What is escrow?
Escrow refers to something of value (usually money) held by a third party on behalf of other people who are negotiating a deal.
Escrow can be thought of as a place of safekeeping, so when two sides are working out a deal, they know that the items they are discussing are not suddenly taken back or altered.
Many different things can be put in escrow, including a deed, stock, or money. Putting these items in escrow means putting them into the hands of a third party until the completion of certain conditions.
Escrow is often used in real estate. For example, if the sale of a house has certain conditions, such as a home inspection, the buyer and seller may use escrow. In this case, the buyer of the property will deposit their payment for the house in an escrow account held by a third party. This assures the seller that the buyer is capable of making payment. Once all conditions of the sale are completed, the escrow transfers the payment to the seller, and title (ownership) is transferred to the buyer.
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Besides real estate, escrow can also be used in the following transactions:
|Online||Internet escrow works by having a third party control money to protect both the buyer and seller. When both parties confirm that the transaction has been completed, the money is released. One example is buying goods on eBay.|
|Banking||In ATMs, the machine holds the money deposited by the customer while it is counted. If the total is not approved, the machine returns the money.|
|Vending equipment||Here, the customer’s money is held in escrow until the transaction is successfully completed.|
|Law||Escrow is used to distribute money from a cash settlement. The defendant pays the total amount of the settlement to the escrow fund, and the fund distributes the money.|
|Intellectual property||Examples include song music and lyrics, manufacturing designs, television and movie treatments, and scripts. This is done to establish legal ownership rights, with the independent escrow agents attesting to the information’s ownership, contents, and creation date.|
|Software||Agents hold the source code of software in escrow on behalf of the customer and the supplier.|
- The word “escrow” is derived from the Middle English word “escrowl,” meaning “scroll” in Modern English. Other variants of the term include the Anglo-Norman term “escrowe” and the French term “escroue.” All of them translate to “scroll,” which basically refers to a checklist (similar to today’s escrow instructions).
- Escrows were originally established in the United States as “mortgage payment escrows” during the Great Depression (1930s) as a way to force homeowners to save enough money to pay their taxes by spreading out the payments into smaller amounts.