What is escrow in real estate and how does it work?

The world of real estate is filled with concepts and terminology that may seem confusing at first, but which are crucial for property buyers and sellers to be aware of when transacting. Such knowledge will not only facilitate a smoother sale and purchase but can also ensure you stay within the boundaries of the law. One term that’s a regular part of the property sale and purchase process is escrow, but there is sometimes confusion about what does escrow mean in real estate. To get more clarification on this term – whether you’re a buyer or a seller – we’ve prepared this guide to help you navigate the waters more seamlessly. Take a look below.

What is escrow in real estate?

To answer the question what is escrow, it’s first necessary to address the parties in the property sale and purchase process. It usually starts off with a seller who intends to put their property up for sale, an estate agent who lists the property and markets it (among other things) to find a suitable buyer, the buyer of the property and a neutral third party. Although there are others involved, such as lenders, solicitors, conveyancers and others, it is this neutral third party and the process involved that is the main focus of this article.

Such a neutral third party is referred to as an escrow officer who is responsible for the documentation and funds involved in the sale process of a property. Escrow requires this third party to handle the property transaction, the exchange of money and any related documents. This process usually takes place once an agreement has been reached between the buyer and the seller for the purchase of the property and to transfer title.

In addition to the above, there is a phase in the property purchase process that is referred to as “in escrow”. But what does “in escrow” mean? In short, being “in escrow” is the legal procedure used when property requires a transfer of title. The period of being in escrow will vary from case to case, as different needs and requirements will need to be met, depending on the individual circumstances of every transaction.


Although not always compulsory, escrow in real estate is a way of providing both sellers and buyers guarantees, protection and security during the process of the sale. This is one of the answers to the question of what is escrow used for.

For example, if a buyer notices roof leaks in the property and wants the seller to have these fixed, they can request this action and once addressed, they can inspect the property. If the roof leaks have not been addressed adequately, the buyer can withhold payment of the purchase price until the problem has been addressed in full.

Meanwhile, if a buyer gets “cold feet” and wishes to back out of an offer made, funds held in escrow are used to protect the seller as well. Thereby giving them more security in the transaction itself and in the intentions of the buyer.

What is an escrow account and balance?

Since the escrow officer’s role is to ensure that no money changes hands before all the documentation and necessities have been taken care of, it is vital for them to open an escrow account. But what is an escrow account and how does it work? In essence, the escrow account is where funds are held until all the necessary disbursements have been made and the deal is closed.

As such, it’s vital for the buyer to place a certain amount of money (usually a small percentage of the purchase price) in the escrow account in order to secure the deal after a seller accepts their offer. This is also commonly referred to as an “earnest money” or “good faith” deposit. Such funds are held by the escrow officer in the escrow account, and are there to compensate the seller in the event that the buyer breaches the sale agreement or contract and fails to close the deal. As a result, when it comes to what is an escrow balance, it’s the amount held in the escrow account during the period of being “in escrow” by the escrow officer as part of the escrow account rules and escrow agreement.

Practical application and uses

When it comes to how does escrow work when buying a house, it’s important to note that the escrow agent will open an escrow. After this the instructions for escrow will be completed and signature will be required by all parties. These instructions can include aspects such as:

  • The purchase price
  • The terms of the agreement
  • Inspections (if necessary)
  • Possession agreements
  • Other documents
  • Disbursements

When these items have been addressed, the escrow officer will then order a title report from a title company. The purpose of this step is to ensure that there are no outstanding liens against the property, as these could delay the closing of the sale.

As a next step, the escrow officer will attend to the closing of the escrow. This is when files are audited to see to it that all instructions have been followed, that the documentation is in order and that everything is correct. It is at this step that the escrow officer will “order the title company to record the document and issue a policy of title insurance.”

Finally, the escrow officer will close the escrow. At this stage, the buyer and seller will receive all the closing documents, money will be distributed accordingly and all the paperwork will be delivered to the relevant parties involved. As such, this is the time when the seller will receive the payment for the property, while the buyer will receive the keys to it.

Closing remarks

As a crucial process involved in the sale and purchase of a property, escrow is vital to understand by both parties since it plays such a critical role when transferring title. Although it may seem confusing at first and daunting to say the least, being aware of this terminology as well as what it entails is crucial for the smooth sailing of the sale-purchase transaction. Both buyers and sellers can have greater peace of mind when it comes to the transaction as they both receive some type of guarantee regarding the security of the sale. If you’re looking for more expert tips on property sale-purchase cases or even letting and rentals, why not get in touch with the experienced estate and letting agents in Hull and Beverley? You’ll get professional advice irrespective of whether you’re looking to sell, buy or let your home.