An escrow is a legal term that comprises a situation whereby an asset or a monetary fund is held by a third party on behalf of the two other parties as a result of a contractual agreement. The escrow is assigned to disburse the money based on the agreement of the parties. Escrow is a professional term used when there is trust issue between two parties in fulfilling a contract. It bails out the common contract uncertainty of whether either party will be able to meet up with the proposed agreement. A common example is the contract between a company selling goods and the buyer. Both parties try to guide their individual interest. That is, whether the buyer will pay after receiving the goods or whether the goods will arrive after payment has been made respectively. In explaining what an escrow really means, there are different types of escrow. Some of them are:
- Banking: Escrow features well when it comes to programmed banking and a vending machine. A vending machine for instance is programmed to operate in such a way that during transaction, the buyer’s money is held in a segregated escrow area while the machine awaits successful transaction. Once there is an error in the process, the refund button is used and the money comes from the escrow area. Same thing applies in automated teller machines (ATMs).
- Gambling: When people bet on the outcome of a future event, a neutral person is usually asked to hold their money. And once the event occurs, this third party distributes the money according to the outcome of the event with respect to the agreement of the bet.
- Mergers and acquisitions: Escrow is also very much applicable in mergers and distribution and most times in this case it spans for a longer time beyond just the transfer of the asset. The Escrow stands to keep the parties informed about the contract, to apply the funds interest and explain the worth of the credit of the banks or source as the case may be.
- Real estate: There is a smooth concord between escrow and real estate. In real estate there is always an account for escrow and the payment referred to as “T&I”. This offers validity as long as the transaction is still on.
- Internet Escrow: This has been in existence for almost as long as the existence of internet itself. This is very common and many people have related well with internet Escrow. Most times when an online transaction is done, the internet Escrow serves as the third party holding the money until the parties involved go on the verify that the individual terms and conditions have been met. The money is then disbursed. However there is provision for resolution of inconsistencies between the individuals involved in the transaction.
- Intellectual property: This is a little advanced description of the legal concepts involved in Escrow. In this case the Escrow deals with software that serves as source for the asset in question. In short, the Escrow process occurs when a neutral person handles the software source code in place of the two transacting parties. It is applicable in music lyrics, graphic designs for products and Scripts. This is a legal way of establishing rightful ownership of the products with full affirmation by the Escrow.
What is an Escrow Account?
An escrow is a third party account whose function/role is clearly specified and explained. It is mostly an account opened for a contractual agreement and its serve as a holding cell for guiding relevant manuscripts. In a professional transaction with more than one party’s involvement, the involved individual/company as the case may be wants to be sure the funds and asset involved in the transaction will not be swapped until the instructional requirements in the transaction is met.
The major aim of the escrow holder is to ensure safety of documents; asset etc until the terms and conditions provided by the escrow has been followed. With this in place, the uncertainties and doubt of either party is cleared. In relation to real estate, there are two types of escrow account and they are:
- Mortgage Escrow: A mortgage escrow account also known as impound is an account that sees to the inclusion of a borrower’s insurance credit and yearly tax in his/her monthly plan of expenses. This account is separate for escrow money so that the taxes on assets and insurance funds can be paid by the middle man in charge of the agreement. Though the mortgage account is not always necessary if the ratio of the loan to the value is way lesser than 80% and there is a proven track record of faithfulness in timely payment. Also depending on the choice of loan, Loans pioneered by the government such as VA loan and the likes requires the intervention of an escrow account. Interestingly, the amount of money in an escrow account can increase like in situation where the amount of tax is reassessed, the amount in the account increases. The escrow account is reviewed yearly in order for the lender to verify that the amounts deposited would be enough to ameliorate the payments of the year ahead. Based on the terms and conditions, lenders are permitted to receive few more months as extra in order to cover for unforeseen increase in tax and insurance. However, the terms and conditions also ensure refund of this money just in case there are no funds that exceed the normal flow. And conditions occur where you have balance in the account; these are uncommon cases where the taxes or funds for insurance came out below the planned amount. The mortgage escrow account is advantageous because you don’t need to go through the stress of raising huge sum of money within six moth interval for taxes and premium on insurance. The escrow account function just like an accrual account, it allows monthly depositing of the required bills. This serve as a protection for the lender and the borrower. The little disadvantage is that someone else gets paid for what you seemingly could do by yourself. And also sometimes there are inconsistencies in the tax rates and premiums.
