Ask a Realtor: What Is Escrow Money?

Q: What is Escrow Money?

A: We’re glad you asked!  Escrow is a very important part of a real estate transaction and we’d love to explain further below.

Understanding Escrow Money

The escrow is a very normal part of the home buying and selling process and is what makes a contract a contract – the money or “consideration”. It protects both the buyer and the seller during the transaction until the deal comes to a close and money and the deed are exchanged. Here is how it works. When a buyer decides on a home to purchase they will make an offer. Their Realtor will draft the contract and the buyers will sign it and then it will be presented to the seller.  Typically, once the contract is accepted by the seller the buyer will be asked to place money in Escrow, typically at the time the offer is made or within 3 days of receipt of the offer. This proves to the seller that the buyer is serious about seeing the deal close. You might also hear it referred to as good-faith or earnest money or escrow deposit.  As Realtors, we typically see escrow amounts anywhere from 1-5% of the purchase price of the home to as much as 50%.  It often depends on the price point of the home.  On a $200,000 home purchase, it is not uncommon to see 1% in escrow or $2,000.  But on a $2,000,000 property, it is common that a seller may want to see a higher percentage in escrow, perhaps $200,000 or 10%.  If you are in a seller’s market and as the buyer, know you are competing against multiple offers, sometimes putting a little extra in escrow and prove to the seller that they should select your offer and it may be seen as more “serious”.

Who Gets the Escrow Money?

Once the buyer writes the check it goes to a third party. This means neither Realtor or Buyer or Seller holds onto the check. Typically, the money is sent to the real estate company, title company or attorney to be held until the deal is closed. The third party is the “escrow agent” and will hold onto the money through the inspection period and all the way until the deal closes.

We’re Serious About Buying, Is Escrow Money Really Necessary?

Absolutely. Without escrow, you don’t have a legal and binding contract.  If you’re truly serious about buying you need to indicate that to the seller and you’ll also want the protections Escrow provides you as well. More on that in a moment, but first here’s a true example of why Escrow money is necessary:

A few months ago we received an offer on our home. The buyer’s contract stated that he intended to purchase the home in cash. He wanted a 7 day inspection period and planned to close the deal in two weeks. We countered the offer and came to an agreement on price and agreed to close the deal in the set period of time. Our house went “under contract” and was removed as an active listing in the MLS. This means our home wouldn’t be considered by other buyers in the market because it was “under contract”. The buyer promised to put the money in Escrow three days after we had both signed the contract at the risk of voiding the contract if he failed to do so. In the meantime, his Realtor scheduled the inspection and we felt confident the purchase was on track. The day the money was due, the buyer pulled a fast one on all of us. He failed to put the money in Escrow and disappeared from contact with his Realtor and with us. The Realtor, with another St. Petersburg real estate company, had failed to check her client. She showed him property and wrote three offers on his behalf without ever having him verify that he indeed had the capacity to actually make a purchase. We lost three days on the market to “real” buyers and had to find out the hard way just what kind of person she had brought into our home.  A little Google research revealed the address he had listed was actually a defunct Post Office in Midtown. He had created a trust just 3 months before trying to buy property and he had a laundry lists of arrests for fraud in Hillsborough County. While we only lost a few days on the market, we had a criminal in our home because his Realtor failed to do her job and had we not attempted to collect Escrow money we might have lost more time on the market engaging in a phony deal. 

Escrow money proves a buyer is not only serious but is willing to put money on the line in good-faith the deal will close.

How Escrow Money Protects the Buyer

In most Florida contracts, the buyer has the right to an inspection. For the sake of discussion, we’ll say the buyer’s inspector finds an issue with the HVAC and the contract was not the as-is contract. This would be something the buyer would be well within their rights to ask the seller to fix or replace prior to the deal closing. The buyers will have a final walk through before the deal closes and they are given the keys. If the seller has failed to fix the HVAC then the sale cannot close until they have fixed the problem. The buyer is protected from being stuck with an unexpected cost right from the get-go.  If the seller failed to fix something, the title company can then escrow money for the expected repair costs to ensure the repairs get made and the money is there to fund the repair.

On the flip side, again depending on which contract is being used, if the buyer gets cold feet and decides the purchase of the property is just too much to take on and walks away after all contingencies have passed, then the seller gets to keep the Escrow money. A buyer must have a good reason for walking away from the deal in order to get back the money placed in Escrow and must be within contingency timeframes. Otherwise, the seller gets to keep it as compensation for the inconvenience of the deal not closing.  A seller could then also sue for specific performance if a buyer just walks away for no apparent reason but that’s a topic for another blog post.

 

More Questions?

Here at the Jamason Group, we’re always available to answer your questions. The home buying and selling process is one of the most important deals you’ll engage in during your lifetime. There’s no question to small. If you have additional questions about Escrow money or any other part of the buying or selling process give us a call now. We’re happy to help in any and every way we can!

 

*We are not attorneys and this is not to be construed as legal advice.