Purchasing a home can be a complicated process and quite overwhelming for a new home buyer. Escrow is a common term in real estate and the home buying process. Escrow accounts are quite facilitative in the business world. And in real estate, an escrow account is widely used for payment related transactions.In business, there are various accounts and processes that are meant to support them and an escrow is one of them. So, if you are interested in knowing how escrow can help realtors, read on.

Escrow account in business

An escrow account is one where funds are held till all the terms of an agreement are met. It involves a contractual agreement and a third party to hold the money. The third party will receive, hold and then disburse property or money for primary parties in a transaction. In simple words, if party A and B enter into an agreement for sale, with A being the buyer, an escrow agent – C will hold the funds from A till B completes his part of the agreement or send the product to A. After the product is received by A, C can release the money to B.

How escrow can help realtors

Escrow in India is essentially a trust building process for real estate. In an escrow, the third party who holds funds is usually a bank or a recognized lender – a third party who is neutral. Escrow in real estate is to protect the seller and the buyer during the process of buying a home. It ensures the seller that the buyer has the money for the property and the buyer is sure that the title will be transferred. This is the main reason an escrow can be helpful before any transaction is initiated. The buyer is assured that the seller isn’t a scamster with no title to his name. Escrows are extremely helpful when two parties don’t know each other and there are high stakes involved.

Escrow services for real estate are arranged by one neutral party or escrow agents. These escrow agents help in completing the real estate transaction and hence, are also known as title agents.

The listing agent will open an escrow account when the buyer and the seller have come to mutually accepted terms. After opening an escrow, the terms are agreed and signed upon. The terms may include price, inspection, possession or disbursements. The real estate escrow account protects the interest of both parties. This particular account can hold instructions, funds, paperwork and deed to the home.

Why is a real estate escrow needed?

A real estate escrow will protect the interests of all the involved parties and also ensure payment safeguarding. It will guarantee that no property or funds can be transferred unless each escrow term and condition is fulfilled. For example, if during an inspection, it is found that some repairs or finishing touches are needed, but the seller doesn’t do it. Then the buyer can stop the sale process if the repairs aren’t done.

Real estate Escrow in India

In India, the Real Estate Regulatory Authority has brought in strict rules to promote stability, transparency and trust in the real estate environment. An important condition imposed by escrow is that all builders and developers have to transfer around 70 percent of the funds received from customers in an escrow account in a scheduled commercial bank. This rule can prevent developers from using funds from one project in another and tries to mitigate the insolvency risk.

If the builder needs funds, then a request verified by the architect, chartered accountant and an engineer must be made. This addresses incessant delays in home construction, where people are waiting for their forever homes.

The Real Estate Act needs all escrows to be audited every fiscal year. This has to be signed by a chartered accountant as well. The RERA Act is mandated for new homes, but hasn’t really taken off in the secondary market where homes are resold. This is because the secondary market isn’t very well regulated.

Benefits of real estate escrow

• The funds are safe in an escrow and if the builder or the seller wants to use the money in a construction project, then a certified request from an engineer or architect is needed. This ensures that the funds are used for the right purpose.
• One of the most important ways how escrow can help realtors is ensuring that the buyers have sufficient funds.
• Digital escrow is a new age solution and has a huge potential to grow.
• The escrow agent often verifies and tracks variables, like the transfer of property title to make parties to the agreement feel secure.

The real estate escrow process

• Once a purchase agreement has been signed between the buyer and seller, the real estate agent collects the deposit or earnest money (this goes as a part of down payment) and adds it to the escrow account. The escrow agent will check the funds deposited, deed and the terms of the agreement.
• In case of mortgage, the lender will appraise the property for its own financial interest. Once the purchase agreement is accepted, the buyer must have cash ready or a mortgage ready.
• Then there are inspections for pests and environmental checks. There could some insurance purchased as well.
• The escrow can be closed only when the process is complete and both parties are satisfied. All paperwork for the home is signed at this stage and transfer of the property title is complete.

If the house sale doesn’t happen?

The sale of a house may not happen for certain reasons. It could be that some unknown issues with the property were discovered, and the sale will fall out of the escrow. In this case the buyer will get his money back. But if the buyer is at fault and he wants to back off without a genuine reason, the deposit or earnest money goes to the seller. It all depends on who is at fault and the decision is favourable for the party who held their part of the agreement.