What is escrow in real estate?

Escrow in real estate refers to a financial arrangement involving a neutral third party that holds onto funds or documents until certain conditions of a transaction are satisfied. This process ensures security for both buyers and sellers during a real estate transaction. For instance, a buyer may deposit earnest money into an escrow account, which the escrow agent will hold until the sale closes. Once the necessary contingencies are met, such as inspections or financing approvals, the escrow agent will then disburse the funds to the seller and finalize the transaction.

This mechanism effectively protects both parties by ensuring that neither the buyer nor the seller can access the funds or documents until all required obligations are fulfilled, reducing the potential for disputes. The use of escrow helps facilitate smoother transactions and builds trust between the involved parties.