Whether you're a first-time homebuyer or a seasoned real estate investor, understanding the role of escrow in the buying and selling process is crucial. But what’s between the branches of the escrow family tree, you ask? Are you confused about the difference between holding escrow and real estate escrow? Don't worry; you're not alone! Yes, both of these escrow accounts have to do with holding your money. But that’s pretty much where the similarities end.

These terms may sound similar, but they serve different purposes.  In this blog post, we'll break down the nitty-gritty of holding escrow vs. real estate escrow– explain each and unravel their key differences, so you can navigate the world of real estate with confidence.  So, grab a notepad and a pen, and get ready for a crash course in escrow 101s.

Let's get started!

What Is Real Estate Escrow?

Simply put, real estate escrow is a type of escrow account specifically used to purchase a home. Real estate escrow is the process of using a neutral third party to oversee the transfer of funds and documents during a real estate transaction. Why is money held in escrow? Well, it's like having a personal assistant to ensure all the necessary steps are taken before closing the sale.

From the initial deposit to the final closing documents, the escrow agent, title company, or attorney acts as a mediator between the buyer and the seller, ensuring that everything is done according to the terms of the purchase agreement. It's a safeguard against fraud and mishandling of funds, providing a secure and smooth process for all parties involved. In short, real estate escrow is the backbone of a successful real estate transaction.

What Is Holding Escrow?

Holding escrow is simply the term used to describe an amount of money held in an escrow account owned by a neutral party. Holding escrow is a type of escrow that can be used for any transaction. Unlike real estate escrow, there are no state-level regulations governing holding escrow, and it is not typically used for the purchase of a home but for other types of large transactions, such as the sale of a car or the purchase of a boat.

Holding escrow services are offered by a variety of organizations, including banks, title companies, escrow companies, and even some real estate agents. These organizations have the necessary experience and expertise to handle holding escrow transactions and ensure they are completed efficiently. They act as a neutral third party providing a level of trust and security for all the parties involved and ensuring that the process is completed smoothly.

What is a Holding Account?

A holding account is a temporary account where funds or securities are placed until they are needed or moved to another account. Holding accounts can be used for various purposes, such as holding funds during a real estate transaction, holding stocks during a corporate merger, or holding funds during the settlement process of securities trades.

The purpose of a holding account is to ensure that the funds or securities are secure and protected while they are being held. It serves as a secure repository for funds you wish to temporarily set aside while awaiting further action instead of allocating them right away.

What is an Escrow Holdback?

An escrow holdback is a portion of funds that are set aside in an escrow account and not released immediately to the recipient. The holdback is typically used as a form of protection or collateral to ensure that certain conditions are met, or certain obligations are fulfilled before the funds are released.

What is a holdback in real estate, you might ask? For example, in a real estate transaction, the escrow holdback may be used to ensure that the seller makes any necessary repairs to the property before the full purchase price is released to them. The holdback amount, the release conditions, and the release timeline are usually specified in the escrow agreement.

Don’t Confuse an (Escrow) Holding Account with an Escrow Holdback!

When it comes to financial transactions, it's important to understand the difference between all the options available. One area where confusion often arises is with holding escrow accounts and escrow holdbacks (also called repair escrow). While they may sound similar, they serve different purposes.

As explained above, a holding account is a temporary account used to hold funds. An escrow account, as well as an escrow holdback, on the other hand, is a specific type of account used to hold a portion of the funds during a transaction until certain conditions are met, ensuring that all parties are protected, and the transaction is completed smoothly.

For example, an escrow holdback is when a portion of the proceeds from the home sale are "held back" in escrow at closing until the required repairs are completed. This is a way to motivate the seller to complete the repairs and make sure that the home is in the best possible condition. Once the repairs are made, and the home is reinspected and reappraised, the money that was held back in escrow is paid out to the seller. This way, escrow holdback works as a safety net for both the buyer and the seller.

