An escrow is basically a type of arrangement, which is made as per the provisions laid down in a contract between parties that are transacting with each other, wherein an independent 3rd party gets and disburses funds or/and documents on behalf of the parties that are transacting, with disbursement timing by the 3rd party depending on fulfilling of all the conditions listed in the contract by the parties that are transacting with each other.
Usually a broker sets up the escrow account as per the license law’s provisions, for holding money on behalf of the principal of broker or any other person till the termination or consummation of a transaction.
Escrow is also opened in the form of a trust account that is held in the name of the borrower for paying obligation like insurance premium and property related taxes.
There are different types of escrow accounts including, internet escrow, law, real estate, intellectual property and banking escrow account.
Example of Escrow
For example, an escrow account can be opened at the time of selling a house. In case, certain conditions are attached to the selling of a house, like clearing an inspection, then in such a condition the seller and buyer can come to an agreement with regard to using escrow. The property buyer will then deposit the funds (payment for buying the house) in an escrow account, which is held by the 3rd party. This gives the property seller an assurance that property buyer is well capable of paying the desired amount. The moment the house has been successfully inspected and all the conditions are met, the 3rd party holding the escrow account transfers the entire fund to the property seller, while the buyer gets the property as well as all the other property rights.
Thus, it is the duty of the escrow agent to account for the funds and make sure that the money is used explicitly for the intended purpose. Escrow accounts are also used for the purpose of transferring business property, purchasing of used cars and for various other purposes such as completion of construction work and for acquiring rental deposit till the time the tenant decides to move out etc.