Escrow is an arrangement in which a trusted third party temporarily holds onto some kind of asset, keeping it safe.
Escrow is typically used to help real estate and other large deals go through successfully.
Escrow has two key features that make it particularly useful for high-value deals:
In high-value deals (like home sales or business mergers), there’s often significant money involved and fears on both sides that the other party won’t live up to its side of the bargain.
Escrow is a tool for easing those concerns. When a buyer puts money into escrow, the seller can feel more confident that the buyer actually has enough money to complete the purchase. But putting the money into escrow first (instead of handing it straight over to the seller) also protects the buyer while the final details of the deal are being worked out.
You may be familiar with escrow if you’ve ever bought or sold a house. In real estate, it has two main roles:
When it comes to buying a house, escrow follows a fairly standard process:
You make an offer on a house
The buyer accepts your offer
You put earnest money into an escrow account
(usually a percentage of the purchase price)
You and the buyer complete the sale
The escrow holder returns the earnest money to you
(buyers often put it toward closing costs or other fees)
However, there are variations on that standard process if your real estate deal falls through for some reason. In that case:
In some other cases, depending on the terms of the contract, the buyer and seller may split the earnest money if the deal falls through.
Besides real estate, escrow can also be used in:
Escrow is an arrangement in which a neutral third party holds an asset (most often money) while a deal is being finalized. Escrow is often used in real estate transactions but can also be used in legal settlements, online sales, and intellectual property claims.