure that no one else can successfully assert a claim to a property that you have bought, a title insurance company will issue you a policy that will defend you against the claims someone else makes to your property.
In most real estate transactions, the title insurance company is the same as, or is closely tied to, the escrow company. Even though they serve different functions, title and escrow are so closely related that most people think of them as the same thing, sometimes saying “title” when really referring to the escrow company.
That can introduce some confusion, especially in the rare case that a buyer chooses to buy title insurance from a company that is not related to the escrow company.
5. Wrapping up.
One final FYI: Not all states use escrow services. Buying and selling real estate works differently in different states across the country. In Hawaii, however, almost every transaction involves escrow services.
Though “escrow” is an obscure word, there’s really nothing too mysterious about it. Just think about it like this: Escrow is the trusted third party paper-shuffler that helps buyers and sellers complete a real estate transaction.
Stay informed on Oahu Real Estate