What is an Escrow Account And How It Works
Escrow accounts are typically related to real estate transactions but they can be used in deals such as mergers and acquisitions, and others. What does escrow mean and how does it work? When do you need to open an escrow account? Who provides escrow services?
Read on to find out and if you need further assistance, don’t hesitate to contact us.
What is an escrow account?
An escrow account is an account where valuable assets or funds are held by a third party until a transaction between two parties is completed and all terms agreed upon are met.
The contractual obligations of the buyer and seller are set out in a special escrow agreement.
The third independent party, called escrow agent, collects, keeps and transfers the money when all obligations have been fulfilled.
An escrow account can be opened in the joint names of a buyer and a seller (or their solicitors). It can be set up as a special escrow bank account or with an escrow agent, an escrow company or a mortgage servicer.
Note that escrow accounts are not interest-bearing and may be associated with certain escrow fees.
When you buy a home or real estate, you deposit the so-called earnest money in an escrow account to show you are really interested in the property purchase.
Note that when buying property in Bulgaria, you will also have to conclude a preliminary contract with the help of Bulgarian solicitors specialising in real estate law.
In the USA, a special escrow arrangement is also made in addition to the mortgage payment. This escrow account is used for the payment of property taxes and insurance premiums. It is often required by mortgage servicers as they want to make sure homeowner’s insurance bills and taxes are duly paid.
Overall, escrow accounts are used in large transactions involving a number of conditions, where escrow funds are released once the requirements are met. They are common in real estate deals, mergers and acquisitions, online transactions, stock market deals and any transfers of high-value assets benefitting from a trusted independent mediator.
Do you need legal advice and assistance? Contact our experienced lawyers.
How does escrow work?
The escrow arrangement typically follows a simple procedure:
- Buyer and seller agree on the escrow terms and open an escrow account.
- Buyer submits the payment.
- Seller transfers asset.
- Buyer conducts due diligence.
- Escrow company releases payment to the entitled party.
The terms of the escrow agreement typically include:
- a description of the asset to be transferred;
- the purchase price;
- the number of days the buyer has in order to inspect the real estate/ product, etc.
- information on the transfer of the asset;
- clear conditions for release of funds;
- dispute resolution clauses.
Once the buyer has submitted the payment into the escrow account, it is verified by the escrow agent and the seller is notified.
Then, in the case of an online purchase, the seller ships the product and provides the necessary tracking information.
The buyer has the opportunity to inspect the deliverable. In the case of real estate, they verify if the building work meets standards determined in the escrow agreement or if all contractual obligations have been fulfilled.
Upon accepting an approval from the buyer, the escrow agent releases the payment to the seller.
The escrow arrangement can be beneficial to both the buyer and the seller as the transaction is mediated by a trusted independent third party.
The success of the escrow hinges on the way conditions are set forth in the escrow agreement, therefore they need to be rigorously detailed by an expert familiar with the relevant process and all aspects of local legislation.
If you need assistance with your escrow agreement, contact us.
What are the benefits of escrow?
The conclusion of an escrow agreement makes sure that both parties involved will follow its terms and conditions. It offers protection against fraud or default.
Escrow facilitates the closing of real-estate deals as:
- the seller is assured the buyer has the necessary funds to close the deal;
- the buyer can verify that the property meets certain standards/ is completed.
In the context of online purchases, the seller is assured about the payment, and the buyer has the opportunity to inspect the merchandise.
Money is only disbursed in case all conditions detailed in the escrow agreement are met.
Risks of escrow
Escrow agents play a key role in this type of arrangement. Finding a trustworthy escrow agent is vital as this is the person responsible for holding the funds/ assets and important documents, as well as releasing the money.
Customers are advised to conduct due diligence before choosing an escrow company (esp. with online escrow). Validity of the escrow license can be checked with the relevant authorities.
The escrow agreement itself plays a vital role in the escrow arrangement as its conditions determine the transfer of the asset/ funds and dispute resolutions. To protect the rights of both sides it should be detailed by a trusted expert.
If you need a reliable escrow agent or assistance with your escrow agreement, contact us.
What happens if the terms of the escrow agreement are not fulfilled?
In case any of the two sides does not fulfil their contractual obligations, the escrow agent moves on to dispute resolution. Its outcome determines if the money will be transferred to the seller or refunded to the buyer.
Conclusion
Escrow accounts reduce the risk in high-value transactions, where a trusted escrow agent releases the funds only when all conditions of the escrow agreement have been met.
If you need assistance with opening an escrow account, the escrow agreement itself or any other escrow or real-estate related issues, contact us.
“Danailova, Todorov and Partners” provide top-quality legal services.
