I have had escrow explained to me three times just now by three different people and I still don’t quite get it.
In: Economics
The escrow is like an “exchange point”. Usually needed when large transactions occur that require both parties to be satisfied that all the details of the transaction are satisfied. When you purchase a house, your purchase is usually covered by a contract that specifies many terms (you get the loan funded, deposits are paid, house passes inspection, no outstanding liens, defects are rectified etc etc). Since neither party has “trust” in the other party a “trusted” third party (could be a bank, lawyer or other group) is appointed that is neutral and ensures that all details that both parties must perform are accomplished before completing the transaction.
“being in escrow” means that one or both parties are in the process of satisfying the contract. Once everything is accomplished, the third party, then “completes” the transaction and the escrow is extinguished.
Escrow is a neutral place where all monies go to be dispersed to the right people at the right time.
Imagine I’m trying to buy a house. I want to give someone a bunch of money, and a little later they will sign a deed over to me. We’re both probably generally trustworthy, but these are really big purchases.
So we hire a third person, Ms Escrow. She’s a professional money holder and there’s a ton of laws about what she can and can’t do with money.
Instead of me giving the seller the money and hope they sign over a deed, I give the money to Ms Escrow. The seller checked with Ms. Escrow to make sure she’s got the money, and then signs the deed. When Ms Escrow verifies that the deed has been signed over, she gives the money to the seller.
Only there’s actually more people. I don’t actually have enough money, so I’m going to borrow from my bank. The seller still owes money on the house, and their bank will only allow the sale if they get the money that’s owed to them. And the realtor also needs some money. Luckily, Ms Escrow is smart and can deal with all of these extra people and their needs.
So my bank and me together give Ms Escrow a bunch of money; the seller signs the deed, and Ms Escrow releases money to the seller’s bank, the realtor and whatever is left goes to the seller. And then Ms Escrow writes up a detailed list of exactly what money came from where, to who, and how much.
It’s an account where money is held by a neutral third party, to be distributed to the appropriate recipient at the time at which all parties agree. Basically, it babysits the money.
It’s most commonly encountered in real estate. An escrow accounts used for funds placed during the purchase process to show the buyer’s serious intent while preventing the seller from getting access until the conditions of the sale are completed and sale closes. Sometimes you’ll even hear the period between a property going under contract (buyer and seller agree on price) through closing (usually 30-60 days later, once inspections have been completed, buyer financing has been approved) as being in escrow.
Once you own property, your mortgage company sets up an escrow account where they set aside part of each month’s mortgage payment to pay your annual homeowners insurance premium and your property taxes.
One of the other 5-year-olds at the playground, Billy, wants to sell his baseball card for $1. You want to buy that card.
You don’t know Billy that well, and you’re afraid Billy might take your money and run away without giving you the card.
Billy doesn’t know you that well, and Billy’s afraid you might take his card and run away without giving him the money.
It sounds like you might be stuck, and unable to make a deal, because you don’t trust each other.
But, it turns out that you and Billy are both good friends with Ed. Since you both trust Ed, you make an arrangement with Ed that works like this:
– You give Ed $1.05.
– Billy gives you the card.
– Ed gives Billy $1.00.
Billy’s happy since he doesn’t give up his card until Ed has the money. You’re happy since Ed won’t give up control of the money until you have the card. Ed’s happy because he got paid $0.05 for being a guy that everybody trusts.
Ed is providing an escrow service. While Ed’s holding onto the $1, it’s said that “the money is in escrow.”
That’s cause its fucking stupid, just another intermediary. It’s basically where they put money away for u, for when its needed. Like property taxes.
Meh, fuck dat, I’ll just pay when it’s due, as opposed to it just sitting there, in some, “account” without making ME interest/or me deciding how to actually “invest” it.
Remember when you were in grade school and you wanted to trade something with the dodgy kid? You had to play this stupid game where you tried to swap at the exact same time become you knew they were going to try to grab both items and run off. One solution would be to give the items a neutral third party, like a teacher, and let them complete the trade.
That is what escrow is. It lets two people who don’t completely trust each other complete a transaction. I’m buying a how from you, but we’re strangers, who knows if we are trustworthy. So I write a check to an escrow company, they verify to you they have received the money, you sign the deed over to me, escrow verifies that it is all good, and releases the money to you, less a small service charge.
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