Types of Escrows in Real Estate

In real estate transactions, an escrow is a third-party account where funds or documents are held until specific conditions are met. This ensures that all parties to a transaction fulfill their obligations before any money changes hands.

The Anatomy of an Escrow: Understanding the Various Types

1. Initial Escrows

Used for initial down payments, these escrows ensure that buyers place funds into a secure account controlled by an attorney or a title company until the sale is finalized. This protects both parties from disputes over deposits.

2. Holdbacks

These are escrows where a portion of the purchase price is set aside to cover potential costs like repairs after the sale. Holdbacks ensure that these costs are covered, leaving no surprises for either party.

3. Escrow at Closing

In this type, an escrow account holds funds until all parties agree on the sale details. Once finalized, the money is released for settlement of purchase prices and payment of outstanding fees.

4. Long-Term Escrows

Used in more complex transactions like construction loans or when buyers need time to secure financing, these escrows hold funds until conditions are met or a specific date arrives. This keeps both parties on schedule without exposing them to unnecessary risks.

5. Trustee's Escrow

A type of long-term escrow managed by a trustee, often used in transactions involving inheritances or when the transaction involves multiple properties. Trustee’s escrows add an extra layer of security for all involved parties.