Discover the Six Problems Escrow is Intended to Solve or Prevent

It is not uncommon for the average person to not know much about the escrow process. While we have covered that in many blogs in the past, this week, we are going to take a step back to discuss why this process is in place at all. What problems is it solving or helping to prevent? Keep reading to learn more and check out our escrow resources if needed.

1. There is a Lack of Trust Between the Buyer and Seller

This might sound negative but it is not – the simple truth is that in the vast majority of real estate transactions, the buyer and seller do not know each other. Do you want to write a check for hundreds of thousands of dollars to a seller, just hoping they will then do what they are legally bound to do and sign over the house to you? An escrow is like a holding ground, where you write a check and then the money stays, clears, and is then distributed to the seller only when they have provided everything they need to provide.

1. The Lack of Formal Binding Contracts

There are other ways to create a formal, binding contract but escrow is an easy way. All parties agree to it and get clear instructions on what they must do to get escrow cleared and the transaction closed.

Title insurance involves a title company searching the records on a property to make sure that there are no outstanding liens that have not been disclosed and that the person or entity selling the property has the legal right to do so. This insurance is included in the escrow process.

With some properties, there is more than land and dwellings that come along with it. For example, if you are buying a business then there might be an alcohol license that comes with it. The escrow process involves transferring that license to the new owners.

If a company has a lien against a property, they will not want to release that lean until they have received payment. However, the seller is generally using proceeds from the sale to pay the liens off, and the sale cannot go through with liens in place. Escrow is the answer because the money goes into one account, a third party (the escrow agent) pays off all liens, and the property can then be transferred.

1. A Lack of Information on Funds and Documents

Without a central escrow process, there can be a lack of information on what funds are needed, where funds are being kept, and which documents are still outstanding. This is due to the fact that there would be no central clearinghouse. Escrow solves this problem, too.