Escrow Account or Agreement

Escrow Account is a legal arrangement whereby a neutral third party, called the escrow agent (a company or attorney), holds an asset during the period in which the deal is being finalized by the other two parties or during a predetermined time period.

You usually see escrow account in real estate transactions. A buyer makes an offer on a property and the seller accepts the offer. The buyer then backs the offer with some cash.

The purchase of the property usually contains stipulations to be completed prior to the final sale.

If the conditions are not met, the cash deposit is returned to the buyer. In the event the conditions are met but the buyer has a change of heart and decides not to go through with the deal, the cash deposit will still be returned by the escrow agent to the seller. This is seen as compensation for having pulled the property off the market.

The escrow agent therefore acts as a neutral third party thereby avoiding possible lawsuits between the buyer and seller over who is to get the deposit if one side backs out of the deal.

There can still be legal action taken. Money in escrow does not prevent the institution of a lawsuit to enforce the purchase agreement.

Other Uses

Another real estate related use of escrow account occurs when the lender requires the borrower to include with their monthly loan payment a sum equal to one twelfth of the annual homeowners insurance premium and real estate taxes. This is to ensure that there will be funds available to pay them on time.

The property secures the loan. The lender wants to make sure that if the property is damaged or destroyed there is insurance in force to pay for repairs or make a cash settlement for the value of the property.

Likewise, failure to pay real estate taxes can result in the local government taking the property and selling it to obtain the unpaid taxes. Not good for the lender. The property could be lost.

Interested in seeing what an Escrow Agreement looks like? I have provided one here.

Warning: Do not use this form without advice of legal counsel! This is something that, if you are not familiar with, could get you into trouble. I have provided this so you have some idea what it looks like only.

Escrow Account and Agreement form is here.

Just So You Know...

For Computers geeks, there are escrow accounts too! This has nothing to do with being a notary, but I just thought it was interesting.

Source code escrow agents hold source code of software in escrow just as other escrow companies hold cash. The highly valuable (and often secret) source code is only released by the agent to either party upon:

1. specific terms of the escrow agreement (such as failure to maintain the application, transfer of ownership of the intellectual property rights, or

2. the liquidation of the owner of the source code).

Interesting?? Thought you might be...