- Real Estate Escrow Account: These are escrow accounts held and maintained by a third party entirely different from the two persons (the buyer and the seller) involved in the real estate sales. Basically, the real estate escrow account handles documentations and funds for necessary payments. This account stands as a protection to all involved in the sales being carried out. And this is achieved by ensuring that money and properties remains stagnant until the terms and condition as given by the escrow is complied with. All the parties involved are involved in coming up with this terms. It is done with everyone’s consensus. The documents are duly appended by everyone and held by the escrow. The escrow organizes the manuscript according to the agreed manner. During this arrangement, the buyer instructs the escrow to release the funds after thorough supervision has been done and the requirements have been met. The role of the escrow in real estate cannot be overemphasized; it is usually termed a “closing account” because most times the closing of an escrow serves as the climax of the real estate sales. And the escrow also facilitates the transfer of ownership title among parties.
How to open an Escrow account
The process and stages involved in opening an Escrow account is not far-fetched. Cognizance of the stage at the inception must be well taken in order to have a hitch-free time opening the account. The choice of the escrow holder is as a result of the agreement of the buyer and seller. And an individual who is of full competence, have wealth of experience about the transaction and isn’t biased is chosen. There are always peculiarities to the type of escrow employed for transactions for instance, Escrows supervised by banks, insurance firms etc are less bounded by tasking rules for adherence compared to Escrow supervised by Private Escrow firms. Private Escrow companies go the extra miles in their rules and regulations just to protect the interest of the consumers. But most importantly you should be able to ascertain that the Escrow personnel will hold firmly to the property until the requirements of the contractual agreement is met.
Most times, the account is opened by the seller’s agents in real estate. However it can be done by anyone of the parties engaging in the transaction. Depending on the situation at hand, Escrow can be opened in various ways; online website, electronic mail, physical meeting etc. The Escrow personnel require some information when an account is to be opened. Some of this info is;
- The actual address of the property
- The fixed price of the sale
- Agreement for purchase
- The specifics of the property’s designation (bungalow, duplex etc)
- Full details of everyone involved in the transaction
- Various commissions attached
In the past, people did not trust escrow. In fact, many people wouldn’t even buy property, due to the fear of been swindled and duped by unscrupulous businessmen. Lack of understanding of escrow had for long allowed mediocrity as people don’t understand the best way to go about acquire what they desire without running into loss. The introduction of Escrow has had a lot of positive impact in many spheres of life most especially in real estate. It has increased the awareness of people towards property acquisition and the most proper way for the transaction to be done. Escrow, in its wealth of benefit has created employment for many. There are companies whose basic work is to serve as Escrow holders and individuals earn their living from such organization. It has enhanced ease in daily life through the use of online trade; people now take bold steps in trading online with the understanding of internet Escrow. Escrow generally benefits both buyers and sellers because it helps to verify that the goods were adequately delivered. And also, it makes sure rightful inspection meets satisfaction before payment is made. The introduction of Escrow has improved the business world because it has done well to eliminate uncertainties of buyers and sellers. Economically it has improved the nation because taxes are demanded over the transactions and property sold. The ease it has created is very obvious because with necessary Escrow accounts, sales have been simplified. And confusion has been minimized because there is a neutral body that always sees to the smoothness of the property transference and funds disbursement.
Also, over the years mergers and acquisition of business has posed a lot of peculiar challenges. However the intervention of an Escrow system has helped in running it smoothly. So many contractors face challenges in the execution of their contract with doubt-filled mind trying to contemplate whether or not they would get there funds in a timely manner. Escrow has made it so easy because with Escrow the contractor has the assurance of their funds with a reliable terms and condition as agreed by the transacting parties. Intellectual property knowledge has been enhanced with the use of software source code for copyright and actualization of authenticity and legal ownership. Escrow is a very organized concept that has facilitated the growth of many businesses. The relationship between buyers and sellers has been improved through assurance of requirements been met for effective transaction. The basics of Escrow should be taught in every business organization and every business man should avail himself of the pros and cons of Escrow. The advantages of Escrow in business suffices for the seemingly loss due to scams or the stagnancy in because as a result of fear to acquire property. Avail yourself with an Escrow account and engage in safe transaction. Every business needs the understanding of what Escrow is are enlightened.