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Is an escrow always necessary?

On Behalf of | Jun 8, 2024 | Real Estate Transactions

When buying a home, people often hear about escrow. It is a common part of many real estate transactions.

However, is escrow always necessary?

Escrow defined

According to Housing Wire, in 2023, people bought more than 4 million houses across the nation. Escrow is a financial arrangement where a third party holds funds or property until the fulfillment of certain conditions. In real estate, escrow ensures that both the buyer and seller meet their obligations before the completion of the transaction. The buyer deposits funds into an escrow account, and the seller provides the necessary documents, such as the title deed. Once both parties meet all conditions, the escrow agent releases the funds to the seller and the title to the buyer.

Advantages of escrow

Escrow offers several advantages. It protects both the buyer and the seller. The buyer can feel confident that the property title is clear and the seller will not receive payment until they fulfill all the conditions. The seller also benefits, knowing the third party has secured the buyer’s funds and the holder will release them upon the buyer completing their obligations.

When escrow might not be necessary

While escrow is highly beneficial, it is not always necessary in every transaction. Some situations may not require escrow. For instance, in cash transactions where trust exists between the buyer and seller, escrow might seem unnecessary.

Private sales and escrow

In private sales, particularly between family members or close friends, the parties might agree to bypass escrow. They might feel that the trust they share eliminates the need for a third party. Although this can work well, it involves risks. Disputes can arise over unexpected issues, and without escrow, resolving these disputes becomes more difficult.

Regional and lender requirements

Some regions and lenders might require escrow for certain types of transactions. For example, mortgage lenders often insist on escrow accounts to ensure the prompt payment of property taxes and insurance. In such cases, skipping escrow is not an option.

Understanding escrow and its benefits is important to both buyers and sellers.