What Does The Term Escrow Mean in Real Estate and How is it Used?

Escrow plays an important role in the real estate transaction process overall.

Escrow Company

An escrow company is a neutral third party that handles all of the money for buyers, sellers, and all real estate agents involved.

Sellers never receive money directly through the buyer or vice versa; the money always passes through the escrow company. The escrow company is often picked by one of the real estate agents on either side of the transaction. It serves as a conduit to receive money from the buyer, pass it on to the seller, and make sure no funny business happens in-between.

Right before closing, the escrow company prepares an estimated settlement statement, which is simply an excel spreadsheet that shows all the debits and credits on both the seller and buyer sides. It gives a sum total of how much the buyer owes and a statement of how much the seller will receive when the deal closes.

In addition to handling all of the money, escrow prepares all of the documents for the buyer and seller to sign during the final days of closing.

This is where you may have heard the term escrow be used in a sentence, such as “Are the documents to escrow yet?” This essentially is asking if the buyer’s lender has released all of the lending documents to escrow. This is important because the documents need to be sent with enough time for the escrow company to analyze and organize them in order for the deal to close on time when the buyer arrives to sign the documents.

Here Are Some More Examples of Ways Real Estate Agents Use The Term “Escrow”

• “Can we open escrow?” Meaning they have a new transaction and want to get the signed document to the escrow company so they can set up a file for them.

• “I have a new escrow.” This would be coming from a real estate agent, referring to a deal that they have taken from an active listing to an under contract property.

The Bottom Line

The escrow company is vital to the real estate transaction process. They handle all of the money, they make sure all of the numbers are correct, and when it comes time to sign they make sure all of the paperwork is correct and that all of the signatures are legal.