Explaining Escrow to Buyers

By December 2, 2014 One Comment

Explaining Escrow to Buyers

The escrow process can seem a bit foreign to many home buyers, especially if they are first-timers. Here’s a quick and easy explanation that lays out the nuts and bolts.*


An escrow company is, essentially, a third-party entity that manages the legal and financial components of a real estate transaction. They make sure that contracts are correctly written, signed, and executed. They also handle the exchange of funds, and ensure that ownership documents are properly filed when a transaction closes.


It begins with a signed contract and an earnest money deposit. Two parties (a buyer and a seller) agree, in writing, to the terms of a purchase. The price and terms and timelines are all laid out, and the buyer hands over a check that, essentially, puts their money where their mouth is. Or, in this case, their pen. These documents are all handed over to a representative of the escrow company, known as the “closer” or “escrow officer,” or, in certain cases, “Karen.” This person is responsible for managing the flow of the transaction and making sure that all the t’s are crossed and i’s are dotted.


Next, the escrow company manages the transfer of funds. See, the buyer gets a loan, usually from a bank. But that bank doesn’t just give the buyer a briefcase full of cash, nor do they want to just transfer the funds directly into the seller’s bank account. Instead, they trust the escrow company, as an impartial third party, to direct transfer of those funds when they’ve made absolutely certain that the time is right, ie. that the conditions of the agreement have all been met. Then, and only then, do they authorize disbursal of funds from one bank, to the other, through their intermediary account.


Once the contracts have been fulfilled, and the money transferred, the escrow company, in most cases, files the proper paperwork to legally transfer ownership of the property from the seller to the buyer. This process, typically known as “recording,” is the final step in the escrow, or “closing,” process, after which the buyers become the new legal owners, and may take physical possession of the property.


Now, this is a simplified, birds-eye view of the process, but it is certainly a great place to start. Feel free to cut and paste it into first-time buyer e-mail templates, maybe with a few personalized phrases thrown in. Should save you quite a bit of time, in the long run.

*Note that this is not the process in every state, so if you’re in one of those areas that uses attorneys or some other variation on these procedures, this post is not for you. Pretend you never saw it.

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