In a real estate transaction, escrow fees cover the cost of the person (usually an escrow agent or lawyer) who looks after the earnest money from the buyer while the sale is pending and then oversees the money’s transfer once everything is complete.
But what exactly is escrow? What conditions have to be met to resolve it? And who actually pays for these things?
You’re about to find out.
What is escrow?
Escrow keeps you safe!
When you buy or sell a piece of property, you often do not know anything about the person on the other side of the deal. You don’t really have a way of knowing whether or not they are going to do what they say they are going to do or pay what they say they are going to pay. The only true way to do this would be just to trust them – but that’s a pretty risky move.
This is why people use escrow accounts. In major financial instances, like real estate transactions, an escrow account exists to keep the money safe until both parties fulfill their contractual requirements.
When you open an escrow account, you enlist the help of a third party. Here, that means someone who is neither the buyer nor the seller and has no connections to either of them. This third party keeps track of the money or the asset for the duration of the transaction.
The reason it is so important that the third party doesn’t have a connection to either the buyer or the seller is that since they will be in control of the funds or assets, it is essential that they don’t have anything to gain by one party benefitting from the deal more than the other one. At the end of the day, all the escrow agent needs to do is keep everything safe until the end of the deal.
To make sure this happens, you need to pick your escrow company very carefully. Be sure to go with a big-name, easily recognized service provider or a company recommended and vetted by your real estate agent.
What are the conditions of escrow?
As mentioned, the escrow process exists to keep both buyers and sellers safe from fraud during the property transfer process.
As a buyer, you can hand over your earnest money to an escrow account without fear, even if the sale is still pending. This is because you can get it back if the seller doesn’t do what they say they are going to, or choose to keep it pending until the seller finally acquiesces.
As a seller, you can confidently take your house off the market because you know that if this buyer just decides to walk away from the deal even after you fulfill your end of the contract, that you can claim back their earnest money for your troubles.
How the Escrow Process Works
The buyer and the seller reach a point in the transaction where both parties will only feel comfortable moving forward if the other can guarantee that they will fulfill their promises.
To make sure this happens, they both agree on a neutral third party to supervise escrow. This third party could be a bank, title company, law firm, closing company, etc. Each state has different laws around what kinds of entities you can choose from.
The buyer and the seller sign a contract that covers the following terms:
- Closing date for the property (when everything must be resolved by)
- Any financing contingencies (like property taxes, homeowners insurance, mortgage insurance, or paperwork from mortgage lenders)
- Any home inspections contingencies (like fixing a leaky roof or cracked foundation, or walking away if the inspection unearths termites)
Once both parties sign the contract, the buyer places their earnest money into the escrow account. After the buyer and the seller resolve all of the contingencies, the sale can move forward and close.
Then, the escrow agent can disburse all of the assets and pay everyone. They would grant the Realtors their fees, the title and property insurance companies their portion, and cover any recording fees or liens placed against the property.
Finally, at the end of the transaction, the sellers or buyers pay the escrow agent in line with state and local laws. Then, they can close the escrow account and the sale is officially over.
How much are escrow fees?
Paying for escrow is a part of paying for closing costs.
As is typically the case for closing costs, escrow fees are really different depending on which state you live and own property in. The amount can vary significantly, as well as the individual who legally needs to pay for the service.
However, in general, escrow fees usually cost between 1 percent and 2 percent of the home’s purchase price. So, if a home is $250,000, expect to pay between $2,500 and $5,000 in total escrow fees.
Who pays escrow fees?
Usually, most people think it’s fair for both the buyer and the seller of a home to team up to cover the cost of the escrow fees. But this doesn’t always happen. Both parties are well within their rights to request that the other cover the full costs of escrow. It’s also normal for one party to ask the other to cover a more significant portion of the fees.
So, whether you are the buyer or the seller of a home, be sure to have a good look at your purchase agreement before signing it to ensure you understand your financial obligations during the transaction. Escrow is a very serious and binding legal process, so be you want to get it right!