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What is Escrow? Its Role in Transactions

Whenever large sums of money are involved in a transaction, parties involved set out a number of obligations that must be met before a deal is finalized. Payment is only made and item released when both parties meet their obligations. The financial arrangements or agreements between two parties give rise to what is often referred to as Escrow.

Escrow is an arrangement or an agreement whereby a third party agrees to hold payments or assets on behalf of two parties involved in a transaction. The third-party holds the money until both parties meet their obligations and agree on the need to finalize the transaction.

The third-party involved in the transaction is referred to as an escrow provider tasked with ensuring safe transactions between involved parties. Likewise, the escrow provider plays the role of keeping assets involved in transactions safe.

How Escrow Work

Escrow being a financial agreement comes into being whenever two parties are involved in a transaction that requires middlemen to ensure either party’s meets set out obligation. Whenever a seller agrees to sell an item, he or she must fulfill certain terms as required by the buyers. Similarly, a buyer must fulfill some terms to assume full ownership of the items on sale.

It is the role of a third party, in this case, escrow provider, to ensure that both parties fulfill pre-set terms. In this case, the escrow provider will provide the item or asset for inspection. In return, sellers would want reassurance that the buyer has sufficient money in-store to cater for payments.

Conversely, the escrow’s role in such a transaction is to receive an item from one party for inspections. In addition, they are required to disburse the items as per the terms of the escrow agreement.

Escrow agreements can be used in any type of transaction as long as there are two parties involved.

Escrow Accounts

An escrow account is an account held and maintained by a third party, the escrow provider. In this case, it is an account where assets involved in a transaction are kept until a particular time when one party meet’s set out obligations to assume control.

Whenever you make payments into an escrow account, the funds are held in a secured non-interest bearing account until a given transaction is complete for disbursement to take place.

Escrow Accounts in Real estate

Escrow accounts find great use in the real estate industry. For instance, whenever a buyer wants to purchase a property, he or she will have to place some agreed amount in an escrow account to affirm commitment to buying the property if conditions are met.

In this case, the escrow will guarantee security to the amount as the buyer continues to verify the property. Once the conditions attached to the property are met, and the buyer is satisfied, the escrow provider would have to release the agreed amount to the seller.

Escrow in stock market

Escrow accounts also find great use in the corporate world. While shareholders own shares of the company, the stocks are usually held in an escrow account, which means the owners are left with limited rights, when it comes to disposal.

For instance, whenever management is paid in stock bonuses, the compensation must wait in the escrow account until certain conditions are met. Once set out conditions are met, management are allowed to sell the stock to recoup the agreed bonuses.

Ruchi Gupta

Ruchi Gupta covers various beats from finance to technology and from lifestyle to hobbies. She has an MBA in Finance. Ruchi enjoys writing on celebrities and political news. She likes traveling and exploring places.

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