Escrow is an arrangement with third parties who are uninvolved in the purchasing and selling of a home. In other words, the third party is not the buyer or the seller.
In a real estate transaction, escrow holds all of the funds which are associated with the transfer of the title as well as maintains all documents and contracts.
Escrow is a transaction where one individual transfers title to property to another individual to be held in trust for a specific period of time. The individual who is holding the property will then deliver that property to another party after the specified period of time or when a specific event occurs.
The transaction is executed according to the escrow agreement. An escrow agreement is a document, similar to a contract, which states the terms and conditions for the exchange.
The individual who is transferring the property is known as the grantor, or depositor. The party who holds the property is called the escrow agent, or depositary.
The party who receives the property from the agent is called the grantee. An escrow agreement is most commonly associated with the transfer of real estate.
The property in escrow is referred to as escrow property. It is held in escrow during the time which the depositary holds it.
Escrow is very important in real estate transactions because it provides assurance that a neutral third party will handle the documents and finances associated with the transaction. In this regard, it makes the transaction safer because it ensures that both the buyer and the seller meet their obligations.
Using escrow also ensures that funds are not exchanged personally between a buyer and a seller. This ensures that if one party fails to perform its obligations, the other party will not automatically receive the funds.
Typically, there are three parties that are involved in escrow in real estate transactions, including:
A buyer, also called a promisor in the context of a contract, is the party who agrees to purchase the real estate in the real estate contract. In exchange for the sum that was agreed upon, called the purchase price, the seller agrees to transfer title to the buyer.
The buyer will have a specific amount of time to perform their end of the bargain per the terms of the contract. The amount of time will vary by contract.
A seller, also known as a promise, is the individual who has title to the real estate and sells the property to the buyer. Similar to the buyer, the seller will have a specific amount of time to perform their end of the bargain according to the terms of the contract.
The neutral third party is, in many cases, the escrow agent. It is important to note that, in some states, attorneys are used instead of escrow agents.
The escrow agent’s job is to hold the documents and funds which are part of the transaction in escrow until both parties perform their obligations under the contract. Once both parties complete their duties, the escrow agent will coordinate closing.
On occasion, an escrow agent may default on their duties to deliver a legal document or property which is placed with them in escrow. Examples of defaults which may occur include:
In most escrow cases, the depositary incurs the liability for a breach, often due to their own misconduct. Depositaries holding property in escrow for the parties owe a duty of care to the grantors and grantees.
If the depositary fails to abide by the terms of the escrow agreements, it may result in a lawsuit. A depositary must abide by the following duties:
For example, if an escrow agent’s default causes property to be transferred before the specified time, the agent may be held liable under a breach of contract law. Another common example of breach which occurs is when an escrow agent completely fails to deliver the title and attempts to sell it to a different party.
It is important to note that both a grantor and a grantee can also be held liable for a breach of an escrow agreement. For example, if a grantor illegally tampers with the property prior to handing it over to an escrow agent, they may have breached some terms in the agreement.
A grantee may also be liable for a breach if they wrongfully coerce the agent to hand over the title too soon.
Between a buyer and a seller, the loss typically falls on the party who owns the property at the time a default occurs. If an escrow agent defaults on their duty prior to the time the seller is entitled to it, the loss then falls on the buyer because it is still the buyer’s money.
If a default occurs after the time at which the seller becomes entitled to the money, the loss would fall on the buyer because it would be considered their property.
If an individual bears the loss which results from an escrow agent’s default, they may have several options available, depending on the state in which they live. There may be several causes of action on which to file a lawsuit, including:
The best way for an individual to protect themselves against an escrow agent’s default is to ensure that they select an escrow agent they can trust. In addition, an individual can regularly check on the status of escrow as well as ensure that the escrow agent is performing their duties.
Yes, it is essential to have the assistance of a real estate attorney if your escrow agent defaults and you are liable for the loss. Your attorney can review your case, determine what causes of action may be available to you, and assist you in obtaining specific performance and damages.
In some cases, you may want to report the actions of the escrow agent to law enforcement for possible criminal prosecution.
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