What is Escrow?

Escrow is a Safeguard for Your Real Estate Transaction

We're back with another answer to one of our frequently asked questions. If you missed the others you can find them here. Today's question is about defining escrow and it comes from a client in Kalaheo. They ask:


Hey Dani, I see your posts that say “In Escrow”, or “Let's Open Escrow!” It sounds like it’s probably a good thing, but what is escrow? Thanks in advance, ~A.S.


Yes! Escrow is a very good thing!

Escrow is an arrangement used in real estate to protect the interests of parties involved in a transaction. An escrow company or agent is a neutral third party that holds assets, documents, or funds on behalf of the parties until all conditions of the contract are met.

Most simply put, when I say, “Let's open escrow,” it means an offer on a property has been accepted by both parties and is now being set up with an escrow agent. The buyer won’t get the deed to the property until the money is received by the escrow agent, and the seller won’t get their money until the deed is clear of any liens and can be transferred as verified by the escrow agent. “In escrow,” means very nearly the same thing: both parties are working towards meeting their contract obligations that will enable them to transfer the property.

In the context of a real estate transaction, here's how escrow works:

First, a buyer and seller reach an agreement on the terms of a real estate deal. They enter into a purchase agreement or contract. This must be in writing to be legally binding. The agreement is often negotiated and documented with the help of a real estate agent. The day the agreement is made is referred to as the Acceptance Date because it is the day both parties accepted the terms of the agreement.

Next, as a show of good faith and to demonstrate the buyer's seriousness, the buyer provides an earnest money deposit, also known as escrow deposit, to the escrow agent. This deposit is typically between 1% to 3% of the purchase price. It is held in a trust account with the escrow company.

Then comes the escrow period. This is the time between acceptance of the offer and closing the transaction. During this period various tasks are completed by both parties. These tasks are specified in the contract and often include things like property inspections, title searches, and loan approvals. A good real estate agent will assist you in completing your tasks in a timely manner and will coordinate with the escrow agent, lenders, service providers, and other parties to the transaction.

In the meantime, the escrow agent ensures that all conditions specified in the purchase agreement are met. When that happens the escrow agent will verify that the property title is clear and ensure the buyer's financing is in order. When it is time to close the deal the buyer provides the remaining funds required to purchase the property, and the seller transfers the property's title. The escrow agent is the middle man that disburses the funds to the seller, and the transfer of ownership to the buyer.

At closing the escrow agent will also release funds held in escrow to others according to the terms of the agreement. This may include paying off mortgages, taxes, transfer fees, real estate agents, and other parties involved in the transaction.

By using the services of an escrow agent, buyers and sellers can have confidence that the transaction is secure, and neither party is at risk of being cheated or defrauded. Next time you hear or read “in escrow” you will celebrate too, knowing that escrow is a crucial component of real estate transactions that provides protection and peace of mind to all parties involved.

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This information is provided by Dani Dooley for educational purposes only and may not be used as legal, business, or financial advice. Seek professional advise about your individual situation. Dani Dooley is a nationally recognized top producing Realtor in Kauai, Hawaii.  Follow @DaniDooley.Kauai.Realtor