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What is Escrow?

Escrow is a term that is frequently misunderstood or confused for other concepts. If you have purchased a house in California, you most likely used the services of an escrow company but you may not have noticed or recognized the escrow services you were using; however, escrow is a critical function in real estate and other complex transactions.

Let's start with a traditional definition: Escrow is a legal arrangement in which an asset (often money, but sometimes other property such as art, a deed of title, website, or software source code) is delivered to a third party (called an escrow agent) to be held in trust pending a contingency or the fulfillment of a condition or conditions in a contract such as payment of a purchase price. Upon the satisfaction of a condition or conditions, the escrow agent will deliver the asset to the proper recipient, otherwise the escrow agent is bound by his or her fiduciary duty to maintain the escrow account.

Still confused? One way to think about escrow is to start with a very basic business transaction. For example, when you purchase groceries at a store, you select the products that you want you proceed to the register, your price is calculated and you pay for your goods and leave with them. When you purchase assets like real estate, you cannot usually walk up to the owner, tender payment and take possession of the real estate. The transactions are more complex and require the buyer and the seller as well as other parties such a title companies and mortgage lenders each to perform certain functions or satisfy certain conditions before the seller's money is tendered and the title is transferred. That's why escrow agents are used. All of the roles and responsibilities are set forth in a purchase agreement. Escrow agents take possession of assets (such as the buyer's good faith deposit) and prepare to transfer title upon satisfaction of all of the conditions in the agreement. Because the escrow agent is a neutral third party, the escrow agent follows the terms of the agreement signed by the parties to the transactions and does not disburse funds or transfer title until all of the conditions have been met.

While escrow is best known in the United States in the context of real estate (specifically in mortgages where the mortgage company will establish an escrow account to pay property tax and insurance during the term of the mortgage), escrow companies are also commonly used in the transfer of high value personal and business property, like websites and businesses, and in relation to person-to-person remote auctions (such as eBay).