Holding Escrow vs. Real Estate Escrow Account: Understanding the Key Differences

When it comes to financial transactions, understanding the key differences between holding escrow and real estate escrow accounts is crucial. Although they may seem similar on the surface, these two types of escrow accounts serve different purposes.

Whether you're buying a home or investing in a business, understanding the key differences can help you make an informed decision, and will go a long way in ensuring a successful and smooth transaction.

1. Types of Purchase Transactions

The first difference between real estate escrow and holding escrow is that real estate escrow applies to property-buying transactions. Real estate escrow accounts are typically only used for purchasing a home. They hold onto funds until the title is transferred and all necessary paperwork is completed, ensuring that the buyer and seller are protected during the transaction.

On the other hand, transactions involved in holding escrow are much more versatile and can be used for any type of transaction. Holding escrows cover a wider range of large purchase agreements, from the acquisition of high-end goods and services, to private capital market deals like mergers and acquisitions, stock investments, and even online sales.

Both escrow accounts ensure all parties involved are protected and that the transaction is completed smoothly.

2. The Party Responsible for the Account

Who holds money in escrow and manages it? When it comes to purchasing a home and opening a real estate escrow account, a real estate agent, a title company or an attorney will typically handle this task on behalf of the home buyer. 

But what if you need to open a holding escrow account for something other than a home purchase? In this case, it's as simple as reaching out to a bank and requesting to open an escrow account in your name, as the funds in hold escrow can be held by anyone.

3. The Time of Opening the Account

When buying a home, real estate escrow accounts can be opened at different stages of the buying journey. 

One option is to open an escrow account before closing on the house to hold your earnest money as a show of good faith. Another option is to open an escrow account after closing on the house by applying for a mortgage. This ensures that the funds for your mortgage payments are held in a secure and regulated account, ensuring a smooth and stress-free home-buying experience.

When it comes to big-ticket purchases, instead of waiting until closing, you would open a holding escrow account as soon as the seller accepts your offer. This ensures that the funds for the transaction are held in a secure and regulated account, where they are protected and managed until the agreed-upon conditions of the purchase are met.

This way, both parties can have peace of mind knowing that the funds are protected and that the purchase will go through as planned. Holdback escrow accounts are essential when it comes to high-value transactions, whether you are buying or selling.

4. Disbursing the Funds

In real estate escrow, the deposit held in the escrow account acts as a guarantee that both parties will follow through on the transaction and is only released upon closing – once the purchase is complete and all closing costs are taken care of.

When it comes to other holding escrow transactions, the funds are securely held until the transaction is completed. This could be the completion of a merger or acquisition or the delivery of an online purchase. Imagine you invested in a stock – you won't see the profits until you sell it and the money is successfully transferred to your account.

In both cases, the escrow account acts as a safeguard, ensuring that both parties fulfill their obligations before any money changes hands.

5. Regulations, Interest & Fees

The interest earned on the money in escrow is an important aspect to consider in any transaction. Firstly, real estate escrow is regulated by state law, while there usually are no such regulations governing holding accounts.

When it comes to real estate escrows, the laws of the state can play a role in determining who reaps the benefits of the interest earned on the money that was held in the escrow account. Take California, for example, where homeowners who pay their mortgages or property taxes through an escrow account are entitled to the interest earned on those funds.

However, this may vary from state to state and even from bank to bank. In contrast, in a holding escrow transaction, such as a large purchase or stock investment, the holdback escrow fee is typically divided between the buyer and seller.

Final Thoughts: Which Escrow Account Should You Use?

The type of escrow account you should use depends on your specific needs. If you are buying a home, you will need to use real estate escrow. If you are engaging in any other type of expensive purchase or large-scale transaction, you may want to consider using holding escrow.

Whatever you opt for, or if you need professional guidance on choosing between holding escrow, real estate escrow, or other types of accounts, don’t hesitate to get in touch. At Lightspeed Escrow, we strive to revolutionize how you handle your real estate transactions. Our goal is to bring you lightning-fast closings that are effortless and stress-free.

So, whether you're embarking on a new venture or finalizing a deal, our exceptional escrow services are here to give you peace of mind.