Explaining Different Types of Escrow

When two people enter a business that requires a transaction, there is often a factor of trust involved. Although most people have good intentions, it is scary to put your hard earn money in someone's hands without knowing what they are capable of and if they are looking for a naive victim. That is why there are different types of escrow accounts, protecting both parties in the transaction.

Escrows are always run by an impartial third party - an escrow company or a title company - and have no other connections with the seller/lender/landlord or buyer/borrower/renter. Escrow accounts serve to create a safe and fair space for a transaction.

What Is an Escrow Account in General?

Escrow accounts are one of the best ways to ensure trust between two parties involved in any kind of transaction. Held by an impartial third party, they do not belong to either side. When an escrow account is opened its owner is an escrow holder, and that person is transferring the money or other assets only on these separate occasions:

• If the applicant (buyer/borrower/renter/) and the beneficiary (seller/lender/landlord) come to an agreement and every point of the sales contract is respected, then the escrow money goes to the seller - the transaction is done.
• If the buyer backs out of the sale, but under conditions not permitted under the sales contract, then the escrow money goes to the seller - the transaction is stopped.
• If the seller backs out under disallowed conditions, the escrow money goes back to the seller - the transaction is stopped.
• If the due date for paying a lump sum has come, the money that the homeowner paid monthly will be transferred to insurance companies, IRS, and others.

An escrow account in the most simple way is a protector of assets, both financial and others, such as deeds and patent rights. It deals with the problem of trust in business and creates a safe space for applicants and beneficiaries.

Escrows in Real Estate

Escrows are used in real estate for several reasons, and they are a very frequently used transaction method. As you’re entering the market, either rental or home buying, you’ll see that escrows await you every step of the way.

Homebuying is almost impossible to conduct without an escrow account between a seller and a buyer because it is such a large sum of money that no one wants to risk it. Renal and mortgage escrows are not always obligatory, but they are highly advised, as they can save you a lot of trouble in the long run.

Home Buying Escrow Accounts

Homebuying escrow accounts hold the buyer’s earnest money deposit until all the contingencies of the purchase agreement have been met. Once the buyer makes an offer and the seller accepts it, the earnest money deposit will be transferred to an escrow account. An escrow agent will be in charge to hold the money and keep track of the contingencies and conditions that the buyer and the seller need to meet.

Once each party has done its part, and they are both content to move forward with the sale - their escrow agent will be present at the closing. At closing, the escrow money is transferred to the buyer's account and that real estate transaction is over, after which the escrow account closes.

There are a few circumstances that favor neither the seller nor the buyer. According to the escrow agreement and the purchasing contract, the money will be transferred back to the buyer if there are any unmet conditions or undisclosed issued by the seller. The escrow provider has to transfer the money to the seller if the buyer backs out of the sale without legal cover.

Mortgage Escrow Accounts

When the earnest money deposit is transferred to the seller’s account it is not the end of the sale. If you are a borrower your lender will transfer the money to the seller as well, and you have to pay it back with interest. You will be paying a monthly mortgage payment, which consists of a loan principal and interest, but your homeowner costs don’t end there.

Among other things, as a homeowner, you need to pay some annual or semi-annual costs, such as homeowners insurance and taxes. If you fail to pay your homeowner costs, your lender might have a problem selling the house or getting any money out of it.

To ensure that the property is a smart investment, the lender will often require you to open an escrow account and pay monthly escrow payments. Those escrow payments are then stored on the account and disbursement comes when the fees and taxes are due. Their due dates and amounts are defined in an escrow agreement.

Mortgage escrows have three types of real estate transactions: from the homeowner to the escrow account, where it builds up, from the escrow to the insurance companies and other institutions, and if there is anything left on the balance sheet - it goes back to the homeowner in a form of a refund.

Renting Escrow Account

The relationship between renters and their landlords can be complicated. There are plenty of landlords who try and take advantage of their tenants, but there are also renters who want to pay less or nothing for their accommodation.

An escrow company or just an escrow account can help mediate their transactions. For example, if the landlord doesn’t provide necessities (water, heat, electricity) or doesn’t address the issues he is responsible for, the renter has the right not to pay their rent.

However, instead of just denying to pay, they are sometimes required to open an escrow account, to show that they are serious about living in that place, and not just avoiding payments. Once the landlord resolves the issues, the escrow payments, in a form of collected rents, are transferred to his account.

Safety deposits can also be saved up on an escrow account so that the landlord can keep track and doesn’t mistakenly spend it on something else.

Escrows in Trading and Business

Although escrows are a very common tool for real estate transactions, this doesn’t mean that other industries don’t use them, and often. We’ll list a few escrow accounts that you might encounter or hear about.

Online Shopping

Any type of online transaction can be helped by an escrow account for the full protection of both parties.

Software Escrow Accounts

When the buyer and software developer negotiate an agreement for licensing software, the escrow account acts as insurance. This is because the software developer can sell their product with a flaw, and once the deal is done, he can disappear and the software will not run. The escrow account will actually be a vault where all the code material is stored until the release conditions are met.

Freelancer Escrow Accounts

Freelancer escrows are a new and rising trend that started since freelance and remote work began spreading across the world. Escrow accounts for freelancers is ensuring that the freelancer will do their job and that their employer will pay them as previously agreed.

When the freelancer is commissioned, the employer will transfer the escrow money to an impartial holder. When the freelancer does their job, the money will be released to them, if they fail to do the assignment, the employer will keep the money.

Construction Escrow Accounts

A construction escrow account is a part of both business and real estate types of escrows. That is because they are used by construction professionals for construction loans. When a housing developer wants to build a new house or totally renovate an old one, that’s when they go for a construction loan.

The lender then opens an escrow account and funds the whole operation stage by stage. The developer can access the funds only by showing detailed receipts about the expenses.

Inheritance Escrow Accounts

When a person dies, their assets go into an escrow opened by tax authorities. This is to ensure that their surviving relatives will pay inheritance taxes and taxes that are left unpaid by the deceased.

Cross-Border Trade Escrow Accounts

Cross-border trade escrow accounts are opened for the purpose of exporter-importer transactions. The importer transfers the money onto an escrow account, escrow service provider verifies the payment and requests the start of exports. The exporter will get the money as soon as the goods arrive at an agreed location and time.

Do You Need to Open an Escrow Account?

If you need a reliable and specialized escrow holder, contact Lightspeed Escrow and get in touch with one of the most professional escrow companies in California. We are real estate experts and we know how much time can an escrow transaction take, that’s why we wanted to take matters into our own hands. We guarantee innovative escrow services and solutions.